Partnership liabilities.

• Author: Laffie, Lesli S.
• Position: Rules to prevent taxpayers from manipulating the liability rules

Final regulations (TD 9207) define the term "liability" under Sec. 752 and prescribe rules to prevent taxpayers from manipulating the liability rules to create artificial losses when a partnership assumes a partner's obligations.

New classes of liabilities: Regs. Sec. 1.752-1(a)(4)(i) describes two types of liabilities: "[section]1.752-1 liabilities" and "[section]1.752-7 liabilities." An obligation is a "[section]51.752-1 liability" to the extent it:

* Creates or increases the basis of any of the obligor's assets, including cash;

* Gives rise to an immediate deduction to the obligor; or

* Gives rise to an expense that is not deductible in computing the obligor's taxable income and is not properly chargeable to capital account.

All obligations that do not meet the definition of Regs. Sec. 1.752-1 obligations are Regs. Sec. 1.752-7 liabilities. An "obligation" can arise under a contract, debt, tort, pension, short sale or derivative financial instrument or be any other type of obligation, according to Regs. Sec. 1.7521(a)(4)(ii).

A partner must immediately reduce his or her basis in the partnership when the partner transfers a R.egs. Sec. 1.752-1 liability and the partnership assumes it. Regs. Sec. 1.752-7 liabilities do not result in an immediate basis reduction.

Regs. Sec. 1.752-7 liabilities: Traditional liabilities (such as mortgages) are described in Regs. Sec. 1.752-1. Regs. Sec. 1.752-7 describes liabilities that have not traditionally been treated as liabilities under the partnership rules, including those not included in the historic definition under Rev. Rul. 88-77. This category would include derivatives such as options and other contingent obligations.

Obligations that qualify as liabilities under Regs. Sec. 1.752-7 are treated significantly differently from Kegs. Sec. 1.752-1 liabilities, because they do not result in an immediate basis reduction. Instead, basis reduction is delayed until a triggering or "separation" event...