Fred-stone Consolidated, Inc., a real estate developer, owns a 50% general partnership interest in Realty Partners, Ltd (Realty). The 50% limited partnership interests are owned by various individual taxpayers. Fred-stone and the limited partner group each contributed $15,000 to form the partnership.
The partnership uses the $30,000 contributed by the partners and a recourse loan of $100,000 obtained from an unrelated third-party lender to acquire $130,000 of rental properties. (All amounts are in millions.) The partners believe they will have extensive losses in the first year due to depreciation expense and initial cash-flow requirements. Fred-stone and the limited partners agreed to share losses equally. To make sure the losses can be allocated as intended, they included a provision in the partnership agreement requiring each partner to restore any deficit balance in their partnership capital account upon liquidation of the partnership.
Fred-stone was also willing to include a provision that requires it to make up any deficit balance within 90 days of liquidation of the partnership. This provision does not apply to the limited partners; instead, they are required to restore any deficit balance in their capital accounts within two years of liquidation of the partnership. No interest will be owed on the deferred restoration payment.
Can Realty allocate the $100,000 recourse debt equally to the two partner groups so that they can deduct their respective shares of partnership losses? Explain.