[Federal Register Volume 78, Number 241 (Monday, December 16, 2013)]
[Proposed Rules]
[Pages 76092-76096]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-29420]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 78, No. 241 / Monday, December 16, 2013 /
Proposed Rules
[[Page 76092]]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-136984-12]
RIN 1545-BL21
Section 752 and Related Party Rules
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations under section 752
of the Internal Revenue Code (Code) relating to recourse liabilities of
a partnership and the special rules for related persons. The proposed
regulations affect partnerships and their partners.
DATES: Written or electronic comments and request for a public hearing
must be received by March 17, 2014.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-136984-12), Room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
136984-12), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC, or sent electronically, via the Federal
eRulemaking Portal at www.regulations.gov (IRS REG-136984-12).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Caroline E. Hay or Deane M. Burke, at (202) 317-5279; concerning the
submissions of comments and requests for a public hearing,
Oluwafunmilayo (Funmi) Taylor at (202) 317-5179 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) under section 752 regarding a partner's
share of recourse partnership liabilities.
Section 752(a) provides, in general, that any increase in a
partner's share of partnership liabilities (or an increase in a
partner's individual liabilities by reason of the assumption by the
partner of partnership liabilities) will be considered a contribution
of money by such partner to the partnership. Conversely, section 752(b)
provides that any decrease in a partner's share of partnership
liabilities (or a decrease in a partner's individual liabilities by
reason of the assumption by the partnership of such individual
liabilities) will be considered a distribution of money to the partner
by the partnership.
When determining a partner's share of partnership liabilities, the
regulations under section 752 distinguish between two categories of
liabilities--recourse and nonrecourse. In general, a partnership
liability is recourse to the extent that a partner or related person
bears the economic risk of loss as provided in Sec. 1.752-2 and
nonrecourse to the extent that no partner or related person bears the
economic risk of loss. See Sec. 1.752-1(a)(1) and (2).
These 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, these proposed regulations provide guidance when a
partner has a payment obligation with respect to a liability or makes a
nonrecourse loan to the partnership (and no other partner bears the
economic risk of loss for that liability) and such partner is related
to another partner in the partnership.
Explanation of Provisions
1. Overlapping Risk of Loss
Under Sec. 1.752-2(a), a partner's share of a recourse partnership
liability equals the portion of that liability, if any, for which the
partner or related person bears the economic risk of loss. Section
1.752-2(b)(1) provides that a partner bears the economic risk of loss
for a partnership liability to the extent that, if the partnership
constructively liquidated, the partner or related person would be
obligated to make a payment on the partnership obligation to any person
or a contribution to the partnership (payment obligation) because the
liability becomes due and payable and the partner or related person
would not be entitled to reimbursement from another partner or a person
that is related to another partner. Moreover, under Sec. 1.752-
2(c)(1), a partner bears the economic risk of loss for a partnership
liability to the extent that the partner or a related person makes (or
acquires an interest in) a nonrecourse loan to the partnership and the
economic risk of loss for the liability is not borne by another
partner. Section 1.752-4(c) provides that the amount of an indebtedness
is taken into account only once.
The IRS and the Treasury Department are aware that there is
uncertainty as to how partners should share a partnership liability if
multiple partners bear the economic risk of loss with respect to the
same liability. The temporary regulations under Sec. 1.752-1T(d)(3)(i)
that preceded the existing final regulations under section 752
addressed the issue of overlapping economic risk of loss by providing
that ``if the aggregate amount of the economic risk of loss that all
partners are determined to bear with respect to a partnership liability
(or portion thereof) . . . exceeds the amount of such liability (or
portion thereof), then the economic risk of loss borne by each partner
with respect to such liability shall equal the amount determined by
multiplying the amount of such liability (or portion thereof) by the
fraction obtained by dividing the amount of the economic risk of loss
that such partner is determined to bear with respect to that liability
(or portion thereof) by the sum of such amounts for all partners.'' The
rule in the temporary regulations, however, was not included in the
final regulations in part in response to comments that the proposed
regulations addressed too many topics generally and should be
simplified to focus on more basic concepts. See 56 FR 36704-02 (1991-2
CB 1125).
