Liabilities Recognized as Recourse Partnership Liabilities Under Section 752, 69282-69291 [2016-23388]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 81, Number 193 (Wednesday, October 5, 2016)]
[Rules and Regulations]
[Pages 69282-69291]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-23388]



[[Page 69281]]

Vol. 81

Wednesday,

No. 193

October 5, 2016

Part IV





Internal Revenue Service





-----------------------------------------------------------------------





 Food and Drug Administration





-----------------------------------------------------------------------





26 CFR Part 1





Liabilities Recognized as Recourse Partnership Liabilities Under 
Section 752; Disguised Sales; Final Rules and Proposed Rule

Federal Register / Vol. 81 , No. 193 / Wednesday, October 5, 2016 / 
Rules and Regulations

[[Page 69282]]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9788]
RIN 1545-BM84


Liabilities Recognized as Recourse Partnership Liabilities Under 
Section 752

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final and temporary regulations 
concerning how liabilities are allocated for purposes of section 707 of 
the Internal Revenue Code (Code) and when certain obligations are 
recognized for purposes of determining whether a liability is a 
recourse partnership liability under section 752. These regulations 
affect partnerships and their partners. The text of these temporary 
regulations serves as part of the text of proposed regulations (REG-
122855-15) published in the Proposed Rules section in this issue of the 
Federal Register.

DATES: Effective date: These regulations are effective on October 5, 
2016.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.707-9T(a)(4) and 1.752-2T(l)(2).

FOR FURTHER INFORMATION CONTACT: Concerning the final and temporary 
regulations, Caroline E. Hay or Deane M. Burke, (202) 317-5279.

SUPPLEMENTARY INFORMATION: In addition to these final and temporary 
regulations, the Treasury Department and the IRS are publishing in the 
Rules and Regulations section in this issue of the Federal Register, 
final regulations under section 707 concerning disguised sales and 
under section 752 regarding the allocation of excess nonrecourse 
liabilities of a partnership to a partner, and, in the Proposed Rules 
section in this issue of the Federal Register, proposed regulations 
(REG-122855-15) that incorporate the text of these temporary 
regulations, withdraw a portion of a notice of proposed rulemaking 
(REG-119305-11) to the extent not adopted by the final regulations, and 
contain new proposed regulations addressing (1) when certain 
obligations to restore a deficit balance in a partner's capital account 
are disregarded under section 704 and (2) when partnership liabilities 
are treated as recourse liabilities under section 752.

Paperwork Reduction Act

    The collection of information related to these final and temporary 
regulations under section 752 is reported on Form 8275, Disclosure 
Statement, and has been reviewed in accordance with the Paperwork 
Reduction Act (44 U.S.C. 3507) and approved by the Office of Management 
and Budget under control number 1545-0889.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    For further information concerning this collection of information, 
and where to submit comments on the collection of information and the 
accuracy of the estimated burden, and suggestions for reducing this 
burden, please refer to the preamble to the cross-referencing notice of 
proposed rulemaking published in the Proposed Rules section in this 
issue of the Federal Register.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by section 6103.

