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Abstract: 

Because financial institutions frequently invest in hedge funds and other investment vehicles treated for federal income tax purposes as “partnerships,” they need to understand how the partnership tax rules will apply. A distinguishing feature of partnership taxation is the fact that the liabilities held within a partnership must be allocated among the partnership’s partners, which then include their respective “shares” of such liabilities in the tax basis of their partnership interests. A number of variables, some of which are within the control of the partnership and its partners, influence the manner in which partnership liabilities are allocated among partners. The author provides a comprehensive discussion of the partnership tax rules governing allocations of partnership liabilities as well as a host of other partnership tax rules and concepts upon which the liability sharing rules rely.

Keywords: minimum gain; nonrecourse deductions; nonrecourse debt; partnership liabilities; economic risk of loss; substantial economic effect

Affiliations:  1: Buckingham, Doolittle & Burroughs LLP.