Election under Regs. Sec. 1.752-5(b) can benefit partnerships and their partners.

• Author: Ruane, James F.

The new final regulations under Sec. 752 provide rules for allocating partnership liabilities. These regulations replace the temporary regulations issued on Dec. 30, 1988 and amended on Nov. 21, 1989, and the proposed regulations released on July 12, 1991 The final regulations apply to any liability incurred or assumed by a partnership on or after Dec. 28, 1991.

The temporary regulations generally apply to partnership liabilities incurred or assumed after Jan. 29, 1989 and before Dec. 28, 1991. Partnership liabilities that predate the final and temporary regulations are subject to the prior final regulations (the "old regulations") However, the final regulations allow a partnership to elect a "Sec. 752 election" to apply the final regulations to all of its liabilities as of the beginning of its first tax year ending on or after Dec. 28, 1991. In certain instances, a partnership land its partners can benefit by choosing the Sec. 752 regulations to which it will be subject.

Under the old regulations, recourse liabilities are generally allocated to partners in accordance with the partner's loss-sharing ratios. Nonrecourse liabilities are 'shared in accordance with the partner's profit-sharing ratios. At the direction of Congress, the Treasury issued the temporary regulations, which provide that the partner's share of recourse liabilities would be determined according to the portion of economic risk of loss for the liability borne by each partner. Temp. Regs. Sec. 1.752-IT(a)(2) provides that a partner's share of nonrecourse liabilities is equal to the sum of (1) the partner's share of partnership minimum gain under Sec. 704(b), (2) any Sec. 704(c) minimum gain allocable to the partner and i3} the partner's share of any additional nonrecourse liabilities allocated m accordance with the partner's profit-sharing percentage. While the temporary regulations were a major departure from the old regulations, the final regulations represent a fine tuning of the temporary regulations. As a result, a Sec. 752 election by a partnership with liabilities subject to the old regulations may result in profound differences in the tax treatment of partnership liabilities. Partnerships with liabilities subject to the old regulations should thoroughly consider the ramifications of a Sec. 752 election, particularly for partnerships that have borrowed from related parties.

While the final regulations generally restate the temporary regulations, there are a number of...