Treasury and the IRS have issued proposed regulations under section 752 relating to recourse liabilities of a partnership and the special rules for related persons. In determining a partner’s share of partnership liabilities, the current regulations under section 752 distinguish between recourse liabilities—liabilities for which a partner or related person bears the economic risk of loss—and non-recourse liabilities—liabilities for which no partner or related person bears the economic risk of loss. The proposed regulations provide guidance as to when and to what extent a partner is treated as bearing the economic risk of loss when multiple partners bear overlapping risk of loss for the same partnership liability. Overlapping risk of loss occurs when the aggregate amount of the economic risk of loss that all partners are determined to bear with respect to a partnership liability under the section 752 regulations exceeds the amount of such liability. The proposed regulations provide that, in such circumstances, the amount of the economic risk of loss that each partner is treated as bearing should be reduced on a pro-rata basis so that the aggregate amount of economic risk of loss equals the amount of the liability. The proposed regulations also provide that when a partner of an upper-tier partnership is also a partner of a lower-tier partnership, and that partner bears the economic risk of loss with respect to a liability of the lower-tier partnership, then the liability should be allocated directly to the partner and not to the upper-tier partnership.
The proposed regulations also contain a carve-out to the related person rules when a subsidiary-corporation of a partnership makes a loan to the partnership or has a payment obligation with respect to a partnership liability. Under the current regulations, a partner who owns 80 percent or more of the interests in a partnership can be treated as related to subsidiary corporations of the partnership. Therefore, if a wholly-owned corporation made a loan to its parent partnership, the partnership liability could be treated as a recourse liability of an 80-percent partner. In contrast, the proposed regulations provide that, when a subsidiary corporation is the lender or has a payment obligation with respect to a partnership liability, the stock owned by the partnership will not be attributed to the partners for the purposes of determining whether the liability is a recourse liability of the partners.
The proposed regulations also provide guidance with respect to persons related to multiple partners and with respect to the “related partner exception” to the related party rules. In particular, under the proposed regulations, the related partner exception only applies when a partner has a payment obligation or is the lender with respect to a partnership liability. This rule is intended to foreclose a broad reading of the Tax Court’s decision in IPO II v. Commissioner, 122 T.C. 295 (2004).
The regulations can be accessed via: [REG-136984-12].pdf