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77 Taxes 20 (1999)
Qualified Nonrecourse Financing and the Allocation of Exculpatory Liabilities

handle is hein.journals/taxtm77 and id is 524 raw text is: QUALIFIED NONRECOURSE FINANCING AND THE ALLOCATION OF EXCULPATORY LIABILITIES SUSAN KALINKA DISCUSSES THE GUIDANCE PROVIDED BYTHE IRS IN LTR 199906025 REGARDING THE RECENTLY ISSUED QUALIFIED NONRECOURSE FINANCING REGULATIONS AND THE ALLOCATION OF EXCULPATORY LIABILITIES AMONG PARTNERSHIP PROPERTIES.' In IRS Letter Ruling 199906025,2 the IRS ruled that a general obli- gation of a partnership for which no partner was personally liable constituted qualified nonrecourse financing and gave the partner- ship broad discretion to allocate the debt among its multiple prop- erties. The partnership obligation in LTR 199906025 was an exculpa- tory liability. An exculpatory liability is a partnership liability that is not se- cured by specific partnership property and that is recourse to the partnership as an entity, but is explicitly not recourse to any partner.3 If a partnership defaults on an exculpatory liability, the creditor is entitled to seize any of the partnership's assets in satisfac- tion of the debt, but may not seek payment from any of the partners. To date, there has been little guid- ance with respect to the proper treatment of a partnership's excul- patory liabilities. Recently issued regulations (the qualified nonre- course financing regulations)4 of- 01999 S. Kalinka fer some guidance with respect to treating an exculpatory liability as qualified nonrecourse financing for purposes of the at-risk rules. LTR 199906025 offers a liberal interpre- tation of the regulations and is one of the IRS's first rulings to offer guidance with respect to the allo- cation of exculpatory liabilities among partnership properties.5 LTR 199906025 should be of par- ticular interest to members of a limited liability company (LLC) because an LLC is likely to have exculpatory liabilities. Under state law, members of an LLC are not personally liable for any of the LLC's debts or obligations. Thus, an obligation for which an LLC is personally liable is likely to be an exculpatory liability unless one or more of the members has in- curred personal liability for repay- Susan Kalinka, J.D., is the Harriet S. Daggett-Frances Leggio Landry Professor of Law at the Paul M. Hebert Law Center, Louisiana State University, in Baton Rouge. BY SUSAN KALINKA 2).@ 1

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