The IRS and the Treasury Department have received comments
requesting guidance in this area. The IRS and the Treasury Department
continue to balance the importance of simplicity in regulations under
section 752 against the utility of providing additional guidance on
identified issues. In light of comments received, the IRS and the
[[Page 76093]]
Treasury Department believe that a rule is needed to address
overlapping economic risk of loss due to uncertainty under the current
regulations and believe that the concepts from the temporary
regulations regarding the overlapping risk of loss rule provide a
reasonable approach in addressing how a partnership liability should be
shared among partners bearing the economic risk of loss for the same
liability. Accordingly, these proposed regulations adopt the rule from
the temporary regulations.
2. Tiered Partnerships
The rules under section 752 regarding the allocation of liabilities
in a tiered partnership structure also may result in overlapping
economic risk of loss. Section 1.752-2(i) provides that if a
partnership (the ``upper-tier partnership'') owns (directly or
indirectly through one or more partnerships) an interest in another
partnership (the ``lower-tier partnership''), the liabilities of the
lower-tier partnership are allocated to the upper-tier partnership in
an amount equal to the sum of the following: (1) The amount of the
economic risk of loss that the upper-tier partnership bears with
respect to the liabilities; and (2) the amount of any other liabilities
with respect to which partners of the upper-tier partnership bear the
economic risk of loss. Section 1.752-4(a) further provides that an
upper-tier partnership's share of the liabilities of a lower-tier
partnership (other than any liability of the lower-tier partnership
that is owed to the upper-tier partnership) is treated as a liability
of the upper-tier partnership for purposes of applying section 752 and
the regulations thereunder to the partners of the upper-tier
partnership.
The regulations therefore allocate a recourse liability of a lower-
tier partnership to an upper-tier partnership if either that upper-tier
partnership, or one of its partners, bears the economic risk of loss
for the liability. When a partner of the upper-tier partnership is also
a partner in the lower-tier partnership, and that partner bears the
economic risk of loss with respect to a liability of the lower-tier
partnership, the current regulations do not provide guidance as to how
the lower-tier partnership should allocate the liability between the
upper-tier partnership and the partner. The IRS and the Treasury
Department believe that the lower-tier partnership should allocate the
liability directly to the partner. The IRS and the Treasury Department
believe that this approach is more administrable and ensures that the
additional basis resulting from the liability is only for the benefit
of the partner that bears the economic risk of loss for the liability.
Thus, the proposed regulations modify the tiered-partnership rule in
Sec. 1.752-2(i)(2) to prevent a liability of a lower-tier partnership
from being allocated to an upper-tier partnership when a partner of the
lower-tier partnership and the upper-tier partnership bears the
economic risk of loss for such liability.
3. Related Party Rules
A. Constructive Owner of Stock
Under Sec. 1.752-4(b)(1), a person is related to a partner if the
partner and the person bear a relationship to each other that is
specified in sections 267(b) or 707(b)(1), except that 80 percent or
more is substituted for 50 percent or more in each of those sections, a
person's family is determined by excluding siblings, and sections
267(e)(1) and 267(f)(1)(A) are disregarded.
In determining whether a partner and a person bear a relationship
to each other that is specified in section 267(b), the constructive
stock ownership rules in section 267(c) are applicable. Specific to
partnerships, section 267(c)(1) provides, in part, that stock owned
directly or indirectly by or for a partnership is considered as being
owned proportionately by or for its partners. Therefore, if a
partnership owns all of the stock in a corporation, a partner that owns
80 percent or more of the interests in the partnership is considered to
be related to the corporation under Sec. 1.752-4(b)(1). If the
corporation has a payment obligation with respect to a liability of its
partnership owner, or the corporation lends to the partnership 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
bears the economic risk of loss for the partnership liability under
Sec. 1.752-2. The IRS and the Treasury Department believe that
partners in a partnership, where that partnership owns stock in a
corporation that is a lender to the partnership or has a payment
obligation with respect to a liability of its partnership owner, should
not be treated as related, through ownership of the partnership, to the
corporation. A partner's economic risk of loss that is limited to the
partner's equity investment in the partnership should be treated
differently than the risk of loss beyond that investment. Thus, for
purposes of Sec. 1.752-4(b)(1), the proposed regulations disregard
section 267(c)(1) in determining whether a partner in a partnership is
considered as owning stock in a corporation to the extent the
corporation is a lender or has a payment obligation with respect to a
liability of its partnership owner.
