Free Reply to Response to Motion - District Court of Federal Claims - federal

Case 1:06-cv-00407-ECH
Section 734

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ice. Individual respondents may require greater or less t_me, depending on their pamcular circumstances, Comments concerning the accuracy of thts burden estimate and suggestions for SubpartD.--Provisi0ns ommonoOtherSubjects reducing this burden should be dxrected C t to the Internal Revenue Serwce, Attn: Section 752.--Treatment 0f Certain IRS Reports Clearance Officer, T.FP, Liabilities Washington, D.C. 20224 and to the 26 CFR 1 752-0 Table of_ontents Office of Management and Budget, Attn. Desk Officer for the Department of the T.D. 8380 Treasury, Office of Informatxon and Regulatory Affairs, Washington, D.C DEPARTMENT OFTHETREASURY 20503 Internal Revenue Service 26 CFRParts 1 and 602 Introduction Treatment of Partnership Liabilities AGENCY Treasury Internal Revenue Service, This document adds new regulation §§1.752-0 through 1752-5 to the Income Tax Regulations (26 CFR part 1) under section 752 of the Internal Revenue Code of 1986 and removes existing §§1.752-0T through 1.752-4T. Background Proposed [PS-229-84, 1989-1 C B. 1057] and temporary regulations [T.D. 8237, 1989-1 C B 180] under section 752 were pubhshed on December 30, 1988, and amended on November 21, 1989 [T.D 8274, 1989-2 C.B 101], and July 26, 1991 [T.D. 8355, 1991-2 C.B. 329], ("temporary regulations"). This document removes the temporary regulations effective December 27, 1991. On July 26, 1991, the Internal Revenue Semce pubhshed proposed regulat_ons [PS-49-91, 1991-2 C.B. 1125] simplifying the temporary regulations and addressing several issues raised by commentators with respect to the temporary regulations. Written comments were received and a public hearing was held on September 17, 1991. Explanation of Provistons The collection of reformation contamed in these final regulattons has been reviewed and approved by the Office of Management and Budget in accordance with the requirements of the Paperwork Reduction Act of 1980 (44 U.S C. 3504(h)) under control number 15451090. The estlmated annual burden per respondent vanes from 3 minutes to 8 minutes, depending on individual c_rcumstances, w_th an estimated average of 5 minutes The estimates are an approximation of the average time expected to be necessary for a collection of reformation They are based on such mformat_on as _s available to the Internal Revenue Serv218 1992-1 C.B. I SharmgRecourseLmbtlities The final regulations prowde that a partnersh_p liabd_ty _s a recourse hability to the extent that any partner bears the economic risk of loss for that habfl=ty, and a partner's share of any recourse hab_l_ty of the partnership equals the port_on, ff any, of the economic risk of loss for the liability that _s borne by the partner. The final regulations also provide that a partner bears the economic risk of loss for a partnership habd_ty to the extent that the partner or related person would be obligated to make a contnbutlon or payment w_th respect to a partnership habflrty (and would not be entitled to be reimbursed for the contrl-

increases the basis of its undistributed property to the extent provided in section 734(b)(l)(B)

butlon or payment by another partner, a .ii person related to another partner, or the ._ partnership) if the partnership con- ,_ structlvely liquidates In a constructive hqu_datlon the following events are deemed to occur: (A) all of the partnership's hablllt_es become due and payable m full, (B) with the exception of property contributed to secure a partnershlp hablhty, all of the partnershlp's assets (including money) become worthless, (C) the partnership disposes of all of _ts assets m a fully taxable transact=on for no consideration (other than rehef from certain hablllt_es), (D) the partnership allocates its 1terns of income, gain, loss, deduction, and credit for the year among the partners, and (E) the partnership completely hqu=dates The constructive liquidation approach is used to determine who bears the economic risk of loss for a partnership habdlty takmg into account the manner m which the partners have agreed to share economic losses and taking into account all arrangements among the partners, related persons, and the partnership II. Sharing Nonrecourse Llabthtte_. The final regulations provide that, ff no parlner bears the economic risk of loss for a partnership habihty, the liability is a nonrecourse hablhty of the partnership. The partners generally share nonrecourse habflmes in accordance w_th their interests in partnership profits. However, the final regulations require that the nonrecourse hablhtles of a partnership be allocated among the partners first to reflect the partners' shares of any partnership minimum gain (within the meaning of section 704(b)) and any gain that would be allocated to the partners under section 704(c) (or in the same manner as section 704(c) m connection with a revaluation of partnership property) ff the partnership disposed of (m a taxable transaction) all partnersh=p property subject to one or more nonrecoursc habllmes of the partnership in full satlsfaction of the habfl_t_es and for no other consideration. IIl. Mod_ficauons To Proposed Regulattons After full consideration of the cornments and the statements made at the pubhc hearing, the following actions were taken w_th respect to the proposed regulations _ssued on July 26, 1991. A. Guarantee of Interest Rule. Section 1 752-2(e) of the proposed and final regulations contains a guarantee

ACTION: Final regulations and removal of temporary regulations, SUMMARY: Th_s document contains final regulations relating to the treatment of partnership hablhtles The final regulatlons reflect changes to the apphcable tax law made by section 79 of the Tax Reform Act of 1984 IPub. L. 98-369, 1984-3 CB (Vol. 1) 1, 105] Theregulatlons affect partnerships and the=r partners, and are necessary to prowde them with guidance needed to comply with the applicable tax law EFFECTIVE DATE' These regulations are effective December 28, 1991, and generally apply to hablhties recurred or assumed by a partnership on or after December 28, 1991 SUPPLEMENTARY INFORMATION:

Paperwork Reductton Act

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Section 752

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interest rule generally providing that if or more partners guarantee the pay: of more than 25 percent of the total interest that will accrue on an otherwise nonrecourse partnership hablhty during its term, the loan is deemed to be recourse to those partners to the extent of the present value of the guaranteed future interest payments. To the extent that the guarantee of interest _s subject to a contingency, the principles of §1.7522(b)(4) apply. The final regulations add a de mmlmls exception to the guarantee of interest rule that generally parallels the de mlmmls exception to the rule for a guarantee of a aonrecourse loan by a partner or related person, B. Economic Risk of Loss Analysts Section 1 752-2(b)(2) of the proposed regulations provides that, for purposes of the constructive hquldatlon analysis, gain or loss on the deemed disposition of the partnership's assets is computed as follows" (1) if the creditor's r_ght to repayment of a partnership hab_llty is limited solely to one or more assets of the partnership, gain or loss is recognized m an amount equal to the difference that is the amount by the of the hability between extinguished deemed disposition and the tax basis m those assets; and (2) a loss is recognized equal to the remaining taxnot taken all of the partnership's assets basis of xnto account in (1). The final regulations clarify that the use of book value rather than tax basis for purposes of the constructwe liquidation analysis is appropriate _f tax basis and book value differ by reason of adjustments made under section 704(c) and the section 704(b) regulations C. Pledged Assets. Section 1 752-2(h)(I) of the proposed regulations provides that a partner as considered to bear the economic risk of loss for a partnership habdtty to the extent of the value of any of the partner's separate property (other than an interest in the partnership) that ts pledged as security for the partnership habfl_ty Th_s provesion has been clarified m the final regulations as applying to a related person's separate property that is pledged as security, as well as that of a partner, Section 1.752-2(h)(2) of the proposed and final regulations prowdes that a parther is considered to bear the economic risk of loss for a partnership hablhty to the extent of the value of any property that the partner contributes to the part-

