Prop. regs. on allocation of partnership debt.

• Author: Bakale, Anthony

On Jan. 19, 2000, the IRS issued proposed regulations on the allocation of nonrecourse liabilities by a partnership. The proposed regulations would revise Regs. Secs. 1.752-3 and -5. In particular, the revisions will (1) affect the third tier of the three-tiered allocation structure contained in the current nonrecourse liability regulations and (2) provide guidance on the allocation of a single nonrecourse liability secured by multiple properties.

Regs. Sec. 1.752-3 currently provides a three-tiered system for allocating nonrecourse liabilities, which applies sequentially. Once an allocation is made under the first tier, that amount is not available for allocation under the second or third tier.

Currently, an allocation to a partner under the first tier represents a liability equal to his share of partnership minimum gain under Sec. 704(b) (Regs. Sec. 1.752-3(a)(1)). Under the second tier, a partner will be allocated a liability equal to the gain he would be allocated under Sec. 704(c) if the partnership disposed of all partnership property (subject to one or more nonrecourse liabilities) in full satisfaction of the liabilities and for no other consideration (Regs. Sec. 1.7523(a)(2)). Finally, under current Regs. Sec. 1.752-3(a)(3), the third tier allocates excess nonrecourse liabilities, using one of several methods. Generally, a partner is allocated any excess nonrecourse liabilities in accordance with his share of partnership profits. The partnership may specify in its agreement the partners' interests in partnership profits for purposes of allocating excess nonrecourse liabilities, provided the specified interests are reasonably consistent with allocations of some other significant item of partnership income or gain. Alternatively, the partnership may choose to allocate excess nonrecourse liabilities in accordance with the manner in which it is reasonably expected that the deductions attributable to such liabilities will be allocated. The partnership is not bound to the same allocation method under the third tier from year to year and may choose to change its allocation method annually.

The three tiers of Regs. Sec. 1.7523 are structured to allocate liabilities to partners who generally would be allocated income or gain on the relief of such liabilities. Under Sec. 752(b), any decrease in a partner's share of partnership liabilities will be considered a distribution of money to him by the partnership. Under Sec. 731(a), a partner will...