Chief Counsel Advice Memorandum Number: 202628009, Office of Chief Counsel, Internal Revenue Service (Written: May 29, 2026, Redacted Version Released: July 10, 2026)

The matter discussed in CCA 202628009 concerns a limited partnership governed by a specific Partnership Agreement. Under the terms of this agreement, limited partners are generally shielded from liability for any partnership obligations. However, the agreement addresses the specific scenario of a limited partner possessing a deficit balance in their capital account.

In such instances, the Partnership Agreement grants the general partner the discretion to demand that the limited partner contribute cash to the partnership to restore the deficit balance. If the limited partner fails to comply with such a demand, the general partner maintains the right, though not the obligation, to withhold distributions otherwise payable to the limited partner, up to an amount sufficient to eliminate the deficit balance. The agreement provides no further recourse against the limited partner for a failure to restore the deficit. Notably, the agreement does not impose a requirement upon a limited partner to restore a deficit balance upon the liquidation of the partnership.

The Inquiry Presented

The Office of the Associate Counsel was asked to provide guidance on a specific regulatory interpretation: whether a limited partner’s conditional obligation to restore a deficit balance in the partner’s capital account constitutes a "payment obligation" for the purposes of determining partnership liability under § 1.752-2(b) of the Income Tax Regulations. Specifically, the inquiry sought to determine if such a conditional obligation results in the limited partner bearing the economic risk of loss for a partnership liability.

Regulatory Framework

The determination hinges on the intersection of several key sections of the Income Tax Regulations. Under § 1.752-1(a)(1), a partnership liability is considered a recourse liability to the extent that a partner or related person bears the economic risk of loss (EROL) under § 1.752-2.

Section 1.752-2(b)(1) establishes the standard for bearing economic risk of loss: a partner bears the economic risk for a partnership liability to the extent that, in a constructive liquidation of the partnership, the partner would be "obligated to make a payment to any person (or a contribution to the partnership) because that liability becomes due and payable and the partner or related person would not be entitled to reimbursement from another partner or person that is a related person to another partner."

Furthermore, § 1.752-2(b)(3)(i) dictates that the determination of whether a partner bears an obligation to make a payment is based on the "facts and circumstances at the time of the determination." This section requires that all statutory and contractual obligations relating to a partnership liability be taken into account, specifically including "obligations to the partnership that are imposed by the partnership agreement, including the obligation to make a capital contribution and to restore a deficit capital account upon liquidation of the partnership as described in § 1.704-1(b)(2)(ii)(b)(3)."

Crucially, for an obligation to be recognized under § 1.704-1(b)(2)(ii)(b)(3) or § 1.704-1(b)(2)(ii)(c)(1), the obligation to restore a deficit balance must be unconditional.

Analysis and Application

The analysis focuses on whether the conditional nature of the partnership agreement's provisions satisfies the requirements of a valid deficit restoration obligation (DRO). To qualify as a DRO under § 1.704-1(b)(2)(ii)(b)(3), a partner must be "unconditionally obligated to restore the amount of such deficit balance to the partnership by the end of such taxable year (or, if later, within 90 days after the date of such liquidation)." Similarly, obligations under § 1.704-1(b)(2)(ii)(c)(1) must also be unconditional.

In the present case, the obligation is not unconditional because it is contingent upon a demand by the general partner. Furthermore, the agreement lacks any requirement for the limited partner to restore a deficit upon the liquidation of the partnership. Consequently, the "payment obligation is conditional and does not qualify as an obligation to restore a deficit balance in a partner’s capital account under § 1.704-1(b)(2)(ii)(b)(3) or § 1.704-1(b)(2)(ii)(c)(1)."

Because the obligation fails to meet these specific regulatory requirements, it cannot be recognized as a payment obligation for the purposes of § 1.752-2(b). When applying the constructive liquidation test under § 1.752-2(b)(1), if the partnership were to liquidate, the Partnership Agreement "does not compel a limited partner with a deficit balance in its capital account to make a contribution to the Partnership."

Conclusion

The Office of the Associate Counsel concludes that because the limited partner's obligation is conditional rather than unconditional, it fails to meet the criteria for a valid deficit restoration obligation. Therefore, "a limited partner’s conditional obligation is not a payment obligation under § 1.752-2(b)," and as a result, "the limited partner does not bear the economic risk of loss for a partnership liability."

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