## Facts

- IPO II, an Illinois LLC taxed as a partnership, was owned by Gerald R. Forsythe and Indeck Overseas, Inc. (an S corporation wholly owned by Forsythe); Indeck Overseas held a 99% membership interest.
- IPO II purchased an aircraft for about \$9.4 million and financed it with a loan documented as a recourse obligation of IPO II.
- The loan was guaranteed by Forsythe (individually), Indeck Energy (an S corporation), and Indeck Power (a C corporation), but not by Indeck Overseas.
- Each guaranty included an express waiver of rights of reimbursement, contribution, or indemnity against IPO II and its members.
- IPO II allocated the recourse liability largely to Indeck Overseas, increasing its basis and enabling larger loss allocations that would pass through to Forsythe as Indeck Overseas’s sole shareholder.
- The IRS issued an FPAA for 1998 and 1999 reallocating the entire recourse liability to Forsythe, reducing the losses allocable to Indeck Overseas; IPO II petitioned the Tax Court under TEFRA procedures.

## Issues

1. Whether the aircraft loan, treated as a recourse partnership liability under I.R.C. § 752, was allocable to Forsythe or to Indeck Overseas based on who bore the economic risk of loss under Treas. Reg. § 1.752-2.
2. Whether guarantees by corporations related to Forsythe could, under Treas. Reg. §§ 1.752-2(c) and 1.752-4(b), shift any portion of the recourse liability to Indeck Overseas as a “related partner.”
3. What effect the guarantors’ waiver of reimbursement, contribution, and indemnity had on determining economic risk of loss under the constructive liquidation analysis.

## Decision

- The Tax Court sustained the Commissioner’s allocation of the entire recourse liability to Forsythe.
- Indeck Overseas was not allocated any portion of the recourse liability because it did not bear economic risk of loss under the regulations.
- The related-person/related-partner rules did not reallocate the liability to Indeck Overseas based solely on common ownership ties among Forsythe and the guarantor entities.
- The FPAA adjustments reducing losses allocable to Indeck Overseas for 1998 and 1999 were upheld.

## Legal Principles

- Under I.R.C. § 752 and Treas. Reg. § 1.752-2, recourse liabilities are allocated to the partner(s) (or related persons) that bear the economic risk of loss, determined by the constructive liquidation test.
- A guarantor’s waiver of reimbursement, contribution, or indemnity against the partnership and its members is given effect in identifying who ultimately bears the economic risk of loss.
- The “related person” rules may allocate liability to a partner when that partner’s related person bears the risk, but common ownership alone does not shift economic risk to a partner that is not obligated under the constructive liquidation analysis.
- Liability allocations that increase basis must correspond to genuine economic exposure; formal related-party structures cannot substitute for actual economic risk.

## Conclusion

The Tax Court held that the LLC’s recourse aircraft-loan liability was allocable entirely to the individual member who guaranteed the debt without rights of recourse against the partnership, and that related corporate guarantees and ownership relationships did not shift any of that liability to the 99% S corporation member for basis and loss-allocation purposes.


IPO II v. Comm’r, 122 T.C. 295 (2004)