Background

1. Overview

    This Treasury decision contains final and temporary regulations 
that amend the Income Tax Regulations (26 CFR part 1) under sections 
707 and 752 of the Code. On January 30, 2014, the Treasury Department 
and the IRS published a notice of proposed rulemaking in the Federal 
Register (REG-119305-11, 79 FR 4826) to amend the then existing 
regulations under section 707 relating to disguised sales of property 
to or by a partnership and under section 752 concerning the treatment 
of partnership liabilities (the 2014 Proposed Regulations). The 2014 
Proposed Regulations provided certain technical rules intended to 
clarify the application of the disguised sale rules under section 707 
and also contained rules regarding the sharing of partnership recourse 
and nonrecourse liabilities under section 752.
    A public hearing on the 2014 Proposed Regulations was not requested 
or held, but the Treasury Department and the IRS received written 
comments.
    Based on a comment received on the 2014 Proposed Regulations 
requesting that guidance provided under section 752 regarding a 
partner's share of partnership liabilities apply instead solely for 
disguised sale purposes, the Treasury Department and the IRS have 
reconsidered the rules under Sec.  1.707-5(a)(2) of the 2014 Proposed 
Regulations for determining a partner's share of partnership 
liabilities for purposes of section 707. Accordingly and as recommended 
by that commenter, this Treasury decision contains temporary 
regulations under section 707 (the 707 Temporary Regulations) that 
require a partner to apply the same percentage used to determine the 
partner's share of excess nonrecourse liabilities under Sec.  1.752-
3(a)(3) (with certain limitations) in determining the partner's share 
of partnership liabilities for disguised sale purposes. This Treasury 
decision also contains temporary regulations under section 752 (the 752 
Temporary Regulations) providing guidance on the treatment of ``bottom 
dollar payment obligations.'' Cross-referencing proposed regulations 
providing additional opportunity for comment are contained in the 
related notice of proposed rulemaking (REG-122855-15) published in the 
Proposed Rules section in this issue of the Federal Register. The 
Summary of Comments and Explanation of Provisions section of the 
preamble of this Treasury decision discusses the changes for 
determining a partner's share of partnership liabilities for disguised 
sale purposes and also the rules relating to certain ``bottom dollar 
payment obligations.''
    The Treasury Department and the IRS are also publishing final 
regulations under section 707 (the 707 Final Regulations) in a separate 
Treasury decision (TD 9787) published in the Rules and Regulations 
section in this issue of the Federal Register that adopt the remaining 
provisions of the 2014 Proposed Regulations under section 707. That 
Treasury decision also contains final regulations under section 752 
(the 752 Final Regulations) concerning the allocation of a 
partnership's excess nonrecourse liabilities as explained in the 
Summary of Comments and Explanation of Provisions sections of that 
Treasury decision.
    Finally, after considering comments on the 2014 Proposed 
Regulations under section 752, the Treasury Department and the IRS are 
withdrawing proposed Sec.  1.752-2 and are issuing new proposed 
regulations (the 752 Proposed Regulations) contained in the related 
notice of proposed rulemaking (REG-122855-15) published in the Proposed 
Rules section in this issue of the Federal Register.

[[Page 69283]]

2. Summary of Applicable Law

    In determining a partner's share of a partnership liability for 
disguised sale purposes, the existing regulations under section 707 
prescribe separate rules for a partnership's recourse liability and a 
partnership's nonrecourse liability. Under Sec.  1.707-5(a)(2)(i), a 
partner's share of a partnership's recourse liability equals the 
partner's share of the liability under section 752 and the regulations 
thereunder. A partnership liability is a recourse liability under 
section 707 to the extent that the obligation is a recourse liability 
under Sec.  1.752-1(a)(1). Under Sec.  1.707-5(a)(2)(ii), a partner's 
share of a partnership's nonrecourse liability is determined by 
applying the same percentage used to determine the partner's share of 
the excess nonrecourse liability under Sec.  1.752-3(a)(3). Generally, 
a partner's share of the excess nonrecourse liability is determined in 
accordance with the partner's share of partnership profits taking into 
account all facts and circumstances relating to the economic 
arrangement of the partners. A partnership liability is a nonrecourse 
liability under section 707 to the extent that the obligation is a 
nonrecourse liability under Sec.  1.752-1(a)(2). In addition, the 
existing regulations under section 707 provide that a partnership 
liability is a recourse or nonrecourse liability to the extent the 
liability would be recourse under Sec.  1.752-1(a)(1) or nonrecourse 
under Sec.  1.752-1(a)(2), respectively, if the liability was treated 
as a partnership liability for purposes of section 752 (Sec.  1.752-7 
contingent liabilities).
    Section 1.752-1(a)(1) provides that a partnership liability is a 
recourse liability to the extent that a partner or related person bears 
the economic risk of loss (EROL) for that liability under Sec.  1.752-
2. Section 1.752-2(a) provides that a partner's share of a recourse 
partnership liability equals the portion of the liability, if any, for 
which the partner or related person bears the EROL. Section 1.752-
1(a)(2) provides that a partnership liability is a nonrecourse 
liability to the extent that no partner or related person bears the 
EROL for that liability under Sec.  1.752-2. A partner generally bears 
the EROL for a partnership liability if the partner or related person 
has an obligation to make a payment under Sec.  1.752-2(b). A partner 
generally has an obligation to make a payment to the extent that the 
partner or related person would have to make a payment if, upon a 
constructive liquidation of the partnership, the partnership's assets 
were worthless and the liability became due and payable (constructive 
liquidation test). Section 1.752-2(b)(6) presumes partners and related 
persons will satisfy their payment obligations irrespective of their 
net worth, unless the facts and circumstances indicate a plan to 
circumvent or avoid the obligation.

