Discussion - Proposed regulations for determining partner’s economic risk of loss for a partnership liability  

December 13: The Treasury Department and IRS today released for publication in the Federal Register proposed regulations (REG-136984-12) providing 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—i.e., an overlapping economic risk of loss.

Also, the proposed regulations provide guidance as to 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 that partner is related to another partner in the partnership.


Read the proposed regulations [PDF 115 KB]


Written or electronic comments and requests for a public hearing must be received by a date that is 90 days after these proposed regulations are published in the Federal Register, on Monday, December 16, 2013.

Proposed regulations

The preamble to the proposed regulations states that the IRS and Treasury are aware that there has been uncertainty as to how partners are to share a partnership liability if multiple partners bear the economic risk of loss with respect to the same liability. In response to comments requesting guidance in this area, the IRS and Treasury issued today’s proposed regulations to address overlapping economic risk of loss and to clarify uncertainty under current regulations.


Temporary regulations under Reg. section 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 generally that if the aggregate amount of economic risk of loss that all partners bear with respect to a partnership liability exceeds the amount of the liability, then the economic risk of loss borne by each partner equals the amount determined by multiplying the amount of the liability by a fraction:


  • The numerator of which is the amount of economic risk of loss that the particular partner bears with respect to the liability and
  • The denominator of which is the aggregate amount of economic risk of loss borne by all partners with respect to the liability

According to the preamble, the IRS and Treasury have found that the prior temporary regulations offered a reasonable approach in addressing how a partnership liability is to be shared among partners bearing the economic risk of loss for the same liability. Accordingly, today’s proposed regulations adopt the rule from the temporary regulations.

Tiered partnerships

Concerning the economic risk of loss when tiered partnerships are involved, the current regulations under section 752 provide for an allocation of a 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.


The current regulations do not provide guidance regarding the allocation of a lower-tier partnership liability under section 752 when a partner of the lower-tier partnership, who is also a partner in the upper-tier partnership, bears the economic risk of loss with respect to a liability of the lower-tier partnership.


Today’s proposed regulations provide that the lower-tier partnership is to allocate the liability directly to the partner. Thus, the proposed regulations modify the tiered-partnership rule in Reg. section 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, who is also a partner in the upper-tier partnership, bears the economic risk of loss for such liability.

Related-party rules - Stock ownership by a partnership

Under the current section 752 regulations, if a partnership owns all of the stock in a corporation, a partner that owns 80% or more of the interests in the partnership is considered related to the corporation. If the corporation has lent money to the partnership, or has a payment obligation with respect to a liability of the partnership, and the economic risk of loss for the liability is not borne by another partner, under the current 752 regulations, any partner that is treated as related to the corporation is considered to bear the economic risk of loss with respect to the partnership liability.


The preamble to today’s proposed regulations states that the IRS and Treasury believe that partners in a partnership which 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 are not to be treated as related to the corporation through ownership of the partnership.


Thus, 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.

Related-party rules - Highest percentage ownership rule

If a person is related to more than one partner in a partnership, the current regulations under section 752 treat the person as related only to the partner with whom there is the highest percentage of related ownership (greatest percentage rule). If two or more partners have the same percentage of related ownership and no other partner has a greater percentage, under the current section 752 regulations, the liability is allocated equally among the partners having the equal percentages of related ownership.


The proposed regulation 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.

Related-partner exception

Finally, the current section 752 regulations provide 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 partnership liabilities (the related-partner exception).


The preamble to today’s proposed regulations indicates that taxpayers may be uncertain of the application of the related-partner exception as a result of the holding of the U.S. Tax Court in IPO II v. Commissioner, 122 T.C. 295 (2004).


The IPO II decision may be read to expand the related-partner exception to turn off relationships between related partners in a partnership without limitation. The proposed regulations, however, provide that the related-partner exception is to apply only when a partner bears the economic risk of loss for a liability of the partnership because the partner is a lender under Reg. section 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.

Request for comments

The proposed regulations include a specific request for comments concerning 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.


Comments are requested on the timing of the liability reallocation relative to the transaction that causes the liability to change from recourse to nonrecourse.

Proposed effective 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.


For more information, contact a tax professional with KPMG’s Washington National Tax:


Bev Katz


Or any member of the WNT passthroughs group




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