B. Person Related to Multiple Partners
Section 1.752-4(b)(2)(i) provides that if a person is related to
more than one partner in a partnership under Sec. 1.752-4(b)(1), the
related party rules in Sec. 1.752-4(b)(1) are applied by treating the
person as related only to the partner with whom there is the highest
percentage of related ownership (greatest percentage rule). If,
however, two or more partners have the same percentage of related
ownership and no other partner has a greater percentage, the liability
is allocated equally among the partners having the equal percentages of
related ownership.
The IRS and the Treasury Department have recently received comments
requesting that the greatest percentage rule be removed. The commenter
explains that if a person is related to more than one partner under
Sec. 1.752-4(b)(1), the ultimate determination of a person's
relatedness to a partner should not be based on which partner has the
highest percentage of related ownership because differences in
ownership percentages within a 20-percent range do not justify treating
a person as related to one partner over another. After considering the
comments, the IRS and the Treasury Department agree with the comments,
especially given the administrative burden associated with determining
precise ownership percentages above the 80-percent threshold in Sec.
1.752-4(b)(1)(i). Therefore, the proposed regulations remove the
greatest percentage rule and provide 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.
C. Related Partner Exception to Related Party Rules
Section 1.752-4(b)(2)(iii) provides that persons owning interests
directly or indirectly in the same partnership are not treated as
related persons for purposes of determining the economic risk of loss
borne by each of them for the liabilities of the partnership (the
related partner exception). The IRS and the Treasury Department are
aware that taxpayers are uncertain of the application of the related
partner exception following the decision in IPO II v. Commissioner, 122
T.C. 295 (2004). IPO II involved an individual, Mr. Forsythe, who owned
100 percent of an S corporation, Indeck Overseas, and 70
[[Page 76094]]
percent of a second S corporation, Indeck Energy. Mr. Forsythe's
children owned the remaining 30 percent of Indeck Energy. Mr. Forsythe
and Indeck Overseas formed a partnership, IPO II, which received a loan
from a bank. To secure that loan, Mr. Forsythe, Indeck Energy, and
Indeck Power (a C corporation of which Mr. Forsythe owned 63 percent)
entered into guarantees with the bank. IPO II allocated 99 percent of
the increase in basis attributable to this liability to Indeck
Overseas. Id. at 296-97. The Tax Court held that this allocation was
incorrect because Indeck Overseas was not directly or indirectly liable
for the debt. The court, while stressing that it interprets ``the
policy behind the related partner exception as preventing the shifting
of basis from a party who bears actual economic risk of loss to one who
does not,'' did not end its analysis by stating that Mr. Forsythe
guaranteed the debt, and thus his economic risk of loss could not be
shifted to Indeck Overseas which did not guarantee the debt. Id. at
303. The court instead examined whether Indeck Overseas indirectly bore
the economic risk of loss due to its relationship with a related party,
Indeck Energy. The Tax Court held that the relationship between Indeck
Overseas and Indeck Energy arose through Mr. Forsythe. Because the
related partner exception shuts off the relationship between Mr.
Forsythe and Indeck Overseas, it should be turned off for all purposes;
therefore, Indeck Energy was not related to Indeck Overseas. Id. at
304.
The IRS and Treasury Department believe the related partner
exception should only apply where a partner has a payment obligation or
is the lender with respect to a partnership liability. IPO II may be
read to expand the related partner exception to turn off relationships
between related partners in a partnership without limitation. Under
this broad interpretation, the related partner exception could be
improperly applied to turn off attribution of economic risk of loss
between related partners even when none of the related partners
directly bears the economic risk of loss for a partnership liability.
The IRS and the Treasury Department believe that such an interpretation
could have unintended results, including causing intercompany debts to
be treated as nonrecourse because no partner alone owns 80 percent or
more of the lending company and the partners are not treated as related
to each other. The proposed regulations provide that the related
partner exception only applies when a partner bears the economic risk
of loss for a liability of the partnership because the partner is a
lender under Sec. 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.
4. Request for Comments: Liquidating Distributions of Tiered
Partnership Interests
The IRS and the Treasury Department are considering the proper
treatment of liabilities when an upper-tier partnership (transferor)
bears the economic risk of loss for a lower-tier partnership liability
and distributes, in a liquidating distribution, its interest in the
lower-tier partnership to one of its partners (transferee) but the
partner does not bear the economic risk of loss for the lower-tier
partnership's liability. The IRS and the Treasury Department request
comments on the timing of the liability reallocation relative to the
transaction that causes the liability to change from recourse to
nonrecourse.