nershzp solely for the purpose of securing a partnership habdity. The rule governlng when property is contributed solely for the purpose of secunng a partnership hablhty _s modified in the final regulatzons The purpose of the modification ts to provide some flex_b_hty in applying the rule m situations where allocations are mandated by the prowslons of sectaon 704 and the regulations thereunder D. Partner's Share of Nonrecourse Liabthttes. The proposed and final regulations require that the nonrecourse habllit_es of a partnership be allocated among the partners first to reflect the partners' shares of any partnership mmmmm gain, then to reflect any gain that would be allocated to the partners under section 704(c), and finally m accordance with the partners' interests in partnership profits. The partnership agreement may specify the partners' interests m partnershtp profits provaded the interests so specified are reasonably consistent with allocataons (which have substantial economic effect under the sectaon 704(b) regulations) of some significant _tem of partnership income or gain Alternatwely, nonrecourse habllities in excess of those allocated to reflect partnership mlmmum gain and section 704(c) gam ("excess nonrecourse liabditles") may be allocated among the partners in accordance with the manner m which at _s reasonably expected that the deductlons attributable to those nonrecourse llabfl_taes wall be allocated. The final regulations provade that excess nonrecourse habihtles need not be allocated under the same method each year E. De Mmmtts Rules Section 1.752-2(d) of the proposed and final regulations provides de mimmts exceptions to the general economic risk of loss analys_s in certain situations when a partner _s the lender or guarantor One of the requirements of the de mlnzmis rules m the proposed regulations was that a partner maintain a 10 percent or less interest m each _tem of partnershap income, gain, loss, deduction, and credit for any taxable year of the partnership The final regulations clarify that the de mtntmts rules apply only as long as the partner maintains a 10 percent or less interest m each 1tern of partnership mcome, gain, loss, deduction, or credit for every taxable year that the partner is a partner in the partnership, Some commentators suggested that the 10 percent requirement of the de mmimts

rule be eliminated After full conslderat_on of the comments, the requirement has not been ehmmated The leglslatwe history of section 752 indicates that regulatlons under this section should apportlon partnership hablhtzes based on the manner in which the partners, and persons related to the partners, share the economic risk of loss for the habfl_ties (other than bona f_de nonrecourse habllitles) H R. Rep. No 861, 98th Cong., 2d Sess 869 (1984). The de mtntmts rule is a narrow exception to the general risk of loss analysts, applying only when a partner who is in the buslness of lending money and whose relataonship to the partnership is primarily that of a lender also owns a small equity interest m the partnershap. Because it is hmlted to these narrow circumstances, the exception prowded by the de mtmmts rule does not d_stort the economic risk of loss analysis. F Effective Dates The fmal regulations are effective for habdltles recurred or assumed by the partnership on or after December 28, 1991. The final regulations provide a partnership with an electaon to apply the regulations to all of its laablllties to which the provisions of §§1 752-1 through 1 752-4 do not otherwise apply as of the beginning of the first taxable year of the partnership ending on or after December 28, 1991. Several commentators have suggested that there _s some confusion regarding the treatment of certain situations under the effectwe date rules of the temporary and final regulations. The following addresses the comments recewed and _s not intended to be a complete restatement of the effective date provas_ons. F_rst, regulations under section 752 are generally effective based on the date liabihtles are recurred. As a result, a partnership w_th habd_tles recurred in different periods may allocate bas_s to _ts partners under different sets of regulat_ons: (1) § 1.752-1 (TD 6175 and TD 6500) (the "old" regulations), (2) §1.752-0T to §1.752-4T (TD 8237, TD 8274, and TD 8355) (the "temporary" regulations), and (3) the final regulations contained m th_s document Second, xf a grandfathered partnership habllity is materially modified, _t loses _ts grandfatherlng and becomes subject to a different set of regulations, depending on when the mater_al modification occurs. Third, a nonrecourse habflzty incurred or assumed by a partnership prior to 1992-1 C.B. 219

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Section 752 March 1, 1984, is not governed by the temporary or final regulations unless an election has been made to apply the temporary or final regulations to the liability or unless a material modification of the habillty has occurred. If a habihty incurred or assumed by the partnership prior to March 1, 1984, is guaranteed by a partner after March 1, 1984, the liabdlty is not governed by the temporary or final regulations Similarly, if a th_rdparty nonrecourse liability incurred or assumed by a partnership prior to January 30, after January 30, 1989, andrelated person 1989, is guaranteed by a agam assuming no election is made to apply the temporary or final regulations to the habdlty, the hablhty is not governed by the temporary or final regulations. In addition, the subsequent guarantee by a partner of a habdlty incurred or assumed by the partnership prior to March 1, 1984, or the subsequent guarantee by a related person of a liabihty incurred or assumed by the partnership prior to January 30, 1989, zs not considered a materlal modification of the habfllty for purposes of applying the regulations under section 752. Specml Analyses These final regulations are not major rules as defined in Executtve Order 12291 · Therefore, a Regulatory Impact Analys_s is not reqmred. It is hereby certified that section 553(b) of the Administrative Procedure Act (5 U S.C chapter 5) does not apply to these regulations It is hereby cert2fied that these rules do not have a s_gmflcant impact on a substannal number of small entrees. Therefore, a final Regulatory Flexlblhty Analysts under the Regulatory Flexlbdlty Act (5 U S C. chapter 6) is not reqmred. Pursuant to section 7805(f) of the for the Business of was submitted to the Code, the notice Administration rulemakmg Small regulations proposed for comment on the impact of the rules on small business, Adoption of Ametutments to the Regulations areAccordingly, 26 CFR parts 1 and 602 amended as follows PART I--INCOME TAX, TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953 Paragraph 1. The authority for part 1 continues to read in part as follows: 220 1992-1 C.B.