Summary of Comments and Explanation of Provisions

1. Partner's Share of Partnership Liabilities for Purposes of Section 
707

    The withdrawn portions of the 2014 Proposed Regulations included 
proposed changes to Sec.  1.752-2 that were intended to ensure that 
only genuine commercial payment obligations, including guarantees and 
indemnities, affected the allocation of partnership liabilities. 
Although the 2014 Proposed Regulations received some unfavorable 
comments, one commenter expressed support for the overall objective of 
those proposed rules. According to the commenter, the clear effect of 
the 2014 Proposed Regulations under section 752 was to make it more 
likely that liabilities would be treated as nonrecourse liabilities, 
and thus allocable under Sec.  1.752-3. The commenter noted that such 
an effect seems appropriate as an economic matter, because, contrary to 
the constructive liquidation test in Sec.  1.752-2(b)(1), lenders, 
borrowers, and credit support providers generally do not expect that 
the assets of the partnership will become worthless. Rather, lenders, 
borrowers and credit support providers generally expect borrowers 
(including partnerships) to satisfy their obligations (in the case of a 
partnership, with partnership profits). However, the commenter 
expressed concerns with the proposed section 752 rules. The commenter 
suggested that the regulations adopt a more narrowly tailored approach 
that treats all liabilities as nonrecourse liabilities for section 707 
disguised sale purposes only.
    Other commenters also suggested that changes to the liability 
allocation rules be limited to the context of disguised sales under 
section 707 to specifically address the abuses that concern the 
Treasury Department and the IRS. One abuse relating to disguised sales 
within the meaning of Sec.  1.707-3 concerns the debt-financed 
distribution exception under Sec.  1.707-5(b). Under this exception, a 
distribution of money to a partner by a partnership is not taken into 
account for purposes of Sec.  1.707-3 to the extent that the 
distribution is traceable to a partnership borrowing and the amount of 
the distribution does not exceed the partner's allocable share of the 
liability incurred to fund the distribution. The legislative history to 
section 707, upon which the debt-financed distribution exception in 
Sec.  1.707-5(b) is based, contemplates a contributing partner 
borrowing through the partnership rather than engaging in a disguised 
sale when the partner, in substance, retains liability for repayment of 
the borrowed amounts. See H.R. Rep. No. 861, 98th Cong., 2d Sess. 859 
(1984). This exception, however, has been abused through leveraged 
partnership transactions in which the contributing partners or related 
persons enter into payment obligations that are not commercial solely 
to achieve an allocation of the partnership liability to the partner, 
with the objective of avoiding a disguised sale. See, for example, 
Canal Corp. v. Commissioner, 135 T.C. 199, 216 (2010) (``We have 
carefully considered the facts and circumstances and find that the 
indemnity agreement should be disregarded because it created no more 
than a remote possibility that [the indemnitor] would actually be 
liable for payment.'').
    After considering the comments on the 2014 Proposed Regulations 
suggesting that the regulations be narrowly tailored to address abuse 
concerns relating to disguised sales, the Treasury Department and the 
IRS have concluded that, for disguised sale purposes only, it is 
appropriate for partners to determine their share of any partnership 
liability, whether recourse or nonrecourse under section 752, in the 
manner in which excess nonrecourse liabilities are allocated under 
Sec.  1.752-3(a)(3), as limited for disguised sale purposes in the 752 
Final Regulations. For purposes of the disguised sale rules, this 
allocation method reflects the overall economic arrangement of the 
partners more accurately than the current regulations or the 2014 
Proposed Regulations. In most cases, a partnership will satisfy its 
liabilities with partnership profits, the partnership's assets do not 
become worthless, and the payment obligations of partners or related 
persons are not called upon. This is true whether: (1) A partner's 
liability is assumed by a partnership in connection with a transfer of 
property to the partnership or by a partner in connection with a 
transfer of property by the partnership to the partner; (2) a 
partnership takes property subject to a liability in connection with a 
transfer of property to the partnership or a partner takes property 
subject to a liability in connection with a transfer of property

