Reference no: EM133163

Question :

Fredstone Consolidated, Inc., a real estate developer, owns a 50 percent general partner interest in Realty Partners, Ltd (Realty). The 50% limited partner interests are owned by several individual taxpayers. Fredstone and the limited partner group each contributed $15,000 to form the partnership. The partnership uses the $30,000 contributed by the partners and a recourse loan of $100,000 get from an unrelated third-party lender to obtain $130,000 of rental properties (All amounts are millions).

The partners believe they can have extensive losses in the first year due to depreciation expense and initial cash-flow requirements. Fredstone and the limited partners agreed to share losses regularly. To make sure the looses will be allocated as intended, they added a provision in the partnership agreement requiring each partner to restore any deficit balance in their partnership capital account upon liquidation of the partnership.

Fredstone was also willing to include a provision that needs it to make up any deficit balance within 90 days of liquidation of the partnership. This provision does not apply to limited partners; instead, they are needed to restore any deficit balance in their capital accounts within two years of liquidation of the partnership. No interest can be owed on the deferred restoration payment.

Can Realty assign the $100,000 recourse debt equally to the two partner groups so that they will deduct their respective shares of partnership losses? Describe.