Debt-financed interest expense allocation?

Can a partnership deduct interest exp on loan proceeds (from re-finance) that it made to its partners? How can it do this? Can the partners deduct this interest exp? If a partnership can deduct, how is it reported? If the partners can deduct, how is it reported? Are there any Codes or Regs to support deductibility?

Need clarification as to the facts to be able to answer your question. Did the partnership borrow? If so, from whom did the partnership borrow? Or did the partnership loan funds to the partners without borrowing? Is the loan secured by real property? Who owns the real property? Did the partnership use the funds in its operations, loan the funds to the partners or distribute the funds to the partners? Is the partnership a passive activity? Are the partners general or limited partners? Etc.

If the partnership made a loan to partners, then the partners would pay interest to the partnership, and that is Income, not deduction. I don't understand your proposition.

It would be helpful if you could answer TaxMan's questions. Usually interest on loans "to" or "from" a company to/from it's partners actually need to be paid to deduct as an expense or claim as income on a federal tax return (even if the company files under the accrual method) because of related party rules. If the company paid a partner interest, it would issue a 1099Int at year end. Is there a loan agreement between the company and the partner(s)?