[[Page 69284]]

by the partnership to the partner; or (3) a liability is incurred by 
the partnership to make a distribution to a partner under the debt-
financed distribution exception in Sec.  1.707-5(b). Accordingly, under 
the 707 Temporary Regulations, a partner's share of any partnership 
liability for disguised sale purposes is the same percentage used to 
determine the partner's share of the partnership's excess nonrecourse 
liabilities under Sec.  1.752-3(a)(3), as limited for disguised sale 
purposes under the 752 Final Regulations.
    Commenters also suggested that a partner's share of a partnership 
liability for disguised sale purposes should not include any portion of 
the liability for which another partner bears the EROL, as these 
liabilities would not be allocated to a partner without EROL under 
general principles of subchapter K. The Treasury Department and the IRS 
agree with the commenter that this change should not create a liability 
allocation not otherwise allowed under general subchapter K principles. 
Therefore, the 707 Temporary Regulations provide that a partner's share 
of a partnership liability for disguised sale purposes does not include 
any amount of the liability for which another partner bears the EROL 
for the partnership liability under Sec.  1.752-2.
    The liability allocation approach for disguised sale purposes in 
the 707 Temporary Regulations does not conflict with Congress's 
directive relating to section 752, which had been raised as a potential 
concern by some commenters with respect to the 2014 Proposed 
Regulations. Section 79 of the Deficit Reduction Act of 1984 (Pub. L. 
98-369) overruled the decision in Raphan v. United States, 3 Cl. Ct. 
457 (1983) (holding that a guarantee by a general partner of an 
otherwise nonrecourse liability of the partnership did not require the 
partner to be treated as personally liable for that liability) and 
directed the Secretary of the Treasury to amend the regulations under 
section 752 to reflect the overruling of the Raphan decision. At issue 
in the Raphan case was debt allocation under section 752; accordingly, 
Congress's directive related to regulations under section 752 only. As 
noted, the 707 Temporary Regulations treat all partnership liabilities, 
whether recourse or nonrecourse, as nonrecourse liabilities solely for 
purposes of section 707. Thus, the approach adopted in the 707 
Temporary Regulations does not conflict with the approach directed by 
Congress after the Raphan case.
    Finally, in addition to the rule for determining a partner's share 
of a Sec.  1.752-1(a) partnership liability for disguised sale 
purposes, the 707 Temporary Regulations reserve with respect to the 
treatment of Sec.  1.752-7 contingent liabilities for disguised sale 
purposes. The 2014 Proposed Regulations proposed removing the ``would 
be treated'' language in Sec.  1.707-5(a)(2)(i) and (ii) of the 
existing regulations relating to contingent liabilities. The 707 
Temporary Regulations replace the proposed provisions with the 
previously discussed rule for determining a partner's share of a 
partnership liability as defined in Sec.  1.752-1(a). Because the 2014 
Proposed Regulations would have removed language relating to Sec.  
1.752-7 contingent liabilities, some commenters suggested that the 
regulations specifically clarify how contingent liabilities are treated 
for purposes of the disguised sale rules. The Treasury Department and 
the IRS agree that clarification of the treatment of Sec.  1.752-7 
contingent liabilities for disguised sale purposes is warranted.
    In many cases, Sec.  1.752-7 contingent liabilities may constitute 
qualified liabilities that would not be taken into account for purposes 
of determining a disguised sale. However, some commenters noted that 
there may be circumstances in which certain transfers of Sec.  1.752-7 
contingent liabilities to a partnership may be abusive. Thus, the 
Treasury Department and the IRS will continue to study the issue of the 
effect of contingent liabilities with respect to section 707, as well 
as other sections of the Code, in connection with future guidance 
projects.