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Authority: Sec. 7805, 68A Stat. 917; 26 U.S.C. 7805 *** Par. 2. Sections 1.752-0T through 1.752-4T are removed Par 3. Sections 1 752-0 through 1.752-5 are added to read as follows: §1.752-0 Table of Contents. This section hsts the captions that appear m §§1.752-1 through 1.752-5· §I 752-1 Treatment of partnership habilittes. (a) Defimtlons. (1) Recours,e liability defined. (2) Nonrecourse liability defmed, (3) Related person. (b) Increase in partner's share of hablliues. (c) Decrease m partner's share of habihtles. (d) Assumption of hability· (e) Property subject to a liabihty. (f) Netting of increases and decreases m llabditles resulting from same transaction, (g) Example. (h) Sale or exchange of partnership interest (i) Bifurcation of partnership habllities. §1 752-2 Partner's share of recourse liabihties. (a) In general. (b) Obligation to make a payment· (1) In general (2) Treatment upon deemed disposition. (3) Obhgatlons recognized. (4) Contingent obhgations, (6) Deemed satisfaction of (5) Reimbursement rights. obhgation (c) Partner or related person as lender· (1) In general. (2) Wrapped debt (d) De mmtmts exceptions, (1) Partner as lender. (2) Partner as guarantor (e) Specml rule for nonrecourse liabihty with interest guaranteed by a partner (1) In general. (2) Computation of present value, (3) Safe harbor,

(4) De mtmmis exception (f) Examples (g) Time-value-of-money considerations (1) In general· (2) Valuation of an obhgation. (3) Satisfaction of obligation with partner's promissory note. (4) Example. (h) Partner providing property as security for partnership liabthty. (1) Direct pledge (2) Indirect pledge. (3) Valuation· (4) Partner's promissory note (i) Treatment of recourse habdltles m tiered partnerships (j) Anti-abuse rules. (t) In general (2) Arrangements tantamount to a guarantee (3) Plan to circumvent or avoid the regulations. (4) Example. §1. 752-3 Partner's share of nonrecourse habdittes (a) In general. (b) Examples. §1.752--4 Special rules (a) Tiered partnerships (b) Related person defmmon. (1) In general (2) Person related to more than one partner. (i) In general. (n) Natural persons (hi) Related partner exception. 0v) Specml rule where entity structured to avoid related person status (B) In general· (A) Ownership interest (C) Example. (c) Lim_tatlon. (d) Time of determination. §1 752-5 Effective dates and transition rules. (a) In general. (b) Election. (1) In general (2) Time and manner of election (c) Effect of section 708(b)(1)(B) termination on determining date habdities are incurred or assumed

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Section 752

§1.752-1 Treatment of Partnership Liabdities. (a) Defimtzons. For purposes of section 752, the following defimtzons apply: (1) Recourse habihty defined. A partnershlp liability is a recourse liability to the extent that any partner or related person bears the economic risk of loss for that habdity under §1 752-2 (2) Nonrecourse hability defined. A partnership liability ts a nonrecoursc habdity to the extent that no partner or related person bears the economic risk of loss for that liability under §1.752-2 (3) Related person. Related person means a person having a relationship to a partner that ts described in §1.752-4(b) (b) Increase m partner's share of habdities Any increase m a partner's share of partnership habtlitles, or any increase in a partner's xn&v_dual habfllt_es by reason of the partner's assumption of partnership lzablhtles, is treated as a contribution of money by that partner to the partnership, (c) Decrease m partner's share of habilities. Any decrease in a partner's share of partnership liabilities, or any decrease in a partner's individual liablJltles by reason of the partnershlp's assumption of the individual hablhtles of the partner, is treated as a distribution of money by the partnership to that partner, (d) Assumption of habiho, Except as otherwise provided in paragraph (e) of this section, a person is considered to assume a liabdlty only to the extent that: (1) The assuming person is personally obligated to pay the hablhty, and (2) If a partner or related person assumes a partnership liability, the person the whom the liability IS owed knows of to assumption and can directly enforce the partner's or related person's obligation for the liability, and no other partner or person that _s a related person to another partner would bear the economic risk of loss for the liability immedmtely after the assumpuon, (e) Property sub/ect to a habthty If property is contributed by a partner to the partnership or distributed by the partnershlp to a partner and the property _s subject to a habfltty of the transferor, the transferee ts treated as having assumed the liabdlty, to the extent that the amount of the hablhty does not exceed the fazr market value of the property at the t_me of the contribution or distribution (f) Netting of increases and decreases in liabtht,es resulting from same transact_on If, as a result of a single transactlon, a partner incurs both an increase in

the partner's share of the partnership liabllitaes (or the partner's ln&vidual habfllues) and a decrease in the partner's share of the partnership liabilities (or the partner's mdlvldual habihtles), only the net decrease is treated as a distribution from the partnership and only the net increase is treated as a contribution of money to the partnership. Generally, the contribution to or distribution from a partnership of property subject to a hablhty or the termination of the partnershJp under section 708(b) will require that increases and decreases m liabilities assocmted with the transaction be netted to determine if a partner will be deemed to have made a contrlbuUon or received a distribution as a result of the transaction. (g) Example The following example illustrates the principles of paragraphs (b), (c), (e), and (f) of this section, _xanlple Proper_ contributedsubjectto a habtho,, netting of increase and decreasem partner's share ofhablhty B contributespropertywith an adjusted bas,s of $1,000to a general pannersh_p m

which one or more partners bear the economic risk of loss is a recourse liabllity and the remainder of the habflity, if any, is a nonrecourse hablhty. §1.752-2 Partner's share of recourse liabilities (a) In general A partner's share of a recourse partnership liability equals the portion of that hablhty, if any, for which the partner or related person bears the economic risk of loss. The determination of the extent to which a partner bears the economic risk of loss for a partnership habfllty is made under the rules in paragraphs (b) through (j) of this section. (b) Obhgatlon to make a payment. (1) In general. Except as otherwise provided in this section, a partner bears the economic risk of loss for a partnership liability to the extent that, if the partnership constructively hquldated, the partner or related person would be obhgated to make a payment to any person (or a contribution to the partnership) because that habality becomes due and payable and the partner or related person would not be enutled to reimbursement from another partner or person that is a related person to another partner. Upon a constructive liquidation, all of the fol]owing events are deemed to occur simultaneously. (1) All of the partnershlp's become payable m full; habflltaes

exchangefor a one-thirdinterestm the partnership At the time of the contribution, the partnership does not have any habditles outstandingand the propertyis subjectto a recoursedebtof $150 and has a fair marketvaluem excessof $150 Afterthe contnbuuon, B remains personally liable to the cred,torand noneof the otherpartnersbearsany of the economic risk of loss for the ha&hay under state law or otherwise Underparagraph of this (e) section, the partnership is treated as having assumedthe$150 habdlty As a resull,B's m&wdual hablhttesdecreaseby $150 At the sametime, however,B's shareof habdmesof the partnersh,p increases by $150 Only the net increase or decreasein B's share of the liabilitiesof the partnershlp and B's m&v_dual,abdit_esis taken into l accountin applyingseetson752 Becausethere is no net change, B is not treatedas havingcontnbutedmoneyto the partnership as havingreceived or a distribution moneyfromthe partnership under of paragraph or (c) of this section ThereforeB's (b) basis for B's partnershipinterest is $1,000 (B's basisfor the contributed property) (h) Sale or exchange of a partnership interest. If a partnership interest as sold or exchanged, the reduction m the transferor partner's share of partnership habllzt_es Is treated as an amount reahzed under section 1001 and the regulations thereunder. For example, ff a partner sells an interest m a partnership for $750 cash and transfers to the purchaser the partner's share of partnership habilmes m the amount of $250, the seller realizes $1,000 on the transaction, (i) Bifurcation of partnership habthttes. If one or more partners bears the economic risk of loss as to part, but not all, of a partnership habihty represented by a single contractual obhgataon, that hablhty as treated as two or more separate llabdJt_es for purposes of section 752 The portion of the liability as to