Proposed Applicability Date
The regulations are proposed to apply to liabilities incurred or
assumed by a partnership on or after the date these regulations are
published as final regulations in the Federal Register, other than
liabilities incurred or assumed by a partnership pursuant to a written
binding contract in effect prior to that date.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866, as supplemented by Executive Order 13563. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to these proposed regulations. Because these proposed
regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ``Addresses''
heading. The IRS and the Treasury Department request comments on all
aspects of the proposed rules. All comments will be available at
www.regulations.gov or upon request. A public hearing will be scheduled
if requested in writing by any person that timely submits written
comments. If a public hearing is scheduled, notice of the date, time,
and place for the public hearing will be published in the Federal
Register.
Drafting Information
The principal authors of these proposed regulations are Caroline E.
Hay and Deane M. Burke, Office of the Associate Chief Counsel
(Passthroughs and Special Industries). However, other personnel from
the IRS and Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income Taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.752-0 is amended by:
0
1. Revising the entry for Sec. 1.752-2(a) and adding new entries for
Sec. 1.752-2(a)(1) and (a)(2).
0
2. Revising the entry for Sec. 1.752-4(b)(2); removing the entries for
Sec. 1.752-4(b)(2)(i), (b)(2)(ii), and (b)(2)(iii); redesignating the
entries for Sec. 1.752-4(b)(2)(iv), (b)(2)(iv)(A) and (b)(2)(iv)(B) as
Sec. 1.752-4(b)(4), (b)(4)(i), and (b)(4)(ii), respectively; and
removing the entry for Sec. 1.752-4(b)(2)(iv)(C).
0
3. Adding new entries for Sec. 1.752-4(b)(3) and (b)(5).
The revisions and additions read as follows:
Sec. 1.752-2 Partner's share of recourse liabilities.
(a) Partner's share of recourse liabilities.
(1) In general.
(2) Overlapping economic risk of loss.
* * * * *
Sec. 1.752-4 Special rules.
* * * * *
(b) * * *
[[Page 76095]]
(2) Related partner exception.
(3) Person related to more than one partner.
(4) Special rule where entity structured to avoid related person
status.
(i) In general.
(ii) Ownership interest.
(5) Examples.
* * * * *
0
Par. 3. Section 1.752-2 is amended by:
0
1. Redesignating paragraph (a) as paragraph (a)(1) and adding a heading
to paragraph (a).
0
2. Adding paragraph (a)(2).
0
3. Adding Example 9 to paragraph (f).
0
4. Revising paragraphs (i)(1) and (2).
0
5. Adding a sentence to the end of paragraph (l).
The additions and revisions read as follows:
Sec. 1.752-2 Partner's share of recourse liabilities.
(a) Partner's share of recourse liabilities-- * * *
(2) Overlapping economic risk of loss. For purposes of determining
a partner's share of a recourse partnership liability, the amount of
the partnership liability is taken into account only once. If the
aggregate amount of the economic risk of loss that all partners are
determined to bear with respect to a partnership liability (or portion
thereof) under paragraph (a)(1) of this section (without regard to this
paragraph (a)(2)) exceeds the amount of such liability (or portion
thereof), then the economic risk of loss borne by each partner with
respect to such liability shall equal the amount determined by
multiplying:
(i) The amount of such liability (or portion thereof) by
(ii) The fraction obtained by dividing the amount of the economic
risk of loss that such partner is determined to bear with respect to
that liability (or portion thereof) under paragraph (a)(1) of this
section, by the sum of such amounts for all partners.
* * * * *
(f) * * *
Example 9. Overlapping economic risk of loss. (i) A and B are
unrelated equal members of limited liability company, AB. AB is
treated as a partnership for federal tax purposes. AB borrows $1,000
from Bank. A guarantees payment for the entire amount of AB's $1,000
liability and B guarantees payment for $500 of the liability. Both A
and B waive their rights of contribution against each other.
(ii) Because the aggregate amount of A's and B's economic risk
of loss under paragraph (a)(1) of this section ($1,500) exceeds the
amount of AB's liability ($1,000), the economic risk of loss borne
by A and B each is determined under paragraph (a)(2) of this
section. Under paragraph (a)(2) of this section, A's economic risk
of loss equals $1,000 multiplied by $1,000/$1,500 or $667, and B's
economic risk of loss equals $1,000 multiplied by $500/$1,500 or
$333.
