Careful analysis required for potential Regs. Sec. 1.752-7 liabilities.

• Author: Klahsen, Rick

On October 20, 2009, a U.S. Court of Appeals upheld the decision of the Court of Federal Claims in Marriott International Resorts, L.P., No. 2009-5007 (Fed. Cir. 10/28/09), determining that an obligation to close a short sale was a Sec. 752 liability for which basis adjustment was required. This liability was included in partnership basis by the taxpayer, resulting in the acceleration of a loss. The IRS reduced the basis of the partnership interest because this obligation to complete a short sale was a Sec. 752 liability requiring basis reduction. While the facts of this case are rather specific, the decision highlights the importance of understanding how the regulations treat certain contingent liabilities. Treasury finalized Regs. Sec. 1.752-7 in 2005 (T.D. 9207), and it applies to partnership assumption of liabilities (1.752-7 liabilities) on or after June 24, 2003. These regulations were drafted to deal with the problems resulting from the son-of-boss tax shelter but have implications for many transactions that are not tax shelters.

Regs. Sec. 1.752-7 defines what constitutes a 1.752-7 liability, how these liabilities are treated when assumed by the partnership or another partner, and the impact of a later sale (or redemption) of a partnership interest by the partner that contributed the debt to the partnership. The regulations prevent duplication of losses so that the deduction related to the liability can be taken only by the partner contributing the 1.752-7 liability and not by the partnership or another person. In addition, the regulations prevent the contributing partner from accelerating losses attributable to the liability until the time of economic performance.

What Is a 1.752-7 Liability?

A 1.752-7 liability is any fixed or contingent obligation to make payment without regard to whether the obligation is otherwise taken into account under Regs. Sec. 1.752-1(a)(4)(i), which defines a liability as an obligation that increases the basis of the obligor's assets, gives rise to an immediate deduction to the obligor, or gives rise to an expense that is not deductible or chargeable to capital. A 1.752-7 liability is assumed by a partnership when contributed in a tax-free contribution under Sec. 721(a). Specific types of these liabilities mentioned in the regulations are debt, environmental, tort, contract, pension, short sale, and derivative financial instrument obligations.

The amount of this liability is the amount of cash that a...