(ii) With the exception of property contributed to secure a partnership habihty (see §1.752-2(h)(2)), all of the partnershlp's assets, including cash, have a value of zero; (iil) The partnership disposes of all of ItS property in a fully taxable transaction for no consideration (except rehef from habihtles for which the creditor's right to repayment is hmlted solely to one or more assets of the partnership); 0v) All items of income, gain, loss, or deduction are allocated among the partners; and (v) The partnership liquidates. (2) Treatment upon deemed dtsposttton. For purposes of paragraph (b)(l) of th_s section, gain or loss on the deemed disposmon of the partnership's assets as computed in accordance with the following: 0) If the creditor's right to repayment of a partnership habdaty is hmited solely to one or more assets of the partnership, gain or loss is recogmzed in an amount equal to the difference between the amount of the liability that is extinguished by the deemed disposition 1992-1 C.B. 221

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; Section 752 and the tax basis (or book value to the extent section 704(c) or §1.704l(b)(4)0) applies) in those assets, (il) A loss is recognized equal to the remaining tax basis (or book value to the extent section 704(c) or §1.704l(b)(4)(1) apphes) of all of the partnership's assets not taken into account m paragraph (b)(2)(i) of this section, (3) Obligations recognized. The determination of the extent to which a partner or related person has an obligatlon to make a payment under paragraph (b)(l) of this sectzon is based on the facts and circumstances at the time of the determination All statutory and contractua! obligations relating to the partnershlp liability are taken into account for purposes of applying this section, including: 0) Contractual obligations outside the partnership agreement such as guarantees, indemnifications, reimbursement agreements, and other obligations runrang directly to creditors or to other partnets, or to the partnership; (ll) Obligations to the pannersh_p that are imposed by the partnershzp agreemerit, including the obligation to make a capital contribution and to restore a deftcit capital account upon hquidation of the partnership; and (ill) Payment obligations (whether zn the form of direct remittances to another partner or a contribution to the partnership) imposed by state law, including the governing state partnership statute, To the extent that the obligation of a panner to make a payment with respect to a partnership habihty is not recognized under this paragraph (b)(3), paragraph (b) of this section is applied as if the obligation did not exist, (4) Contmgent obligations A payment account all isthe facts and if, taking disregarded ctrcuminto obligation stances, the obligation is subject to contingencies that make tt unlikely that the obligatmn will ever be discharged. If a payment obligation would arise at a future time after the occurrence of an event that is not determinable with teasonable certainty, the obligation is ignored until the event occurs, (5) Rezmbursement rights. A partner's or related person's obhgataon to make a payment with respect to a partnership liabdity is reduced to the extent that the partner or related person is entitled to reimbursement from another partner or a person who is a related person to another partner, (6) Deemed satzsfactlon of obligation. For purposes of determining the extent to 222 1992-1 C.B.

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which a partner or related person has a payment obligation and the economic risk of loss, it is assumed that all partners and related persons who have obhgations to make payments actually perform those obligations, irrespective of their actual net worth, unless the facts and circumstances indicate a plan to clrcumvent or avoid the obligation See §1 752-20). (c) Partner or related person as lender--(l) In general. A partner bears the economic risk of loss for a partnership habdlty 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 habdity is not borne by another partner, (2) Wrapped debt. ff a pannershJp habihtyand owed liability includes (i.e., person is that to a partner or related is "wrapped" around) a nonrecourse obhgation encumbering partnership property that is owed to another person, the partnership liability wall be treated as two separate habdzties. The portion of the partnership hability corresponding to the wrapped debt is treated as a liability owed to another person, (d) De minimis exceptions---(l) Partnet as lender. The general rule contained in paragraph (c)(l) of this section does not apply if a panner or related person whose interest (directly or indirectly through one or more partnerships mcluding the interest of any related person) m each item of partnership income, gain, loss, deduction, or credit for every taxable year that the partner is a partner in the partnership ts 10 percent or less, makes a loan to the partnership which constitutes quahfied nonrecourse financmg within the meanmg of section 465(b)(6) (determined without regard to the type of activity financed), (2) Partner as guarantor. The general rule contained m paragraph (b)(l) of this section does not apply if a partner or related person whose interest (directly or indirectly through one or more partnerships including the interest of any related person) in each item of partnership income, gain, loss, deduction, or credxt for every taxable year that the partner is a partner m the partnership is 10 percent or less, guarantees a loan that would otherwise be a nonrecourse loan of the partnership and which would constitute qualified nonrecourse financing within the meaning of section 465(b)(6) (without regard to the type of activity financed) if the guarantor had made the loan to the partnership (e) Speczal rule for nonrecourse hability with interest guaranteed by a

partner--(l) In general For purposes of this section, if one or more partners or related persons have guaranteed the payment of more than 25 percent of the total interest that will accrue on a partnership nonrecourse liability over its remaining term, and it zs reasonable to expect that the guarantor will be required to pay substantially all of the guaranteed future interest if the partnership fails to do so, then the liability is treated as two separate partnership liablhtles. If this rule applies, the partner or related person that has guaranteed the payment of interest Is treated as bearing the economic risk of loss for the partnership liability to the extent of the present value of the guaranteed future interest payments. The remainder of the stated principal amount of the partnership liability constitutes a nonrecourse applying thzs liability is Generally, rule, it reasonable in to expect that the guarantor wdl be required to pay substantially all of the guaranteed future interest if, upon a default m payment by the partnership, the lender can enforce the interest guaranty without foreclosing on the property and thereby extinguishing the underlying debt The guarantee of interest rule continues to apply even after the point at which the amount of guaranteed interest that will accrue is less than 25 percent of the total interest that will accrue on the liability. (2) Computation of present value The present value of the guaranteed future interest payments _s computed using a discount rate equal to either the interest rate stated in the loan documents, or Jf interest is imputed under either section 483 or section 1274, the applicable federal rate, compounded semi-annually. The computation takes into account any payment of _nterest that the partner or related person may be required to make only to the extent that the interest will accrue economically (determined in accordance with section 446 and the regulatlons thereunder) after the date of the interest guarantee If the loan document contains a variable rate of interest that is an interest rate based on current values of an objectlve interest index, the present value is computed on the assumption that the interest determined under the objective interest index on the date of the computation will remain constant over the term of the loan The term "objective interest index" has the mean,ng given to it in section 1275 and the regulations thereunder (relating to variable rate debt instruments). Examples of an objective interest index include the prime rate of a designated financial instltutlon, LIBOR (London lnterbank Offered