* * * * *
(i) * * *
(1) The amount of liabilities with respect to which the upper-tier
partnership has the payment obligation or is the lender as provided in
paragraph (c) of this section; and
(2) The amount of any other liabilities with respect to which
partners of the upper-tier partnership bear the economic risk of loss,
provided the partner is not a partner in the lower-tier partnership.
* * * * *
(l) * * * Paragraphs (a)(2), (f) Example 9, and (i) of this section
apply to liabilities incurred or assumed by a partnership on or after
the date these proposed regulations are published as final regulations
in the Federal Register, other than liabilities incurred or assumed by
a partnership pursuant to a written binding contract in effect prior to
that date.
0
Par. 4. Section 1.752-4 is amended by:
0
1. Removing the word ``and'' at the end of paragraph (b)(1)(ii).
0
2. Removing ``267(f)(1)(A).'' at the end of (b)(1)(iii) and adding in
its place ``267(f)(1)(A); and''.
0
3. Adding paragraph (b)(1)(iv).
0
4. Revising paragraph (b)(2).
0
5. Adding paragraphs (b)(3), (4), and (5).
0
The additions and revisions read as follows:
Sec. 1.752-4 Special rules.
* * * * *
(b) * * *
(1) * * *
(iv) Disregard section 267(c)(1) in determining whether stock of a
corporation owned, directly or indirectly, by or for a partnership is
considered as being owned proportionately by or for its partners if the
corporation is a lender as provided in Sec. 1.752-2(c) or has a
payment obligation with respect to a liability of the partnership.
(2) Related partner exception. Notwithstanding paragraph (b)(1) of
this section (which defines related person), if a person who owns
(directly or indirectly through one or more partnerships) an interest
in a partnership is a lender as provided in Sec. 1.752-2(c) or has a
payment obligation with respect to a partnership liability, or portion
thereof, then other persons owning interests directly or indirectly
(through one or more partnerships) in that partnership are not treated
as related to that person for purposes of determining the economic risk
of loss borne by each of them for such partnership liability, or
portion thereof. This paragraph (b)(2) does not apply when determining
a partner's interest under the de minimis rules in Sec. 1.752-2(d) and
(e).
(3) Person related to more than one partner. If a person that is a
lender as provided in Sec. 1.752-2(c) or that has a payment obligation
with respect to a partnership liability, or portion thereof, is related
to more than one partner under paragraph (b)(1) of this section, the
partnership liability, or a portion thereof, is shared equally among
such partners.
(4) Special rule where entity structured to avoid related person
status--(i) In general. If--
(A) A partnership liability is owed to or guaranteed by another
entity that is a partnership, an S corporation, a C corporation, or a
trust;
(B) A partner or related person owns (directly or indirectly) a 20
percent or more ownership interest in the other entity; and
(C) A principal purpose of having the other entity act as a lender
or guarantor of the liability was to avoid the determination that the
partner that owns the interest bears the economic risk of loss for
federal income tax purposes for all or part of the liability; then the
partner is treated as holding the other entity's interest as a creditor
or guarantor to the extent of the partner's or related person's
ownership interest in the entity.
(ii) Ownership interest. For purposes of paragraph (b)(4)(i) of
this section, a person's ownership interest in:
(A) A partnership equals the partner's highest percentage interest
in any item of partnership loss or deduction for any taxable year;
(B) An S corporation equals the percentage of the outstanding stock
in the S corporation owned by the shareholder;
(C) A C corporation equals the percentage of the fair market value
of the issued and outstanding stock owned by the shareholder; and
(D) A trust equals the percentage of the actuarial interests owned
by the beneficial owner of the trust.
(5) Examples. The following examples illustrate the principles of
paragraph (b) of this section.
Example 1. Person related to more than one partner. A owns 100
percent of X, a corporation. X owns 100 percent of Y, a corporation.
A and X are equal members of P, a limited liability company treated
as a partnership for federal tax purposes. Y
[[Page 76096]]
guarantees payment of a liability of P of $1,000. A and X are not
lenders as provided in Sec. 1.752-2(c) and do not otherwise have a
payment obligation with respect to the liability. Therefore,
paragraph (b)(2) of this section does not apply for purposes of
determining the economic risk of loss borne by A and X. Under
paragraph (b)(1) of this section, Y is related to A and X.
