On July 10, 2026, the Office of Chief Counsel issued CCA 202628009, a not surprising Chief Counsel Advice addressing a conditional DRO of a limited partner in a limited partnership. In the CCA, the partnership agreement merely provided that in the case of a limited partner having a negative capital account, the general partner “may demand” that the limited partner contribute cash to the partnership to restore the negative capital account. If the limited partner does not make the contribution, the general partner “may (but is not required to) withhold distributions otherwise payable to the limited partner up to an amount that would eliminate” the negative capital account. The partnership agreement provided no other remedies for the limited partner’s failure to restore the negative capital account, even upon liquidation of the partnership. The IRS ruled that the above DRO was not a payment obligation under Reg. §1.752-2(b), and the specific “conclusion” was the following:

Because a limited partner’s conditional obligation is not a payment obligation under §1.752(b), the limited partner does not bear the economic risk of loss for a partnership liability.

While the IRS did not specifically address the allocation of any partnership losses attributable to a liability that would have been paid with any capital contribution made by the above-mentioned limited partner, the IRS relied on the §704(b) capital account maintenance rules relating to DROs and capital contribution obligations. Undoubtedly, this means that the IRS would rule that any losses funded by such liability would be allocated to the general partner (assuming the liability wasn’t nonrecourse). What’s missing in the CCA, as is missing in the October 2019 finalized regulations defining a recourse liability, is any discussion of the at-risk rules. Would the general partner be at risk for the liability that funded the losses when the general partner could cause any future distributions that otherwise would be made to the limited partner with the negative capital account to be used to satisfy the partnership’s liability? Keep in mind the stop loss rules contained in §465(b)(4), whereby a taxpayer is not considered at risk when the taxpayer is “protected against loss through…stop loss agreements, or other similar arrangements.” However, if the creditor were seeking enforcement against the partnership for nonpayment of the liability, presumably there wouldn’t be any partnership funds to distribute to the limited partner. So, what’s the answer?

Well, the partnership presumably always could use its assets (and is expected to use its assets) to satisfy its liabilities. In the CCA, the partnership had no right to collect the amount of the negative capital account balance from the limited partner, so one would think that the partner who is ultimately responsible for paying the liability (if the partnership does not do so) and has no claim against another partner if the liability is not satisfied, would be at risk to the extent of that partner’s ultimate payment obligation. Needless to say, that would be the general partner in a limited partnership. However it would be nice to hear from the IRS as to the manner in which the at-risk rules apply to “unrecognized” guarantees or indemnities under the §752 regulations or conditional capital contribution obligations such as in the CCA.

Complex and commonplace issues arising under §465, §704(b), §704(c), and §752 are always a topic at our annual Tax Planning Forum® programs, and this year is no exception. Additionally, we take a deep dive into the general operation of these Code sections at our Fundamentals of Flow-Through® programs. Registration is in full swing; however, the early-bird registration discount ends on July 31st. So, register now!