2. Determining Whether a Liability Is a Recourse Liability of a 
Partnership

    The 752 Temporary Regulations amend Sec.  1.752-2 to address 
certain payment obligations of a partner or related person. The 
Treasury Department and the IRS continue to have concerns that partners 
and related persons are entering into payment obligations that are not 
commercial solely to achieve an allocation of a partnership liability.
    Under the 2014 Proposed Regulations, a partner's or related 
person's payment obligation with respect to a partnership liability 
would not have been recognized under Sec.  1.752-2(b)(3) unless seven 
factors (recognition factors) were satisfied. Two of the seven 
recognition factors imposed certain additional requirements on 
contractual obligations outside a partnership agreement, such as 
guarantees, indemnifications, reimbursement agreements, and other 
obligations running directly to creditors, other partners, or to the 
partnership (guarantee and indemnity recognition factors). In the case 
of a guarantee or similar arrangement, the 2014 Proposed Regulations 
would have required the partner or related person to be liable up to 
the full amount of such partner's or related person's payment 
obligation, if, and to the extent that, any amount of the partnership 
liability is not otherwise satisfied. In the case of an indemnity, 
reimbursement agreement, or similar arrangement, the 2014 Proposed 
Regulations would have required the partner or related person to be 
liable up to the full amount of such partner's or related person's 
payment obligation if, and to the extent that, any amount of the 
indemnitee's or other benefited party's payment obligation is 
satisfied. The terms of the guarantee, indemnity, or reimbursement 
agreement would be treated as modified by any right of indemnity, 
reimbursement agreement, or similar arrangement. However, a right of 
proportionate contribution running between partners or related persons 
who were co-obligors with respect to a payment obligation for which 
each of them was jointly and severally liable would not modify a 
guarantee, indemnity, or reimbursement agreement. If the partner's or 
related person's payment obligation failed to satisfy any of the 
recognition factors, the payment obligation was not recognized and the 
partner would not bear EROL for the partnership liability. In addition 
to the guarantee and indemnity recognition factors, a partner's or 
related person's payment obligation with respect to a partnership 
liability would not be recognized under an anti-abuse rule in the 2014 
Proposed Regulations if the facts and circumstances indicated that the 
partnership liability was part of a plan or arrangement involving the 
use of tiered partnerships, intermediaries, or similar arrangements to 
convert a single liability into multiple liabilities with a principal 
purpose of circumventing the guarantee and indemnity recognition 
factors.
    The Treasury Department and the IRS continue to believe that 
certain obligations, such as certain so-called ``bottom-dollar 
guarantees,'' should generally not be recognized as payment obligations 
under Sec.  1.752-2(b)(3) because they generally lack a significant 
non-tax commercial business purpose. No commenters suggested that 
bottom-dollar guarantees were relevant to loan risk underwriting. 
Accordingly, the 752 Temporary Regulations retain the

[[Page 69285]]

