Determining a Partner’s Share of Recourse Liabilities

Jan. 2, 2014

Recently released proposed regulations under Section 752 provide guidance on how to determine a partner’s share of recourse liabilities in the case of overlapping risk of loss, tiered partnerships, and certain related-party situations.

Under the proposed regulations, a liability is taken into account only once for purposes of determining a partner’s share of a recourse liability. This means if the aggregate amount of the economic risk of loss that all partners are determined to bear with respect to a partnership liability exceeds the amount of the liability, then the economic risk of loss borne by each partner will be determined by a fraction, with the numerator equaling the amount of a liability borne by a single partner and the denominator equaling the total amount borne by all partners of the same liability.

To illustrate this concept, assume Partner A owns 33 percent of the profits and capital of partnership AB, and Partner B owns the remaining 67 percent of profits and capital of AB. AB incurs a $20,000 nonrecourse liability from an unrelated lender. Partner A and Partner B each guarantee the entire $20,000 nonrecourse liability. Under the proposed regulations, these guarantees result in overlapping risk of loss because multiple partners bear the economic risk of loss for the same liability by virtue of the guarantees. The proposed regulations allocate each partner a share of the liability equal to that partner’s share of the liability divided by the total of the risk of loss borne by all partners. In this case, Partner A’s share of the liability would be $10,000 computed as follows:

Partner A’s economic risk of loss due to the guarantee $20,000
Total of all partners’ economic risk of loss ($20,000 guarantee by Partner A and $20,000 guarantee by Partner B) $40,000
Partner A’s share of overlapping risk of loss 50% ($20,000/$40,000)
Partner A’s share of liability $10,000

The proposed regulations also address overlapping risk of loss in tiered partnership situations 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 on how the lower-tier partnership should allocate the liability between the upper-tier partnership and the partner. Under the proposed regulations, all the liability would be allocated to the partner by the lower-tier partnership and none of the liability would be allocated to the upper-tier partnership.

It should be noted that these allocations of liability under Section 752 might not give rise to at-risk basis under Section 465.

The proposed regulations also modify related-party rules used in determining economic risk of loss.


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