For purposes of section , the following definitions apply: Obligations include, but are not limited to, debt obligations , environmental obligations , tort obligations , contract obligations , pension obligations , obligations under a short sale, and obligations under derivative financial instruments such as options , forward contracts, futures contracts, and swaps.
Any increase in a partner 's share of partnership liabilities, or any increase in a partner 's individual liabilities by reason of the partner 's assumption of partnership liabilities, is treated as a contribution of money by that partner to the partnership. Any decrease in a partner 's share of partnership liabilities, or any decrease in a partner 's individual liabilities by reason of the partnership 's assumption of the individual liabilities of the partner , is treated as a distribution of money by the partnership to that partner.
Except as otherwise provided in paragraph e of this section, a person is considered to assume a liability only to the extent that: If property is contributed by a partner to the partnership or distributed by the partnership to a partner and the property is subject to a liability of the transferor, the transferee is treated as having assumed the liability , to the extent that the amount of the liability does not exceed the fair market value of the property at the time of the contribution or distribution.
If, as a result of a single transaction, a partner incurs both an increase in the partner 's share of the partnership liabilities or the partner 's individual liabilities and a decrease in the partner 's share of the partnership liabilities or the partner 's individual liabilities , only the net decrease is treated as a distribution from the partnership and only the net increase is treated as a contribution of money to the partnership.
Generally , the contribution to or distribution from a partnership of property subject to a liability or the termination of the partnership under section b will require that increases and decreases in liabilities associated with the transaction be netted to determine if a partner will be deemed to have made a contribution or received a distribution as a result of the transaction.
The following example illustrates the principles of paragraphs b , c , e , and f of this section. Property contributed subject to a liability; netting of increase and decrease in partner's share of liability.
After the contribution, B remains personally liable to the creditor and none of the other partners bears any of the economic risk of loss for the liability under state law or otherwise. Only the net increase or decrease in B's share of the liabilities of the partnership and B's individual liabilities is taken into account in applying section Because there is no net change, B is not treated as having contributed money to the partnership or as having received a distribution of money from the partnership under paragraph b or c of this section.
Merger or consolidation of partnerships holding property encumbered by liabilities. B also owns a 20 percent interest in partnership S. Immediately thereafter, partnership T distributes the interests in partnership S to its partners in liquidation of their interests in partnership T. B owns a 25 percent interest in partnership S after partnership T distributes the interests in partnership S to B.
If a partnership interest is sold or exchanged, the reduction in the transferor partner 's share of partnership liabilities is treated as an amount realized under section and the regulations thereunder. If one or more partners bears the economic risk of loss as to part, but not all, of a partnership liability represented by a single contractual obligation , that liability is treated as two or more separate liabilities for purposes of section The portion of the liability as to which one or more partners bear the economic risk of loss is a recourse liability and the remainder of the liability , if any, is a nonrecourse liability.
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