IRS Issues Proposed Regulations Addressing Related Party Rules And Overlapping Risk Of Loss

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...