restriction on certain guarantees and indemnities and provide that 
these payment obligations are not recognized under Sec.  1.752-2(b)(3). 
In addition, these regulations remove the Example in Sec.  1.752-
2(j)(4) to comport with the provisions in the 752 Temporary Regulations 
relating to bottom dollar payment obligations. However, after 
considering the comments received on the 2014 Proposed Regulations, the 
752 Temporary Regulations provide for an exception as well as an anti-
abuse rule to address arrangements that are not intended to be subject 
to this rule.
A. General Rule: Bottom Dollar Payment Obligations
    Although the 752 Temporary Regulations retain the restriction 
relating to certain guarantees and indemnities, these temporary 
regulations refine the description of non-commercial obligations in 
response to comments. Commenters expressed concerns with the 2014 
Proposed Regulations' description of so-called ``bottom-dollar 
guarantees and indemnities.'' Commenters thought the language was 
confusing. In addition, with respect to the anti-abuse rule in the 2014 
Proposed Regulations, one commenter believed that ``tranches'' of debt 
could be used to effect arrangements that are economically similar to 
``bottom-dollar guarantees'' and recommended that the regulations 
strengthen the anti-abuse rule. This commenter suggested that two or 
more liabilities be treated as a single liability if: (1) The 
liabilities are incurred pursuant to a common plan, as part of a single 
transaction, or as part of a series of related transactions; (2) the 
liabilities have the same counterparty or counterparties (or 
substantially the same group of counterparties); or (3) the guarantee 
or similar arrangement would fail the guarantee recognition factor if 
the liabilities were treated as a single liability; and (4) multiple 
liabilities (rather than a single liability) were incurred with a 
principal purpose of avoiding the guarantee recognition factor.
    In response to comments, the 752 Temporary Regulations clarify the 
description of so-called ``bottom-dollar guarantees and indemnities'' 
by consolidating these non-commercial obligations under one term: 
Bottom-dollar payment obligations. In addition, instead of having an 
anti-abuse rule to address arrangements that use tiered partnerships, 
intermediaries, senior and subordinate liabilities, or similar 
arrangements, the 752 Temporary Regulations define these arrangements 
as bottom dollar payment obligations if certain factors, taking into 
account the commenter's suggestion, exist. Therefore, under the 752 
Temporary Regulations, the term ``bottom dollar payment obligation'' 
includes (subject to certain exceptions): (1) Any payment obligation 
other than one in which the partner or related person is or would be 
liable up to the full amount of such partner's or related person's 
payment obligation if, and to the extent that (A) any amount of the 
partnership liability is not otherwise satisfied in the case of an 
obligation that is a guarantee or other similar arrangement, or (B) any 
amount of the indemnitee's or benefited party's payment obligation is 
satisfied in the case of an obligation which is an indemnity or similar 
arrangement; and (2) an arrangement with respect to a partnership 
liability that uses tiered partnerships, intermediaries, senior and 
subordinate liabilities, or similar arrangements to convert what would 
otherwise be a single liability into multiple liabilities if, based on 
the facts and circumstances, the liabilities were incurred (A) pursuant 
to a common plan, as part of a single transaction or arrangement, or as 
part of a series of related transactions or arrangements, and (B) with 
a principal purpose of avoiding having at least one of such liabilities 
or payment obligations with respect to such liabilities being treated 
as a bottom dollar payment obligation. Any payment obligation under 
Sec.  1.752-2, including an obligation to make a capital contribution 
and to restore a deficit capital account upon liquidation of the 
partnership as described in Sec.  1.704-1(b)(2)(ii)(b)(3), may be a 
bottom dollar payment obligation if it meets the requirements set forth 
above.
    The preamble of the 2014 Proposed Regulations requested comments on 
whether and under what circumstances regulations should permit 
recognition of a payment obligation for a portion, rather than 100 
percent, of each dollar of a partnership liability to which the payment 
relates (a ``vertical slice'' of a partnership liability). The 
commenters believed that regulations under section 752 should recognize 
a vertical slice of a partnership liability because these payment 
obligations represent the same economic risk as a guarantee, for 
example, of the entire partnership liability.
    The Treasury Department and the IRS agree with the commenters that 
certain obligations, including a vertical slice of a partnership 
liability, should not cause a payment obligation to be a bottom dollar 
payment obligation and, thus, not recognized under Sec.  1.752-2(b)(3). 
In addition, the Treasury Department and the IRS have determined that, 
as long as a partner or related person is or would be liable for the 
full amount of a payment obligation, such obligation is not a bottom 
dollar payment obligation merely because a maximum amount is placed on 
the partner's or related person's obligation. Accordingly, the 752 
Temporary Regulations specifically except certain payment obligations 
within those parameters, including obligations with joint and several 
liability, from being treated as bottom dollar payment obligations.
B. Exception From Treatment as a Bottom Dollar Payment Obligation
    In addition to comments relating to the description of ``bottom-
dollar guarantees'' and the anti-abuse rule in the 2014 Proposed 
Regulations, commenters expressed concerns that the guaranty and 
indemnity recognition factors would deprive a partner from being 
allocated a liability even in situations where there is real EROL. One 
commenter described the 2014 Proposed Regulations as prejudging all 
payment obligations to be remote and fictitious if the obligations did 
not cover 100 percent of any shortfall in repayment. The commenter 
believed EROL could exist even if 100 percent of the liability was not 
covered.
    Another commenter appreciated the merits of a bright-line rule that 
would look to every dollar of a liability, but thought that the 100 
percent threshold was too high. This commenter recommended that a 
payment obligation should be respected if a partner or related person 
(i) is or would be liable up to the full amount of such partner's or 
related person's payment obligation if, and to the extent that, less 
than 80 percent of the partnership liability is not otherwise satisfied 
and (ii) either (A) the taxpayer or the IRS clearly establishes that 
the credit support materially decreased the partnership's borrowing 
costs with respect to the liability or materially enhanced the other 
terms of the borrowing, or (B) the partners (or persons related to one 
or more of the partners), in the aggregate, are or would be liable up 
to the full amount of their payment obligations if, and to the extent 
that, any amount of the partnership liability is not otherwise 
satisfied. The commenter believed that this lower threshold 
incorporates the idea that a person may have meaningful risk with 
respect to the underlying liability, while protecting the legitimate 
interests of the government in ensuring that the lower threshold is not 
abused by taxpayers.
    The Treasury Department and the IRS recognize that, in certain 
circumstances, it might be appropriate to treat a partner as bearing 
EROL with respect to a

