Handling LLC member and member affiliate loans and guarantees.

• Author: Ellentuck, Albert B.
• Position: Limited liability company

[ILLUSTRATION OMITTED]

This case study has been adapted from PPC's Guide to Limited Liability Companies, 14th Edition, by Michael E. Mares, Sara S. McMurrian, Stephen E. Pascarella II, Gregory A. Porcaro, Virginia R. Bergman, William R. Bischoff, James A. Keller, and Linda A. Markwood, published by Thomson Tax & Accounting, Ft. Worth, TX, 2008 ((800) 323-8724; ppc.thomson.com).

SPECIAL RULES APPLY FOR ALLOCATING basis from loans made or guaranteed by limited liability company (LLC) members or affiliates of members. The following discusses how loans made or guaranteed by members or member affiliates generally must be allocated 100% to the member who makes or guarantees the loan (or whose affiliate makes or guarantees the loan).

Allocating Debt Owed to Members and Member Affiliates

If a member or related person (i.e., a member affiliate) makes a loan to an LLC, it is generally categorized as recourse for basis purposes (Regs. Sec. 1.752-2(c)). This is true even if the loan would be characterized as nonrecourse if made by an unrelated person. This type of liability is called a member nonrecourse loan. The lender member or member affiliated with the lender is deemed to bear all economic risk of loss with respect to the loan. As a result, the lender member or member affiliated with the lender is allocated 100% of the liability for basis purposes. A similar rule applies to guarantees of nonrecourse debt by a member or member affiliate.

As discussed in the previous paragraph, nonrecourse loans from members or member affiliates are generally allocated 100% to the lender member (or member related to the lender). However, a de minimis rule applies to member (or member affiliate) nonrecourse loans if (1) such member's interest in each and every item of income, gain, loss, deduction, or credit is 10% or less over the life of the LLC, and (2) the loan constitutes qualified nonrecourse financing under the at-risk rules. If both criteria are met, member nonrecourse loans are treated as true nonrecourse debt that is allocated based on the three-tier system described in Regs. Sec. 1.752-3(a).

The determination of whether a debt is qualified nonrecourse financing for purposes of this de minimis rule is made without regard to the type of activity for which the debt is used (i.e., it need not be held in connection with real estate activities). The intent of this rule is to allow the allocation of basis to nonlender members for nonrecourse loans owed to a member (or member affiliate) who is predominantly a creditor of the LLC rather than a member. For direct member nonrecourse loans, this rule applies to debt incurred, assumed, or materially modified on or after...