Final Regulations Governing Allocation of Partnership Recourse Liabilities Under Section 752 of the Internal Revenue Code

The Department of Treasury has recently published final regulations governing the allocation of recourse liabilities of partnerships among its partners under Section 752 of the Internal Revenue Code. These regulations, which were previously proposed in 2013, aim to provide clarity on how partnership liabilities should be allocated among partners who bear economic risk of loss (EROL).

The new guidance focuses on resolving uncertainties regarding EROL, addressing allocation in tiered partnership structures, and clarifying related-party rules. A liability is considered a recourse liability if one or more partners bear EROL, typically through guarantees or lending arrangements.

One key aspect of the regulations is the treatment of multiple partners with EROL. The proportionality rule is adopted to determine how partners share a recourse liability when multiple partners bear EROL. This rule ensures a fair allocation based on each partner’s EROL.

Additionally, the regulations provide updated rules for allocating liabilities in tiered partnership structures. Partnerships must allocate liabilities to partners who bear EROL, with specific provisions for partners who are also partners in lower-tier partnerships.

The regulations also address related party rules, clarifying when a partner may be considered to bear EROL indirectly through a related party. These rules prevent partners from being treated as bearing EROL based on their relationship with another partner who directly bears EROL.

Overall, the Final Regulations provide much-needed clarity on the allocation of partnership recourse liabilities, with significant implications for partners’ tax basis and cash distributions. Partners are advised to consult with their tax advisors to understand the impact of these rules on their partnership liabilities.