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Section 752 Proposed Regulations

Posted on February 07, 2014 by Jeff Hobbs

Section 752 introduces new proposed regulations.

On January 30, 2014, the Treasury Department issued proposed regulations under Section 752 of the Internal Revenue Code addressing partnership liabilities and under Section 707 of the Code relating to disguised sales of property. 

The proposed section 752 regulations provide new guidance on classifying and allocating partnership liabilities. The new section 752 regulations fundamentally alter the way economic risk of loss is determined with the goal that only “commercial” guarantees will be afforded recourse treatment, and thus be allocated to the guaranteeing partner, for income tax purposes.  All other guarantees – in particular “bottom dollar” guarantees – will be ignored.  The proposed section 752 regulations also modify the allocation of excess non-recourse liabilities among partners.

The proposed section 752 regulations on both recourse and non-recourse liabilities generally will apply only to liabilities incurred or assumed by a partnership, and to payment obligations entered into by a partner, on or after the date of enactment of final regulations.  However, under a special transition rule, for seven years following the date of enactment of final regulations, a partnership may continue to apply the existing regulations to treat an existing partner as recourse in respect of indebtedness in an amount equal to the excess of the existing partner’s recourse liabilities over the existing partner’s adjusted basis in its partnership interest, in each case immediately prior to the effective date of the final regulations, subject to certain limitations.

Contributed by:Goodwin Proctor LLP