Volume 5 Winter 2011 Number 2 - Charleston Law Review

CHARLESTON LAW REVIEW [Volume 5that the deemed cash distribution exceeds the adjusted basis ofthe partner’s interest in the partnership immediately before thedistribution. 87 On the other hand, the partner should receive astep-up in his outside basis for his partnership interest. 88 Thus,one should have offsetting basis adjustments, but the partnershould realize discharge of indebtedness income.The admission of a creditor in satisfaction of a portion ofnonrecourse debt may result in a reallocation of debt among thepartners. In this connection, Treas. Reg. § 1.752-2(c) provides asfollows:(c) Partner or related person as lender[—](1) In general[—]Apartner bears the economic risk of loss for a partnershipliability to the extent that the partner or a related personmakes (or acquires an interest in) a nonrecourse loan to thepartnership and the economic risk of loss for the liability is notborne by another partner. 89So assume that a creditor is admitted to a partnership inpartial satisfaction of existing nonrecourse debt. The creditor isnow both a creditor and a partner in the partnership. Theremaining portion of the nonrecourse debt should be treated asrecourse to the creditor pursuant to the above-cited regulation. 90Thus, there should be a shifting of the remaining portion of thenonrecourse debt from the other partners to the creditor-partner.Because the other partners reduce their allocation of nonrecoursedebt, they are also allocated fewer deductions attributable tosuch nonrecourse debt.The admission of the creditor as a partner in exchange for aportion of nonrecourse debt should also trigger a revaluation ofpartnership property. The resulting capital accounts must bebased on § 704(c) principles. 91 This adjustment is necessary inorder to ensure that the book values are properly reflected sothat the partners will share the tax items arising from theproperties in a manner that accords with principles under §24687. I.R.C. § 731(a).88. I.R.C. § 705(a).89. Treas. Reg. § 1.752-2(c)(1) (2009).90. Id.91. Treas. Reg. § 1.704-(1)(b)(2)(iv)(f)(g) (2006).