Question: Fredstone Consolidated, Inc. and Gradison Enterprises, Inc. are both real estate developers. Each entity owns a 50% general partner interest in Realty Partners, GP, a general partnership. Fredstone and Gradison 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 thousands.) The partners believe they will have extensive losses in the first year due to depreciation expense and initial cash-flow requirements. Fredstone and Gradison 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. Fredstone 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 Gradison; instead, Gradison is required to restore any deficit balance in its capital account within two years of liquidation of the partnership. No interest will be owed on the deferred restoration payment.

a. Can Realty allocate the $100,000 recourse debt equally to the two partners so that they can deduct their respective shares of partnership losses? Explain.

b. Assume, instead, that Realty is an LLC, but that the lender has required that Fredstone must guarantee 100% (all $100,000) of the debt and Gradison must guarantee 50% ($50,000) of the debt.

Assume, also, that Fredstone and Gradison agree to waive their rights of contribution against each other. Under Proposed Regulations, how is the debt now allocated between Fredstone and Gradison under § 752?