7742 / What are the rules for allocation of partnership losses and deductions attributable to nonrecourse obligations in taxable years beginning after December 29, 1988 and before December 28, 1991?

Regulations finalized in 1991 modified the rules relating to the allocation of losses and deductions attributable to nonrecourse obligations. In addition, if there is no substantial modification to the partnership agreement, various transitional rules permit the use of the earlier regulations under certain circumstances.¹

For those partnerships which qualified under the 1989-1991 rules and which choose to remain grandfathered under such rules, former Temporary Treasury Regulation Section 1.704-1T(b)(4)(iv) generally provides that nonrecourse debt be treated under the rules described in Q 7744. Nonrecourse deductions will be deemed to be allocated in accordance with the partners’ interests in the partnership if the first four and part (a) of the fifth of the current requirements ( Q 7741) are met, and if the partnership agreement contains a clause complying with the minimum gain chargeback requirements contained in former Temporary Treasury Regulation Section 1.704-1T(b)(4)(iv). Those requirements provide that if there is a net decrease in partnership minimum gain during a year, each partner must be allocated a minimum gain chargeback equal to the greater of (1) the partner’s share of the net decrease in minimum gain attributable to a disposition of property securing nonrecourse liabilities, or (2) the partner’s deficit capital account, as specially defined in the former temporary regulations.

1. See Treas. Reg. § 1.704(l).