The Word That Does All the Work.

The memorandum — I.R.S. Chief Counsel Advice 202628009 (May 29, 2026; released July 10, 2026) — is short, non-precedential by its own terms (it states on its face that it “may not be used or cited as precedent”), and easy to skim past as a technicality. That would be a mistake. What it describes is not an exotic structure but the ordinary drafting of countless limited partnership and LLC agreements — real estate funds, family investment partnerships, holding vehicles — in which the general partner may call for a deficit to be restored, but no one is obligated to restore it. The lesson for anyone who relies on a partnership deficit restoration obligation (“DRO”) to support loss deductions is direct and unwelcome: a DRO that a partner can decline, or that the partnership can choose not to enforce, is not a DRO at all for the purposes that matter.

The Chief Counsel Advice is CCA 202628009, dated May 29, 2026 and released July 10, 2026, from the Office of Associate Chief Counsel (Passthroughs, Trusts, and Estates). It responds to a field request from the Large Business & International division’s Pass-Through Entities Practice Area. The issue is stated precisely: whether a limited partner’s conditional obligation to restore a deficit balance in the partner’s capital account is recognized as an obligation to make a payment for a partnership liability under § 1.752-2(b) of the Income Tax Regulations (CCA 202628009).

The answer is one sentence: “A limited partner’s conditional obligation to restore a deficit balance in the partner’s capital account is not a payment obligation under § 1.752-2(b)” (CCA 202628009).

The facts are unremarkable, which is exactly why the conclusion travels so widely. The partnership agreement provided that no limited partner was liable for any partnership obligation. If a limited partner ran a deficit capital account, the general partner may demand a cash contribution to cure it; and if the partner refused, the general partner may — “but is not required to” — withhold future distributions up to the deficit amount. There was no other recourse against the partner, and critically, the agreement did not require a limited partner with a deficit balance to restore it upon liquidation of the partnership (CCA 202628009).

Two contingencies, then. The obligation arose only on the general partner’s demand, and it did not attach at all at liquidation. Each was fatal on its own.

To see why this matters to a client’s tax return, follow the plumbing. Under Reg. § 1.752-1(a)(1), a partnership liability is a recourse liability to the extent a partner bears the economic risk of loss for it. A partner’s share of recourse liabilities is added to the outside basis of his partnership interest — and outside basis (together with the at-risk rules of § 465) is what allows a partner to actually deduct his share of partnership losses. Losses in excess of basis are suspended, not lost forever, but suspended is a cold comfort to a taxpayer who planned around the deduction this year.

Economic risk of loss is tested by a stylized thought experiment. Reg. § 1.752-2(b)(1) asks: if the partnership constructively liquidated — all assets deemed worthless, all liabilities due and payable — would this partner be obligated to make a payment or contribution that he could not recover from anyone else? To the extent he would, he bears the risk, and the liability is recourse to him. A partner who has signed an unconditional DRO answers “yes”: on liquidation, he must write a check to cure his deficit, and that promised check is precisely what the regulation counts.

A DRO is thus a basis engine. It is why so many agreements contain one, and why sophisticated partners sometimes ask for one. But the engine only runs if the obligation is real in the specific sense the regulations demand.

The recognition rules of Reg. § 1.752-2(b)(3) tell you which obligations count. They direct that “[a]ll statutory and contractual obligations relating to the partnership liability are taken into account,” and they expressly list obligations 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)” (CCA 202628009). That cross-reference is the trapdoor. Section 1.704-1(b)(2)(ii)(b)(3) defines a qualifying DRO as one where the partner is “unconditionally obligated to restore” the deficit following liquidation of his interest, by year-end or within 90 days (Treas. Reg. § 1.704-1(b)(2)(ii)(b)(3)).

There is a fallback for agreements that do not spell out an express DRO. Reg. § 1.704-1(b)(2)(ii)(c)(1) treats a partner as obligated to restore a deficit to the extent of any promissory note he contributed, or “the amount of any unconditional obligation” — imposed by the agreement or by state or local law — to make subsequent contributions (Treas. Reg. § 1.704-1(b)(2)(ii)(c)(1)). The same adjective governs the back door as governs the front.

