Sec. 752 recourse liabilities and related-party rules.

• Author: Edwards, Vlada

On Dec. 16,2013, the IRS issued proposed regulations under Sec. 752 (REG-136984-12) on partnership recourse liabilities and the special rules for related persons. The proposed regulations address issues that are either ambiguous or not covered under the current regulations. In particular, the proposed regulations provide guidance as to when and to what extent a partner is treated as bearing the economic risk of loss for a partnership liability when multiple partners bear the economic risk of loss for the same partnership liability (overlapping economic risk of loss). In addition, the proposed regulations provide guidance for when a partner has an obligation to pay a liability or makes a nonrecourse loan to the partnership (and no other partner bears the economic risk of loss for that liability) and that partner is related to another partner in the partnership.

Background

Under Sec. 752(a), any increase in a partner's share of a partnership's liabilities, or any increase in a partner's individual liabilities by reason of the assumption by that partner of partnership liabilities, is considered a contribution of money by that partner to the partnership. In turn, under Sec. 752(b), any decrease in a partner's share of the partnership's liabilities, or any decrease in a partner's individual liabilities by reason of the partnership's assumption of those individual liabilities, is considered a distribution of money to the partner by the partnership. Regs. Sec. 1.752-1 separates partnership liabilities into two categories: recourse and nonrecourse. A liability is recourse to the extent that a partner or a related person bears the economic risk of loss for that liability under Regs. Sec. 1.752-2 and nonrecourse to the extent that no partner or related person bears the economic risk of loss for that liability under Regs. Sec. 1.752-2.

Overlapping Risk of Loss

Under the current regulations, there is uncertainty about how partners should share a partnership liability when overlapping economic risk of loss exists. For example, two partners might bear the economic risk of loss for the same partnership liability if they both guarantee that liability. The proposed regulations address the overlapping economic risk of loss by adopting a rule contained in Temp. Regs. Sec. 1.752-1T(d)(3)(i) that preceded the existing final regulations under Sec. 752. Under the proposed regulations, where there is overlapping economic risk of loss for a partnership liability...