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Post Date:  10/8/2019
Last Updated:  10/8/2019

Summary
Cross References
- T.D. 9876
- T.D. 9877

The IRS has issued two Treasury Decisions (TD) containing the final regulations for issues related to certain partnership liabilities.

One TD replaces existing temporary regulations with the final regulations that were in effect prior to the temporary regulations. On April 21, 2017, the President issued an Executive Order (EO) which directed the IRS to review all significant tax regulations issued on or after January 1, 2016, and to take concrete action to alleviate certain burdens imposed on taxpayers by the regulations. In response, the IRS identified temporary regulations concerning the allocation of partnership liabilities for IRC section 707 purposes as meeting some of the regulatory burdens specified in the EO.

The temporary regulations had adopted an approach requiring a partnership to apply the same percentage used to determine a partner’s share of excess nonrecourse liabilities in determining the partner’s share of all partnership liabilities for disguised sale purposes. The IRS has decided to continue studying the merits of this approach and other proposed approaches to determine which results in the most appropriate treatment of liabilities in the context of disguised sales. As a result, the temporary regulations are withdrawn. Thus, under the prior rules that are now in effect, a partner’s share of a recourse liability of the partnership equals the partner’s share of the liability under IRC section 752. A partner’s share of a nonrecourse liability of the partnership is determined by applying the same percentage used to determine the partner’s share of the excess nonrecourse liability under the regulations of IRC section 752.

The other TD addresses the issue of when certain obligations to restore a deficit balance in a partner’s capital account are disregarded under IRC section 704 when partnership liabilities are treated as recourse liabilities, and how bottom dollar payment obligations are treated under IRC section 752.

IRC section 752 separates partnership liabilities into two categories, recourse liabilities and nonrecourse liabilities. A liability is a recourse liability to the extent that any partner bears the economic risk of loss for that liability. A liability is nonrecourse to the extent that no partner bears an economic risk of loss for that liability.

A partner generally bears an economic risk of loss for a partnership liability if the partner has an obligation to make a payment to any person to restore a deficit capital account upon liquidation of the partnership. Regulations contain an anti-abuse rule to which a payment obligation of a partner may be disregarded or treated as an obligation of another person if facts and circumstances indicate that a principal purpose of the arrangement is to eliminate the partner’s economic risk of loss with respect to that obligation, or create the appearance of the partner bearing an economic risk of loss when the substance is otherwise. See T.D. 9877 for details of how these regulations address this issue.

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