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Section 752

Rate), and the applicable under section 1274(d).

federal

rate

tion m that amount to make a contribution

to the

right to recover the amount G pa_d to the recourse lender from the general partner Therefore, G does not bear the economic risk of loss for the partnershlp hablhty Example 5 B_furcatwn of partnership habdav, guarantee of part ofnonrecourse habth_ A partnershtp borrows $10,000, secured by a mortgage on real property. The mortgage note contains an exoneration clause which provides that m the event of default, the holder's only remedy is to foreclose on the property The holder may not look to any other partnership asset or to any partner to pay the habd_ty However, to reduce the lender to make the loan, a partner guarantees payment of $200 of the loan prmcipal The exoneration clause does not apply to the partner's guarantee If the partner paid

(3) Safe harbor The general rule contamed in paragraph (e)(1) of this section does not apply to a partnership nonrecourse liability if the guarantee of interest by the partner or related person is for a period not in excess of the lesser of five years or one-third of the term of
the liability,

partnership Example 2 Recourse habthty, deficit restoration obhgatwn C and D each conmbute $500 m cash to the capital of a new general partnership, CD CD purchases property from an unrelated seller for $1,000amgeneral and a $9,000 mortgage note tThe cash note ts obhgatLon of the partnership, e, no partner has been reheved from personal habdtty The partnership agreement provides that profits and losses are to be &wded 40% to C and 60% to D C and D are requn.ed to make up any deficit m then" capital accounts In a constructive hqu_datlon, all partnership assets are deemed to become worthless and all partnership habd_tles become due and payable m full The partnership Is deemed to thspose of all its assets m a fully taxable transacuon for no consideration. Capital accounts are adjusted to reflect the loss on the hypothetical &sposmon, as

(4) De mmtmts exception. The general rule contained in paragraph (e)(l) of this section does not apply if a partner or related person whose interest (directly or indirectly through one or more partnershlpS including the interest of any related

follows,
Imtlal contribution Loss on hypothetical C $500 (4,000) ($3,500)

nership income, gain, loss, deduction,

person)

in each item of partor sale

credit for every taxable year that the partner is a partner In the partnership lS lO percent or less, guarantees the interest on a loan to that partnership which constitutes quahfled nonrecourse financing within the meaning of section 465(b)(6) (determined without regard to the type of actavlty financed). An allocation of inter-

pursuant to the guarantee, the partner would be subrogated to the rights of the lender with respect to $200 of the mortgage debt, but the partner is not otherwise entitled to reimbursement from the partnershtp or any partner For purposes of section D 752, $200 of the $10,000 mortgage hablhty is $500 treated as a recourse habdlty of the partnership and (6,000) $9,800 is treated as a nonrecourse habthty of the (5,'_3-3"_-_) partnership The parmer's share of the recourse hablhty of the partnership _s $200 Example Wrapped debt unrelated seller for chases real 6 estate from an 1, an m&wdual, pur$10,000, paying $1,000 ru cash and giving a $9,000 purchase mortgage to which whichseller can personal habdtty and as note on the 1 has no look only to the property for satisfaction At a time when the property _s worth $15,000, 1 sells the property to a partnership m which I ,s a general partner The partnership pays for the property with a partnership purchase money mortgage note of $15,000 on which neither the partnership nor any partner (or person related to a partner) has personal habthty The $15,000 mortgage note _s a wrapped debt that includes the $9,000 obhgatlon to the ongmal seller The habd_ty Is a recourse habdtty to the extent of $6,000 because 1 Is the cre&tor w_th respect to the loan and I bears the economic risk of loss for $6,000 l's share of the recourse habd_ty _s $6,000 The remaining $9,000 _s treated as a partnersh_p nonrecourse habfllty that _s owed to the unrelated seller Example 7 Guarantee of interest by partner treated as part recourse and part nonrecourse On January I, 1992, a partnership obtams a $4,000,000 loan secured by a shopping center owned by the partnership Neither the partnership nor any partner has any personal habthty under the loan documents for repayment of the stated prmctpal amount Interest accrues at a 15 percent annual rate and ts payable on December 31 of each year The pnnc_pal m payable m a lump sum on December 31, 2006 A interest guarantees required by the payment of 50 percent of each partner payment loan The guarantee can be enforced w_thout first foreclosing on the property When the partnership obtains the loan, the present value (discounted at 15 percent, compounded annually) of the future interest payments ts $3,508,422, and of the future principal payment Is $491,578 If tested on that date, the loan would be treated as a partnership habd_ty of $1,754,211 ($3,508,422 × 5) for which the guaranteeing partner bears the economic risk of loss and a partnership nonrecourse habdlty of $2,245,789 ($1,754,211 + $491,578) Example 8 Contmgent obhgatton not recograzed J and K form a general partnership w_th cash contributions of $2,500 each J and K share partnersh_p profits and losses equally The partnership purchases an apartment budding for its $5,000 of cash and a $20,000 nonrecourse loan from a commercml bank The nonrecourse loan _s secured by a mortgage on the building The loan documents prowde that the partnership will be hable for the

C's capital account reflects a deficit that C would have to make up of $3,500 and D's capital account reflects a deficit that D would have to make up of $5,500 Therefore, the $9,000 mortgage note is a recourse l,abdlty because one the more partners share the economic risk of loss for or habdlty C's bear of the recourse habthty ts $3,500 and D's share is

est to the extent paid by the guarantor is
not treated
deduction as a or loss

$5,500
Example 3 Guarantee by hmlted partner, partner deemed to satisfy obhgatton E and F form a hmlted partnership E, the general partner, contnbutes $2,000 and F, the hm_ted partner, contributes $8,000 m cash to the partnership. The partnersh,p agreement allocates losses 20% to E and 80% to F until F's capital account _s reduced to zero, after which all losses are allocated to E The partnership purchases deprecmble property for $25,000 using _ts $10,000 cash and a $15,000 recourse loan from a bank F guarantees payment of the $15,000 loan to the extent the loan remains unpaid after the bank has exhausted _ts remedies against the partnership In a constructive hqu_dat_on, the $15,000 habdlty becomes due and payable All of the partnersh_p's assets, including the deprec_able property, are deemed to be worthless The deprecmble property _s deemed sold for a value of zero Capital accounts are adjusted to reflect the loss on the hypothetical &sposmon, as follows Imtml contribution Loss on hypothetical sale E $2,000 F $8,000