The CCA applies both provisions and finds the clause fails each: “Here, the obligation of a limited partner to restore a deficit balance in the partner’s capital account is conditioned upon demand by the general partner and the Partnership Agreement does not require a limited partner to restore any deficit balance upon liquidation of the Partnership; therefore, 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)” (CCA 202628009).

The memorandum then closes a clever argument before anyone can make it. One might read the § 1.752-2(b)(3)(i)(B) list as recognizing any payment obligation to the partnership imposed by the agreement, with the § 1.704 DRO merely an example. Perhaps. But, the CCA answers, the obligation “must still be a payment obligation under § 1.752-2(b)(1)” — and on a constructive liquidation of this partnership, “the Partnership Agreement does not compel a limited partner with a deficit balance in its capital account to make a contribution” (CCA 202628009). No compelled payment on liquidation, no economic risk of loss, no recourse allocation, no basis. The chain breaks at the first weak link.

None of this arrives out of nowhere. It is of a piece with the government’s decade-long campaign against illusory risk. The 2019 final regulations under § 752 famously refused to recognize bottom-dollar payment obligations — guarantees engineered so the partner is liable only in the practically impossible event that the creditor recovers almost nothing else — precisely because such an obligation does not put the partner at genuine risk (T.D. 9877, 84 Fed. Reg. 54,014 (Oct. 9, 2019); see Treas. Reg. § 1.752-2(b)(3)(ii)–(iii)). The animating principle in both places is identical: the tax law counts a payment obligation only when the partner truly stands to pay. A DRO the partnership may never invoke, and that evaporates at liquidation, is illusory risk of a different flavor. CCA 202628009 simply applies the settled principle to a garden-variety agreement.

The discipline this CCA teaches is one Lighthouse preaches in every context, tax and otherwise: the document has to say what you are counting on it to say — years before anyone tests it, not after. A partner cannot bootstrap basis from a clause that leaves the partnership free to walk away. If loss allocations, at-risk amounts, or the economics of a leveraged partnership depend on a partner bearing real risk, the agreement must impose a genuinely unconditional obligation — restoration triggered by liquidation of the interest, not by the general partner’s mood, and not quietly switched off at the partnership’s own liquidation.

Several practical points follow for anyone reviewing existing structures:

• Read the trigger, not the heading. A section titled “Deficit Restoration Obligation” is worth nothing if its operative verb is may. The words “the general partner may demand” and “may, but is not required to” are precisely what sank the clause here. Conditioning language and carve-outs are where recognition dies.
• Watch the liquidation gap. The most easily missed defect in the CCA was structural: the agreement said nothing about restoration at partnership liquidation. Reg. § 1.704-1(b)(2)(ii)(b)(3) is built around the liquidation event. An obligation that never attaches there fails no matter how it is otherwise worded.
• Reconcile the tax story with the asset-protection story. Here the two disciplines can pull in opposite directions, and clients need to see the trade honestly. An unconditional personal DRO is exactly the promise-to-pay that generates basis — and it is also a personal liability a creditor of the partner may reach. A limited partner who signs a real DRO to unlock loss deductions has, by the same stroke, put his own balance sheet behind the venture. That may be entirely appropriate. But it is a decision to make deliberately, with eyes open, not a box to check because a form agreement carried the language forward. The reflex to have it both ways — the basis of an unconditional obligation and the insulation of a limited partner — is the very thing the regulation refuses to honor.
• Do not retrofit after the losses show up. As in the fraudulent-transfer setting, a clause amended into existence once the deductions are needed invites exactly the scrutiny the taxpayer hoped to avoid. Recognition rests on facts and circumstances at the time of the constructive-liquidation test; a freshly minted, conveniently timed obligation is a poor foundation. The obligation that works is the one built into the structure at inception, for genuine economic reasons, and left undisturbed.

None of this makes deficit restoration obligations bad. Used correctly, an unconditional DRO is a legitimate and powerful tool for a partner who does intend to stand behind partnership debt and wants the basis to prove it. The failure in CCA 202628009 was not that the partners used a DRO. It was that they used the shape of one — the appearance of an obligation without its substance — and expected the Code to treat appearance as reality. It does not. In partnership taxation, as in asset protection, a promise you can decline to keep is not a promise the law will count.