Section 752 Proposed Regulations Regarding Partnership Recourse Liabilities And Rules For Related Persons

On December 13, 2013, the Internal Revenue Service and U.S. Department of the Treasury issued proposed regulations under Section 752 regarding recourse liabilities of a partnership and the special rules for related persons (Proposed Regulations). The Proposed Regulations provide guidance as to when and what extent a partner is treated as bearing the economic risk of loss (EROL) for a partnership liability when multiple partners bear the EROL for the same partnership liability (overlapping EROL). The Proposed Regulations also provide guidance as to when a partner has a payment obligation with respect to a liability or makes a nonrecourse loan to the partnership (and no other partner bears the EROL for that liability) and such partner is related to another partner in the partnership.

On December 13, 2013, the Internal Revenue Service (IRS) and U.S. Department of the Treasure (Treasury) issued the proposed regulations under Section 752 regarding recourse liabilities of a partnership and the special rules for related persons (Proposed Regulations). The Proposed Regulations address the uncertainty related to treating a partner as bearing the economic risk of loss (EROL) for a partnership liability when there are multiple partners that bear the EROL for the same partnership liability (overlapping EROL). The Proposed Regulations also address when a partner has a payment obligation with respect to a liability or makes a nonrecourse loan to the partnership (and no other partner bears the EROL for that liability) and such partner is related to another partner in the partnership.

The Proposed Regulations have generally been well received by practitioners, who view them as clarifying issues raised by the U.S. Tax Court's decision in IPO II v. Commissioner, 122 T.C. 295 (2004) (IPO II), with respect to the "related-partner exception" under Treas. Reg. § 1.752-4(b)(2)(iii).

Section 752—Generally

Under Section 752, a partner may include her share of partnership liabilities in the basis of her partnership liabilities. The determination of a partner's share of partnership liabilities is therefore important in determining, for example, the partner's ability to deduct partnership losses under Section 704(d) and whether a distribution of cash from the partnership will result in the recognition of gain under Section 731. Section 752(a) provides that any increase in a partner's share of partnership liabilities (or an increase in a partner's individual liabilities by reason of the assumption by the partner of partnership liabilities) will be considered a contribution of money by the partner to the partnership. Section 752(b) provides that any decrease in a partner's share of partnership liabilities (or a decrease in a partner's individual liabilities by reason of the assumption by the partner of partnership liabilities) will be considered a distribution of money to the partner by the partnership.

The rules for determining a partner's share of partnership liabilities differ depending on whether the liability is recourse or nonrecourse. Treas. Reg. § 1.752-1(a) provides that a partnership liability is a recourse liability to the extent that any partner or related person bears the EROL for that liability under Treas. Reg. § 1.752-2. To the extent that no partner or related person bears the EROL for a liability, the liability is nonrecourse. The Proposed Regulations address only the allocation of recourse liabilities.

Treas. Reg. § 1.752-2(a) provides that a partner's share of a recourse liability equals the portion of that liability, if any, for which the partner or related person bears the EROL. Treas. Reg. § 1.752-2(b)(1) provides that a partner bears the EROL for a partnership liability to the extent that, if the partnership constructively liquidated, the partner or related person would be obligated to make a payment on the partnership obligation to any person or a...