partnership item of subject to the 10 per-

cent or less rule. (f) Examples. The following examples illustrate the principles of paragraphs (a) through (e) of this section,
Example 1 Determmmg when a partner bears the economtc risk of loss A and B form a general partnership with each contributing $100 m cash The partnership purchases an office budding on leased land for $1,000 from an unrelated seller, paying $200 m cash and executing a note to the seller for the balance of $800 The note _s a general obhgat_on of the partnership, _e , no partner has been reheved from personal habd_ty The partnershlp agreement provides that all _tems are allocated equally except that tax losses are specially allocated 90% to A and 10% to B and that capital accounts will be ma,ntamed m accordance w_th the regulations under secuon 704(b), including a def, clt capital account restoration obhgat_on on hqmdatton In a constructwe hqu_datlon, the $800 habdtty becomes due and payable All of the partnersh_p's assets, mcludmg the budding, are deemed to be worthless The braiding _s deemed sold for a value of zero Capital accounts are adjusted to reflect the loss on the hypothetical &sposmon, as follows A $100 (900) ($800) B $100 (100) _

Inltml contnbut,on Loss on hypothetical

sale

(17,000) (8,000) (_) -0E, as a general partner, would be obhgated by operation of law to make a net conmbutson to the partnership of $15,000 Because E is assumed to satisfy that obhgat_on, _t _s also assumed that F would not have to satisfy F's guarantee The $15,000 mortgage ts treated as a recourse habthty because one or more partners bear the economic risk of loss E's share of the llabdlty _s $15,000, and F's share _s zero This would be so even ff E's net worth at the time of the determination _s less than $15,000, unless the facts and circumstances m&cate a plan to cn.cumvent or avosd E's obhgatson to contribute to the partnership Example 4 Partner guarantee wtth right of subrogatwn G, a hm_ted partner m the GH partnershtp, guarantees a portion of a partnership habd_ty The I,abfl_ty is a general obhgat_on of the partnership, t e, no partner has been reheved from personal habdlty. If under state law G is subrogated to the rights of the lender, G would have the

Other than the partners' obhgatlon to fund negatwe capital accounts on hqmdat_on, there are no other contractual or statutory payment obhgat_ons existmg between the partners, the partnership and the lender Therefore, $800 of the partnership habdlty _s class,fied as a recourse habthty because one or more partners bears the economic risk of loss for non-payment B has no share of the $800 habd_ty since the constructive hqu_dat_on produces no payment obhgatlon for B A's share of the partnership habdlty is $800 because A would have an obhga-

1992-1 C.B.

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!

balanceof the loanon a recoursebasis of section 1274 (t e., the debt instrument to the extent of any decrease m the value of the is treated as if it were issued for property apartment budding resulting from the partnershtp's failureproperly to maintainthe property There are at the ttme of the valuation) no facts that estabhsh with reasonable certamtythe (3) Satisfaction of obligation with existenceof any hablhty on the part of the part- partner's promissory note. An obligation
outstanding nership (and us partners) for damages resulting

bear the economic risk of loss for a partnershlp hablhty to the extent of the value of any of the partner's or related person's separate property (other than a direct or Indirect interest in the partnership) that is pledged as security for the partnership liability (2) Indirect pledge. A partner is consldered to bear the economic r_sk of loss for a partnership liability to the extent of the value of any property that the partner contributes to the partnership solely for the purpose of securing a partnership hablhty. Contributed property is not treated as contributed solely for the purpose of securing a partnership habihty unless substanttally all of the ttems of income, gain, loss, and deductton attributable to the contributed property are allocated to the contributmg partner, and this allocation is generally greater than the part, '

from the partnershlp'sfailureproperlyto maintain the budding Therefore, no partner bears the economic of loss, and the habdity constitutes a risk nonrecourse liability Under §1 752-3, J and K share this all profts and hablhty equally because nonrecourse equally they share losses (g) T_me-value-of-money considerations--(1) In general. The extent to which a partner or related person bears the economic risk of loss is determined by taking Into account any delay In the time when a payment or contribution obligation with respect to a partnership liability is to be satisfied. If a payment obligation with respect to a partnershtp liability is not required to be satisfied within a reasonable time after the hablhty becomes due and payable, or tf the obligation to make a contribution to the partnership is not required to be sattsfied before the later of-(l) The end of the year in which the partner's interest is liquidated, or (ii) 90 days after the liquidation, the obligation is recognized only to the extent of the value of the obligatton (2) Valuat, on of an obhgatton. The value of a payment or contribution obligatton that is not required to be sattsfled within the time period specified in paragraph (g)(i) of this section equals the entire prmclpal balance of the obhgation only if the obligation bears interest equal to or greater than the applicable federal rate under sectton 1274(d) at the time of valuation, commencing on-(i) In the case of a payment obhgatlon, the date that the partnership liability to a creditor or other person to whom the able,°bligati°nor relates becomes due and pay(u) In the case of a contrlbutton obhgatlon, the date of the hquidatlon of the partner's interest in the partnership, if the obligation does not bear interest at a rate at least equal to the applicable federal rate at the time of valuation, the value of the obligation is discounted to the present value of all payments due from the partner or related person (t e., the imputed principal amount computed under section 1274(b)). For purposes of making this present value determination, the partnership is deemed to have constructzvely hqutdated as of the date on which the payment obhgatton is valued and the payment obligation is assumed to be a debt mstrument subject to the rules 224 1992-1 C.B.

IS not satisfied by the transfer to the obhgee of a promissory note by a partner or related person unless the note IS readtly tradeable on an estabhshed securities market, (4) Example. The followmg example illustrates the principle of paragraph (g) of this section,
Example Value of obligation not required to be sansfied wuhm specifiedtime period A. the general partner, and B, the limited partner, each con-

tributes$10,000 to partnership AB AB purchases propertyfrom an unrelatedseller for $20,000 m
cash and a $70,000 recourse purchase money note

The partnership agreement provides losses are to be d_v_dedequally
required

that profits

to make up any deficit m their capital accounts WhdeA is requiredto restoreanydefiot

and A and B are

ner's share of other significant items of balancem A's capaal accountw_thm daysafter partnership 90 income, gain, loss, or the date of hqmdatmnof the partnership,B is not deduct,on. requiredto restoreany deficitfor twoyears followmgthe date of hquidat_on The defic=t B's caplm (3) Valuation. The extent to which a tal account will not bear interest during that twopartner bears the economic risk of loss as
year period In a constructive hquldanon, all parta result of a direct pledge described m

.

