In Chief Counsel Advice (CCA) 202628009, released on July 10, 2026, the Internal Revenue Service concluded that a limited partner’s conditional obligation to restore a deficit capital account does not constitute a payment obligation for purposes of Treasury Regulation § 1.752-2(b). Although Chief Counsel Advice cannot be cited as precedent, the memorandum provides important insight into the IRS’s interpretation of partnership liability allocation rules under Internal Revenue Code § 752.
The memorandum involved a limited partnership whose partnership agreement generally shielded limited partners from liability for partnership debts. The agreement permitted the general partner to require a limited partner with a deficit capital account to contribute cash to eliminate the deficit. However, if the limited partner failed to contribute, the general partner’s sole remedy was the discretionary withholding of future distributions. The agreement did not require the limited partner to restore the deficit upon liquidation and provided no additional recourse against the partner.
The IRS analyzed whether this arrangement created an economic risk of loss that would permit the partnership liability to be allocated to the limited partner under Treasury Regulation § 1.752-2. The memorandum concluded that it did not. According to the IRS, a payment obligation exists only when a partner is legally obligated to satisfy a partnership liability if the partnership cannot do so. Because the general partner could satisfy any deficit merely by withholding future distributions and the limited partner had no unconditional legal obligation to make an out-of-pocket payment, the arrangement failed to create the requisite economic risk of loss.
The IRS distinguished this arrangement from a true deficit restoration obligation, which generally requires a partner to contribute personal funds upon liquidation if the partner has a negative capital account. A discretionary right to offset future distributions, standing alone, merely reallocates partnership economics rather than imposing a genuine payment obligation on the partner. As a result, the conditional obligation could not support an allocation of recourse liabilities under § 752.
Partnerships should review partnership agreements that rely on conditional deficit restoration provisions when allocating recourse liabilities among partners. If the agreement does not impose an enforceable obligation requiring a partner to satisfy partnership liabilities with personal assets, the IRS may disregard the provision for purposes of § 752 liability allocations. For more information about this update, contact Liskow attorneys Leon Rittenberg III, Caroline Lafourcade, and Kevin Naccari, and visit Liskow’s Tax Practice page.