How are 'Nonrecourse deductions' allocated among Marble Slab Creamery members?
Marble_Slab_Creamery Franchise · 2025 FDDAnswer from 2025 FDD Document
7.2.4 Nonrecourse Deductions. "Nonrecourse deductions," as defined in and determined under Regulation Sections 1.704-2(b)(1) and (c), shall be allocated among the Members in accordance with their respective Percentage Interests.
7.2.5 Member Nonrecourse Deductions. "Partner nonrecourse deductions," as defined in and determined under Regulation Sections 1.704-2(i)(1) and (2), shall be specially allocated among the Members in accordance with Regulation Section 1.704-2(i).
7.3 Corrective Allocations. The allocations set forth in Section 7.2 are intended to comply with certain regulatory requirements under Code Section 704(b).
The Members intend that, to the extent possible, all allocations made pursuant to such Sections will, over the term of the Company, be offset either with other allocations pursuant to Section 7.2 or with special allocations of other items of Company income, gain, loss, or deduction pursuant to this Section 7.3.
Accordingly, the Manager is hereby authorized and directed to make offsetting allocations of Company income, gain, loss or deduction under this Section 7.3 in whatever manner the Manager determines is appropriate so that, after such offsetting special allocations are made (and taking into account the reasonably anticipated future allocations of income and
gain pursuant to Sections 7.2.1 and 7.2.2), the Capital Accounts of the Members are, to the extent possible, equal to the Capital Accounts each would have if the provisions of Section 7.2 were not contained in this Agreement and all income, gain, loss and deduction of the Company were instead allocated pursuant to Section 7.1.
Source: Item 23 — RECEIPT (FDD pages 101–346)
What This Means (2025 FDD)
According to Marble Slab Creamery's 2025 Franchise Disclosure Document, the allocation of nonrecourse deductions among members is determined by their respective percentage interests. Specifically, nonrecourse deductions, as defined under Regulation Sections 1.704-2(b)(1) and (c), are allocated in this manner. This means that if a member holds a larger percentage interest in the company, they will be allocated a correspondingly larger share of these deductions.
In contrast, 'partner nonrecourse deductions,' which are defined and determined under Regulation Sections 1.704-2(i)(1) and (2), are specially allocated among the members according to Regulation Section 1.704-2(i). This indicates a different method of allocation for these specific types of deductions, potentially tied to individual member's debt or liabilities within the company.
These allocations are designed to comply with regulatory requirements under Code Section 704(b), and Marble Slab Creamery intends to offset these allocations over time with other allocations or special allocations of company income, gain, loss, or deduction. The manager of the company is authorized to make these offsetting allocations to ensure that the capital accounts of the members align with what they would have been if these special allocation provisions were not in place, and all income, gain, loss, and deduction were allocated according to Section 7.1 of the agreement.