IRS says a conditional deficit restoration promise buys a partner no basis

The IRS released a Chief Counsel Advice memorandum on July 10 concluding that a conditional deficit restoration obligation does not make a limited partner bear the economic risk of loss for a partnership liability. Ed Zollars at Current Federal Tax Developments reported the memorandum, which was written on May 29. The agreement at issue let the general partner decide whether to demand that a limited partner contribute cash to clear a negative capital account.

That discretion was fatal. Because the obligation was conditional rather than unconditional, it failed the payment obligation test under Treasury Regulation 1.752-2(b), so no recourse liability was allocated to the partner. A Chief Counsel Advice memorandum binds nobody beyond the taxpayer it addresses and cannot be cited as precedent. It still shows how the IRS reads the rule.