[[Page 69286]]

payment obligation that would be characterized as a bottom dollar 
payment obligation under the general rule. What otherwise would be a 
bottom dollar payment obligation can be distinguished in a situation 
where the partners have allocated the risk among themselves, and the 
person making the bottom dollar payment obligation is liable for at 
least 90 percent of the person's payment obligation (because the person 
is not entitled to indemnification or reimbursement for more than 10 
percent of the person's payment obligation). For example, if one 
partner (Partner A) guarantees 100 percent of a partnership liability 
and another partner (Partner B) indemnifies Partner A for the first one 
percent of Partner A's obligation, Partner A's obligation would be 
characterized as a bottom dollar payment obligation under the general 
rule because Partner A would not be liable to the full extent of the 
guarantee if any amount of the partnership liability is not otherwise 
satisfied (because Partner A would be reimbursed due to Partner B's 
indemnity). To address this concern, the 752 Temporary Regulations 
provide an exception if a partner or related person has a payment 
obligation that would be recognized (initial payment obligation) under 
Sec.  1.752-2T(b)(3) but for the effect of an indemnity, reimbursement 
agreement, or similar arrangement. Such bottom dollar payment 
obligation is recognized under Sec.  1.752-2T(b)(3) if, taking into 
account the indemnity, reimbursement agreement, or similar arrangement, 
the partner or related person is liable for at least 90 percent of the 
initial payment obligation. This obligation, like any other payment 
obligation, must otherwise be recognized under Sec.  1.752-2, including 
under the anti-abuse rules in Sec.  1.752-2(j).
C. Anti-Abuse Rule
    Some commenters noted that partners could manipulate contractual 
arrangements to achieve a federal income tax result that is not 
consistent with the economics of an arrangement. For example, a partner 
could deliberately fail one of the recognition factors in the 2014 
Proposed Regulations (including the guarantee or indemnity recognition 
factor) to cause a partnership liability to be treated as nonrecourse 
even when one partner has true EROL. Just as the 752 Temporary 
Regulations provide an exception for certain obligations that meet the 
definition of a bottom dollar payment obligation but give rise to EROL, 
the 752 Temporary Regulations also provide an anti-abuse rule in Sec.  
1.752-2T(j)(2) that the Commissioner may apply to ensure that if a 
partner actually bears EROL for a partnership liability, partners may 
not agree among themselves to create a bottom dollar payment obligation 
so that the liability will be treated as nonrecourse.
    Section 1.752-2(j)(2) of the existing regulations currently 
provides that, irrespective of the form of a contractual obligation, a 
partner is considered to bear the EROL with respect to a partnership 
liability, or a portion thereof, to the extent that: (A) The partner or 
related person undertakes one or more contractual obligations so that 
the partnership may obtain a loan; (B) the contractual obligations of 
the partner or related person eliminate substantially all the risk to 
the lender that the partnership will not satisfy its obligations under 
the loan; and (C) one of the principal purposes of using the 
contractual obligations is to attempt to permit partners (other than 
those who are directly or indirectly liable for the obligation) to 
include a portion of the loan in the basis of their partnership 
interests. The 752 Temporary Regulations expand Sec.  1.752-2(j)(2) to 
include situations in which a partner is considered to bear the EROL 
irrespective of a bottom dollar payment obligation.
D. Disclosure Requirement
    The 752 Temporary Regulations require the partnership to disclose 
to the IRS all bottom dollar payment obligations with respect to a 
partnership liability on a completed Form 8275, Disclosure Statement, 
attached to the partnership return for the taxable year in which the 
bottom dollar payment obligation is undertaken or modified. That 
disclosure must identify the payment obligation with respect to which 
disclosure is made including the amount of the payment obligation and 
the parties to the payment obligation. If a bottom dollar payment 
obligation meets the exception, the partnership must also disclose to 
the IRS on Form 8275 the facts and circumstances that clearly establish 
that a partner or related person is liable for up to 90 percent of the 
partner's or related person's initial payment obligation and, but for 
an indemnity, reimbursement agreement, or similar arrangement, the 
partner's or related person's payment obligation would have been 
recognized.

