Recourse Partnership Liabilities and Related Party Rules

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[TD 10014]</DEPDOC> <RIN>RIN 1545-BL21</RIN> <SUBJECT>Recourse Partnership Liabilities and Related Party Rules</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains final regulations relating to recourse liabilities of a partnership and special rules for related persons. These regulations affect partnerships and their partners. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> These regulations are effective on December 2, 2024. <E T="03">Applicability dates:</E> For dates of applicability, <E T="03">see</E> §§ 1.704-2(l)(1)(vi), 1.752-2(l)(4), and 1.752-5(a). </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning these final regulations, contact Caroline Hay of the Office of Associate Chief Counsel (Passthroughs and Special Industries), (202) 317-6850 (not a toll-free number). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> This document amends the Income Tax Regulations (26 CFR part 1) under section 752 of the Internal Revenue Code (Code) regarding a partner's share of a recourse partnership liability (final regulations). The final regulations are issued under the express delegation of authority under section 7805(a) of the Code, which provides that “[t]he Secretary shall prescribe all needful rules and regulations for the enforcement of [the Code], including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.” <HD SOURCE="HD1">Background</HD> Section 752(a) provides, in general, that an 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. Conversely, section 752(b) provides that a 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 partnership of the individual liabilities) will be considered a distribution of money to the partner by the partnership. When determining a partner's share of partnership liabilities, the existing regulations under section 752 (existing §§ 1.752-1 through 1.752-3) distinguish between two categories of liabilities—recourse and nonrecourse. In general, a partnership liability is recourse to the extent that a partner or related person bears the economic risk of loss (EROL) as provided in existing § 1.752-2 and nonrecourse to the extent that no partner or related person bears the EROL under existing § 1.752-2. <E T="03">See</E> existing § 1.752-1(a)(1) and (2). A partner bears the EROL for a partnership liability if the partner or related person: (1) has a payment obligation as provided in existing § 1.752-2(b) (except as provided in existing § 1.752-2(d)(2)); (2) is a lender to the partnership as provided in existing § 1.752-2(c) (except as provided in existing § 1.752-2(d)(1)); (3) guarantees payment of interest on a partnership nonrecourse liability as described in existing § 1.752-2(e); or (4) pledges property as security for a partnership liability as provided in existing § 1.752-2(h). On December 16, 2013, the Department of the Treasury (Treasury Department) and the IRS published in the <E T="04">Federal Register</E> (78 FR 76092) a notice of proposed rulemaking (REG-136984-12) that would amend the existing regulations under section 752 relating to a partner's share of a recourse partnership liability and the rules for related persons (proposed regulations). The provisions of the proposed regulations are explained in greater detail in the preamble to the proposed regulations. The Treasury Department and the IRS received two comments responding to the proposed regulations. A public hearing on the proposed regulations was not requested or held. The Treasury Department and the IRS are mindful that the proposed regulations were issued approximately eleven years ago. However, no intervening legislative changes regarding allocations of partnership liabilities have been made, no subsequent changes to regulatory rules concerning allocations of partnership liabilities address the issues in the proposed regulations, and the issues raised by the commenters continue to remain relevant. For these reasons, the Treasury Department and the IRS have determined that a new notice of proposed rulemaking or a further opportunity for public comment would be unlikely to generate different comments. Furthermore, issuing the same rules again as a notice of proposed rulemaking would unnecessarily delay further this rulemaking to the continued detriment of taxpayers desiring to apply these rules to allocate their partnership liabilities. Accordingly, after full consideration of the comments received, these final regulations adopt the proposed regulations with certain modifications in response to the comments described in the Summary of Comments and Explanation of Revisions. <HD SOURCE="HD1">Summary of Comments and Explanation of Revisions</HD> <HD SOURCE="HD2">I. Overlapping Economic Risk of Loss</HD> Under existing § 1.752-2(a), a partner's share of a recourse partnership liability equals the portion of that liability, if any, for which the partner or related person bears the EROL. The proposed regulations would have provided a proportionality rule to determine how partners share a partnership liability when multiple partners bear the EROL for the same liability (overlapping EROL). Under the proportionality rule, the EROL borne by a partner would be the amount of the partnership liability (or portion thereof) multiplied by a fraction obtained by dividing the amount of EROL borne by the partner by the sum of the EROL borne by all partners with respect to that liability. One commenter suggested that the final regulations should not adopt the proportionality rule but should instead allocate liabilities among partners with overlapping EROL in a manner analogous to the manner in which a nonrecourse liability is allocated under § 1.752-3. Specifically, the commenter suggested that such liabilities should be allocated in a manner consistent with the partner's interest in partnership profits. The commenter stated that this allocation approach more closely reflects the partners' economic arrangements and permits losses attributable to the liability to be allocated among the partners without any of the losses being suspended under section 704(d) of the Code. Under the existing section 752 regulations, a recourse partnership liability is shared among partners that bear the EROL for the liability. Conversely, with a nonrecourse partnership liability, no partner bears economic risk with respect to the liability; therefore, the liability is generally allocated in accordance with a partner's share of partnership profits. Adopting a framework applicable to a nonrecourse partnership liability for purposes of determining how a recourse partnership liability should be shared under section 752 could cause the liability to be allocated disproportionally among those partners depending upon their profit-sharing ratios even though the partners bear the same amount of EROL for the liability. The proportionality rule provides a reasonable approach in addressing how a recourse partnership liability should be shared when partners have overlapping EROL. Therefore, the final regulations do not adopt the commenter's suggestion. Another commenter requested clarification on the effect of local law and separate agreements between partners in determining whether partners have overlapping EROL. Under existing § 1.752-2(b)(3), all statutory and contractual obligations relating to a partnership liability are taken into account for purposes of determining a partner's EROL. Therefore, the proportionality rule applies to cases in which partners have overlapping EROL after taking into account all statutory and contractual obligations relating to the partnership liability. The final regulations illustrate in § 1.752-2(f)(9) that these obligations are considered in determining whether the partners have overlapping EROL. <HD SOURCE="HD2">II. Tiered Partnerships</HD> Another overlapping EROL issue under section 752 relates to tiered partnerships. The proposed regulations would have provided guidance on how a lower-tier partnership (LTP) must allocate a liability in cases in which a partner of an upper-tier partnership (UTP) is also a partner of the LTP and that partner bears the EROL with respect to the LTP's liability. Under the proposed regulations, the LTP would be required to allocate the liability directly to the partner. One commenter, while acknowledging that the rule in the proposed regulations provides certainty and is administrable, expressed concerns that this rule could cause the partner in both the UTP and the LTP to recognize gain. The commenter recommended that the final regulations allow the LTP to allocate the liability in any reasonable manner between the partner and the UTP. The final regulations do not adopt this suggestion. The rule in the proposed regulations is the most administrable, especially in a case in which an LTP may not be aware that one of its partners is also a partner in a UTP that is removed from the LTP. Therefore, under the final regulations, an LTP must allocate the liability directly to the partner that bears the EROL with respect to the LTP's liability. Section § 1.752-2(i)(2) of the final regulations also clarifies how the tiered partnership rule applies in a case in which there is overlapping EROL ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 61k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━