Recently proposed regulations issued by the IRS under Section 752 provide technical rules concerning related parties and areas of overlapping economic risk of loss.
REG-136984-12, issued Dec. 16, is prospective and apply to liabilities incurred or assumed by a partnership on or after the date the regulations are published as final regulation, other than liabilities incurred or assumed by a partnership pursuant to a written binding contract in effect prior to that date.
The IRS and Treasury have another project pending under Section 752 that might address the economic risk of loss rules for a thinly capitalized partner, as well as potential regulations under Section 707 relating to disguised sales of property. REG-136984-12 apparently is not intended to address issues related to the Section 707 regulations project.
The proposed regulations address how partners should share a partnership liability if multiple partners bear the economic risk of loss related to that liability. Under the proposed regulations, if the aggregate amount of the economic risk of loss that all partners bear related to a partnership liability exceeds the amount of the liability, the economic risk of loss borne by each partner equals the amount determined by multiplying the amount of the liability by a fraction. The fraction is the amount of economic risk of loss the particular partner bears related to the liability over the aggregate amount of the economic risk of loss borne by all partners related to the liability.
Regarding tiered partnerships, the proposed regulations state that when a partner of the lower-tier partnership, who is also a partner in the upper-tier partnership, bears the economic risk of loss with respect to a liability of the lower-tier partnership, the lower-tier partnership is to allocate the liability directly to the partner.
The proposed regulations also address related-party rules regarding stock ownership by a partnership. Under the proposed regulations, partners in a partnership that owns stock in a corporation that is a lender to the partnership, or that has a payment obligation related to a liability of the corporation's partnership owner, must not be treated as related to the corporation through ownership of the partnership. That is, the proposed regulations disregard Section 267(c)(1) in determining whether a partner is considered as owning stock in a corporation to the extent the corporation is a lender or has a payment obligation related to a liability of its partnership owner.
Under the current Section 752 regulations, if a partnership owns all of the stock in a corporation, a partner that owns 80% or more of the interests in the partnership is considered related to the corporation. If the corporation has loaned money to the partnership or has a payment obligation related to a partnership liability, and the economic risk of loss for the liability is not borne by another partner, any partner that is treated as related to the corporation is considered to bear the economic risk of loss regarding the partnership liability.
The proposed regulations would remove the rule under the current Section 752 regulations that if a person is related to more than one partner in a partnership, the person is treated as related only to the partner with whom the percentage of related ownership is highest. The proposed regulations would add a provision that if a person is a lender or has a payment obligation for a partnership liability and is related to more than one partner, those partners share the liability equally.
The current Section 752 regulations also provide for a related-partner exception, where taxpayers owning interests directly or indirectly in the same partnership are not treated as related persons for purposes of determining the economic risk of loss for partnership liabilities borne by each of them. Taxpayers found some uncertainty in applying the related-partner exception as a result of the holding in IPO II v. Commissioner, 122 T.C. 295 (2004). Under the proposed regulations, the related-partner exception should apply only when a partner bears the economic risk of loss for a liability of the partnership because the partner is a lender under Treas. Reg. Section 1.752-2(c)(1) or has a payment obligation for the partnership liability. The proposed regulations also clarify that an indirect interest in a partnership is an indirect interest through one or more partnerships.
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