The Story of Tufts: The

The Story of Tufts: The "Logic" of Taxing Nonrecourse Transactions

Description

It should come as no surprise to students of the income tax that the presence of liabilities in property transactions can cause enormous complications. In no area is this more true than in the partnership setting, where partnership liabilities are included in the partners’ bases in their partnership interests (i.e., their “outside bases”) under the complex set of rules and regulations under Code § 752. Under those rules, each partner is treated as contributing cash in an amount equal to her share of the partnership liabilities. On the other hand, if a partner’s share of partnership liabilities decreases, the partner is deemed to have received a cash distribution in that amount. As complicated as these rules are, they draw upon and are consistent with the basic rules learned in income tax: When a taxpayer borrows funds, he does not have income because of his equal and offsetting liability, and when he repays the loan he is not given a deduction. The only time a borrowing transaction generates any taxable income is when the taxpayer is discharged from all or part of his obligation to make repayment. If borrowed funds are used to purchase property, they are included in the basis of the purchased property: Taxpayers receive basis credit not only for what they have paid for the property but what they have promised to pay. If the property is depreciable, the owner will compute his depreciation deductions on the full basis so computed: Because we assume that the loan will be paid we assume that any losses represented by those deductions will in fact be borne by the taxpayer when he repays the loan. And when the taxpayer sells the property, he must include in his amount realized from the sale the amounts he uses to repay the loan.

Source Publication

Business Tax Stories

Source Editors/Authors

Steven A. Bank, Kirk J. Stark

Publication Date

2005

The Story of Tufts: The

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