nershipassetsare deemedto becomeworthlessand allfull The partnership is becomedue and payable partnership habdmes m deemed to dispose of all

paragraph (h)(l) of this sectton or an mdtrect pledge described in paragraph

' ', i ,

its assets m a fully taxabletransactionfor no con- (h)(2) of this section is hmlted to the fair slderauon.Capital accounts are adjustedto reflect market value of the property at the time the loss on the hypothetical d_sposltlon, follows of the pledge or contribution as A B (4) Partner's promissory note. For lnmal contrJbut)on $10,000 $10,000 purposes of paragraph (h)(2) of th)s seeLosson hypothetical sale (45,000) (45,000) tton, a promissory note of the partner or (35-g_3-....._.0_) (35-__-_,0_)elated person that is contributed to the r A's and B's capital accounts eachreflectdeficitsof partnership shall not be taken into $35,000 B's obhganon to makea contribution pur- account unless the note is readily tradesuantto B's deficitrestoration fair market value of able on an established securities market razed only to the extent of the obhgatlonis recogdatmonecauseB is not required b to
that obligation at the time of the construcnve hqmsatisfy thatobh(i) Treatment of recour._e liabthttes m

ganon by the later of the end of the partnership taxable year m which B's mterest is hquldated or wlthm 90 days after the date of the hqmdatlon BecauseB's obligation does not bear intercst,the

fair marketvalue =sdeemed to equal

the imputed principal amount under section 1274(b) Under sec-

uered partnerships. If a partnership (the "upper-tier partnership") owns (directly or indirectly through one or more partnershlpS) an interest in another partnersh_p (the "lower-tter partnership"), the liabilities of the lower-tier partnersh_p 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

debtt_°n lnstrument1274(b)' theequalsimputedthe presentPrm°palvalueam°Untof all pay-°f a mentsdue underthe debt instrument Assumethe apphcable federalrate with respectto B's obhgation ts 10 percent compounded semiannually Using this dJscount rate, the present value of the $35,000 payment that B wouldbe required to make two years after the constructive hqmdat,on to restore the defiot balance m B's capital account equals $28,795 To the extent thatB's deficit restoration obhgatlon Is not recognized, it is assumed that B's obhgat=on does not exist Therefore, A, as the sole general partner, would be obhgated by operation law to contributean addmonal$6,205 of to the partnership Accordingly, under paragraph (g) of this section, B bears the economic risk of loss for $28,795 and A bears the economic riskof lossfor $41,205 ($35,000 + $6,205)

of capital

(h) Partner provtding property as securtty for partnershtp hability--(1) Direct pledge A partner is considered to

bears with respect to the hablhtles; and (2) Any other amount of the habdltles with respect to which partners of the upper-tier partnership bear the economic risk of loss. (j) Anti-abuse rules--(l) In general. An obligation of a partner or related person to make a payment may be disregarded or treated as an obhgatton of another person for purposes of th_s section if facts and circumstances indicate that a principal purpose of the arrangement between the parties is to ehminate

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Section 752

to enjoy the tax losses generated

property for a $1,000 purchase money note that is a nonrecourse habdlty the only the rules of this sectionot Assume that this is under nonrecourse habthty the partnership, and that no prmclpal payments ale due on the purchase money note for a year The partnership agreemeut prov,des that all _tcms ol mcome, gam, loss, and deduction are allocated equally Immediately aftershare the nonrecourse hable properly, the partners purchasmg the depreclabdity equally because they have equal mterests _n partnership profits A and B are each treated as _t they contributed$500 to the parmersh_p to reflect each partner's increase in his or her share of partnership liabdtttes (from $0 to $500) The mmmmm

respect to that obligation or create the appearance of the partner or related person bearing the economic risk of loss when, In fact, the substance of the arrangement is otherwise Circumstances with respect to which a payment obhgatlon may be disregarded include, but are not limited to, the situations described in paragraphs (.1)(2) and (J)(3) of this
section

while at for such losses These facts, its monetary exposure the same time hmrtmg when constdered together with B's guarantee, mdlcate a plan to c_rcumvent or avoid A's obhgatlon to contribute to the partnership The rules of sect,on 752 must be applzed as if A's obligation to contr2bute did not exmst the $150,000 habdlty recourseAccordmgly, habd_ty that is allocated entirely to B is a

§1.752-3 Partner's share of nonrecourse liabthties (a) In general A partner's share of the nonrecourse liabilities of a partnershlp equals the sum of paragraphs (a)(1) through (a)(3) of this section as follows-(1) The partner's share of partnership
minimum gain determined m accordance

(2) Arrangements tantamount to a guarantee Irrespective of the form of a contractual obhgatlon, a partner is considered to bear the economic risk of loss with respect to a partnership liability, or a portton thereof, to the extent that
(i) The partner or related person

gamw,th respectto an _tem partnership property of subject to a nonrecourse liability equals the amount ofdisposedgainpropertybe full satisfaction thatofwouldthe recognizedm ff the partnershlPof the nonrecoursehabdlty and for no other conslderation Therefore, if the partnership claHns a deprecmtlon the year it acquires for the deprecmble property for deductionof $200 that property, partnersh_p mm_mum gam for the year wdl mcrease by $200(theexcessof the$1,000nonrecourse habdity See the $800 adjusted the regulations over section 704(b) and tax basis of the thereunder property) A and B each have a $100 share of partnership

undertakes one or more contractual obligatlons so that the partnership may obtain a loan, (ll) The contractual obligations of the partner or related person eliminate substanttally all the risk to the lender that the partnership will not satisfy its obhgatlons under the loan, and (lU) One of the principal purposes of using the contractual obhgattons ts to attempt to permit partners (other than those who are directly or indirectly liable
for the obligation) to include their a portion of

with the rules of section 704(b) and the regulations thereunder; (2) The amount of any taxable gain that would be allocated to the partner under section 704(c) (or in the same manner as section 704(c) in connectton with a revaluation of partnership property) If the partnership d_sposed of (In a taxable transaction) all partnership property sub,1ect to one or more nonrecourse liabilities of the partnership in full satisfaction of the liabilities and for no other
consideration; and

mmlmumgam at the end of that year becausethe depreciation See section 704(b) andas a nonrecou,se deductionis treated the regulations deduction thereunder Accordmgly, at the end of that year, A and B are allocated$100 each of the nonrecourse hab,hty to match theirshares of partnership mmtmumga,n be remaining$800 between A and B hablhty wdl The allocated equally of the nonrecourse ($400each) Example 2 Excessnonrecoursehabthttes allocated consistently with reasonably erpected deducttons The the partnership same as mprovides that Eaample 1 except that facts are the agreement depreciation deductionswallbe allocatedto A The partners agree to allocate excess nonrecourse habihtles in accordance with the manner m which it is reasonably expected that the deductions attributable to those nonrecourse habthtles wdl be allocated Assuming that the allocationof all of the deprecm-