Therefore, under paragraph (b)(3) of this section, A and X each have
a $500 share of the $1,000 liability.
Example 2. Related partner exception. A owns 100 percent of two
corporations, X and Y. A and Y are members of P, a limited liability
company treated as a partnership for federal tax purposes. P borrows
$1,000 from Bank. A and X each guarantee payment of the $1,000 debt
owed to Bank. A and Y are not treated as related to each other
pursuant to paragraph (b)(2) of this section because A has the
payment obligation with respect to the $1,000 debt pursuant to Sec.
1.752-2(b). Y is therefore not treated as related to X. Because A is
the only partner that bears the economic risk of loss for P's $1,000
liability, A's share of the liability is $1,000 under Sec. 1.752-
2(a)(1).
Example 3. Related partner exception. A owns 100 percent of two
corporations, X and Y. X owns 79 percent of a corporation, Z, and Y
owns the remaining 21 percent of Z. X and Y are members of P, a
limited liability company treated as a partnership for federal tax
purposes. P borrows $2,000 from Bank. Both X and Z guarantee payment
of the $2,000 debt owed to Bank. X has a payment obligation with
respect to P's $2,000 liability; therefore, paragraph (b)(2) of this
section applies and X and Y are not treated as related for purposes
of determining the economic risk of loss borne by each of them for
P's $2,000 liability. Because X and Y are not treated as related,
and neither owns an 80 percent or more interest in Z, neither X nor
Y is treated as related to Z under paragraph (b)(1) of this section.
Because X bears the economic risk of loss for P's $2,000 liability,
X's share of the liability is $2,000 under Sec. 1.752-2(a)(1).
Example 4. Related partner exception and person related to more
than one partner. Same facts as in Example 3, but X guarantees
payment of only $1,200 of the debt owed to Bank and Z guarantees
payment of $2,000. Pursuant to paragraph (b)(2) of this section, X
and Y are not treated as related to the extent of X's $1,200
guarantee. Because X bears the economic risk of loss for $1,200 of
P's $2,000 liability, X's share of the liability is $1,200 under
Sec. 1.752-2(a)(1). In addition, because paragraph (b)(2) of this
section does not apply with respect to the remaining portion of the
liability that X did not guarantee, X and Y are treated as related
for purposes of the remaining $800 of the liability pursuant to
paragraph (b)(1) of this section. Therefore, Z is treated as related
to X and Y under paragraph (b)(1) of this section. Pursuant to
paragraph (b)(3) of this section, X and Y share the $800 equally. In
sum, X's share of P's $2,000 liability is $1,600 ($1,200 under Sec.
1.752-2(a)(1) and $400 under paragraph (b)(3) of this section) and
Y's share of P's $2,000 liability is $400 under paragraph (b)(3) of
this section.
Example 5. Entity structured to avoid related person status. A,
B, and C form a general partnership, ABC. A, B, and C are equal
partners, each contributing $1,000 to the partnership. A and B want
to loan money to ABC and have the loan treated as nonrecourse for
purposes of section 752. A and B form partnership AB to which each
contributes $50,000. A and B share losses equally in partnership AB.
Partnership AB loans partnership ABC $100,000 on a nonrecourse basis
secured by the property ABC buys with the loan. Under these facts
and circumstances, A and B bear the economic risk of loss with
respect to the partnership liability equally based on their
percentage interest in losses of partnership AB.
* * * * *
0
Par. 5. Section 1.752-5 is amended by adding a second sentence in
paragraph (a) and removing the word ``However'' at the beginning of the
third sentence and adding in its place ``In addition''.
The addition reads as follows:
Sec. 1.752-5 Effective dates and transition rules.
(a) * * * However, Sec. 1.752-4(b)(1)(iv), (b)(2), (b)(3), and
(b)(5) Examples 1, 2, 3, and 4 apply to any liability incurred or
assumed by a partnership on or after the date that these regulations
are published as final regulations in the Federal Register, other than
a liability incurred or assumed by a partnership pursuant to a written
binding contract in effect prior to that date. * * *
* * * * *
Beth Tucker,
Deputy Commissioner for Operations Support.
[FR Doc. 2013-29420 Filed 12-13-13; 8:45 am]
BILLING CODE 4830-01-P