the loan in the basis of interests, The partners
economic accordance

partnership to bear the

(3) The partner's share of the excess nonrecourse liabilities (those not allocated under paragraphs (a)(l) and (a)(2) of this section) of the partnership as determined in accordance wtth the partnet's share of partnership profits The partner's interest in partnership proflts is determined by taking into account all facts and circumstances relating to the economic arrangement of the partners The partnership agreement may specify the partners' mterests in partnership profits for purposes of allocating excess nonrecourse liablhtles provided the interests so specified are reasonably consistent with allocations (that have substantial economic effect under the section 704(b) regulations) of some other significant item of partnership income or gam. Alternatively, excess nonrecourse liablhtles may be allocated among the parthers in accordance with the manner in

are considered

risk of loss for the hablhty in with their relative economic

burdens for the habllity pursuant to the contractual obligations. For example, a lease between a partner and a partnership which IS not on commercially reasonable terms may be tantamount to a guarantee by the partner of a partnership habthty (3) Plan to circumvent or avoid the obligatton An obhgatlon of a partner to make a payment ts not recognized if the facts and circumstances evidence a plan to circumvent or avoid the obligation, (4) Example The following example illustrates the principle of paragraph (j)(3) of this section. Example Plan to circumventol avoid obhgatton A and B form a general pm-tnershlp porat_on, contributes $20,000 and A, a cot-

lion deductionsto A is valid undersection704(b}. immediately after purchasmg the depreclable property, A's share of the nonrecourse habfltty t,, $1uted,000$1,000AccordinglY,to if A contnbthe partnershtpA is treated as §1.752-4 Special rules. (a) Tteredpartnershtps. An upper-tier partnershlp's share of the liabilities of a lower-tier partnership (other than any hability 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 sectlon 752 and the regulations thereunder to the partners of the upper-tier
partnership.

B contributes $80,000 to the partnership A is obligatedto restore any deficit in its partnelship capital account The partnership agreement allocateslosses 20% to A and 80%to B untd B's capital accountis reduced to zero, after which all losses are allocated Io A
The partnership purchases deprecmble property for $250,000 using its $100.000 cash and a $150,000 recourseloanfrom a bank B guaranteespayment ofthe $150,000loanto the extentthe loanremams unpaid after the bank has exhausted its remedies agamst the partnership A _s a subsldmry, formed by a parent of a consolidated group, with capital limited to $20,000 to allow the consolidated group

which it is reasonably expected that the deductions attributable to those nonrecourse liabilities wall be allocated. Excess nonrecourse liabilities are not required to be allocated under the same method each year.
(b) Examples The followmg exampies illustrate the principles of paragraph (a) of this section,

(b) Related person definition ----(I) In general. A person is related to a partner If the person and the partner bear a relatlonshlp to each other that is specified m sections 267(b) or 707(b)(1), subject to the following modifications. (l) Substitute "80 percent or more" for "more than 50 percent" each place it appears In those sections;
(11) A person's family is determined

Example 1 Partner's share of nonrecourse habdmes The AB partnership purchases depreciable

by excluding brothers and sisters, and 1992-1 C.B. 225

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partnership loss or deduction for any taxable year; (2) An S corporation equals the percentage of the outstanding stock in the S corporation owned by the shareholder, (3) A C corporation equals the percentage of the fair market value of the issued and outstanding stock owned by the shareholder, and (4) A trust equals the percentage of the actuarial interests owned by the beneficml owner of the trust
(C) Example Entity structuredto avoid related person status A, B, and CC form equal partners, nershlp, ABC A, B. and are a general parteach contributing $1,000 to the partnership A and

(b)(1) of this section, a person is related to more than one partner, paragraph (b)(l) of this section IS applied by treatlng the person as related only to the partner with whom there IS the highest percentagc of related ownership. If two or more partners have the same percentage of related ownership and no other partner has a greater percentage, the hablhty is allocated equally among the partners having the equal percentages of
related ownership

§§1 752-0T to 1.752-4T, set forth in 26 CFR 1.752-0T through 1.752-4T as contained in 26 CFR edition revised April l, 1991, (TD 8237, TD 8274, and TD 8355) and §1.752-1, set forth in 26 CFR 1 752-1 as contained in 26 CFR edition revised April 1, 1988 (TD 6175 and TD 6500). (b) Elecuon--(l) In general A partnership may elect to apply the provisions of §§ 1 752-1 through 1.752-4 to all of its habdltles to which the provisions of those sections do not otherwise apply as of the beginning of the first taxable year of the partnershrp ending on or after December 28, 1991.
(2) Time and manner of election. An

(u) Natural persons For purposes of determining the percentage of related ownership between a person and a partner, natural persons who are related by virtue of being members of the same famdy are treated as having a percentage relationship of 100 percent with respect to each other, (iii) Related partner excepnon. Notwithstanding paragraph (b)(l) of this sectlon (which defines related person), persons owning interests directly or indirectly _n 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 llabdltles of the partnership This paragraph (fii) does not apply when determining a partner's interest under the de mmtmzs rules in §1 752-2(d) and (e) (iv) Special rule where entity structured to avoM related person status--(A) In general. If--(I) A partnership habihty IS owed to or guaranteed by another entity that is a partnership, an S corporation, a C corporatton, or a trust, (2) A partner or related person owns (directly or indirectly) a 20 percent or more ownership interest in the other entity, and (3) A principal purpose of having the other entity act as a lender or guarantor of the liability was to avoid the deterruination that the partner that owns the interest bears the economic risk of loss for federal income tax purposes for all or part of the liablhty, then the partner _s treated as holding the other entlty's interest as a creditor or guarantor to the extent of the partner's or related person's ownership interest m the entity (B) Ownership mterest. For purposes of paragraph (b)(2)(xv)(A) of this sectlon, a person's ownership interest in: (1) A partnership equals the partner's highest percentage interest in any item of 226 1992-1 C.B.

want to loan money to ABC and have the loan treatedas form partnership purposes section752 nonrecourse AB to which each confor of A and B tributes$50,000 A and B share losses equally m partnership AB Partnership AB loans partnership ABC $100,000 on a nonrecourse bas_ssecuredby the propertyABC buys w_ththe loan Underthese facts and risk of loss with A and B bearpartc_rcumstances, respect to the the economic nershlp habdlty equally based on theLrpercentage interestm lossesof partnership AB
B

(c) Lim,tatton. The amount of an indebtedness is taken into account only once, even though a partner (in addition to the partner's liability for the indebtedness as a partner) may be separately hable therefor in a capacity other than as a partner, (d) Time of determination. A partner's share of partnership liabilities must be determmed whenever the determination is necessary in order to determine the tax liablhty of the partner or any other person See §1 705-1(a) for rules regarding when the adjusted basis of a partner's interest in the partnership must be determmed. §1.752-5 Effective dates and transmon rules. (a) In general. Unless a partnership makes an election under paragraph (b)(1) of this section to apply the provisions of §§1.752-1 through 1 752-4 earlier, §§1.7