Effective/Applicability Date

    With respect to changes under Sec.  1.707-5, the 707 Temporary 
Regulations apply to any transaction with respect to which all 
transfers occur on or after January 3, 2017. In addition, with respect 
to the changes under Sec.  1.752-2, the 752 Temporary Regulations apply 
to liabilities incurred or assumed by a partnership and payment 
obligations imposed or undertaken with respect to a partnership 
liability on or after October 5, 2016, other than liabilities incurred 
or assumed by a partnership and payment obligations imposed or 
undertaken pursuant to a written binding contract in effect prior to 
that date.
    The 2014 Proposed Regulations provided for an effective date 
similar to the one in these final and temporary regulations. A 
commenter recommended that partnerships be permitted to elect to apply 
all, but not less than all, of the provisions of the final regulations 
to all of its liabilities and payment obligations with respect to its 
liabilities after the effective date of the final regulations. These 
752 Temporary Regulations adopt that change; therefore, partnerships 
may apply all the provisions contained in the 752 Temporary Regulations 
to all of their liabilities as of the beginning of the first taxable 
year of the partnership ending on or after October 5, 2016.
    Commenters on the 2014 Proposed Regulations also recommended that 
partnership liabilities or payment obligations that are modified or 
refinanced continue to be subject to the provisions of the existing 
regulations to the extent of the amount and duration of the pre-
modification (or refinancing) liability or payment obligation. The 752 
Temporary Regulations do not adopt this recommendation as the terms of 
the partnership liabilities and payment obligations could be changed, 
which would affect the determination of whether or not an obligation is 
a bottom dollar payment obligation.
    The 752 Temporary Regulations do, however, provide transition 
relief for any partner whose allocable share of partnership liabilities 
under Sec.  1.752-2 exceeds its adjusted basis in its partnership 
interest on the date the temporary regulations are finalized. Under 
this transitional relief, the partner can continue to apply the 
existing regulations under Sec.  1.752-2 with respect to a partnership 
liability for a seven-year period to the extent that the partner's 
allocable share of partnership liabilities exceeds the partner's 
adjusted basis in its partnership interest on October 5, 2016. The 
amount of partnership liabilities subject to transitional relief will 
be reduced for certain reductions in the amount of liabilities 
allocated to that partner under the transition rules and, upon the sale 
of any partnership property, for any tax gain (including

[[Page 69287]]

section 704(c) gain) allocated to the partner less that partner's share 
of amount realized.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact 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 regulations.
    Although the temporary regulations under sections 707 and 752 
respond to comments received in response to the 2014 Proposed 
Regulations, the Treasury Department and the IRS have determined that 
the regulations would benefit from additional notice and comment 
instead of being published as final regulations. In addition, decisions 
made in the final regulations under section 707 contained in a separate 
Treasury decision (TD 9787) published in the Rules and Regulations 
section in this issue of the Federal Register interact with the changes 
in the 707 Temporary Regulations regarding how liabilities are 
allocated for disguised sale purposes. Finally, pursuant to authority 
under section 7805(b) of the Code, the temporary regulations under 
sections 707 and 752 are necessary to address particular abuses as 
described in the Summary of Comments and the Explanation of Provisions 
section of the preamble of this Treasury decision. For these reasons, 
good cause also exists pursuant to 5 U.S.C. 553 to issue temporary 
regulations.
    For applicability of the Regulatory Flexibility Act, please refer 
to the cross-referencing notice of proposed rulemaking published in the 
Proposed Rules section in this issue of the Federal Register. Pursuant 
to section 7805(f) of the Code, these regulations have been submitted 
to the Chief Counsel for Advocacy of the Small Business Administration 
for comment on its impact on small business.

Drafting Information

    The principal authors of these regulations are Caroline E. Hay and 
Deane M. Burke of the Office of the Associate Chief Counsel 
(Passthroughs & Special Industries), IRS. However, other personnel from 
the Treasury Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is 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 * * *
    Sections 1.707-2 through 1.707-9 also issued under 26 U.S.C. 
707(a)(2)(B).


0
Par. 2. Section 1.707-5 is amended by revising paragraph (a)(2) and 
Examples 2, 3, 7, and 8 in paragraph (f) to read as follows:


Sec.  1.707-5  Disguised sales of property to partnership; special 
rules relating to liabilities.

    (a) * * *
    (2) [Reserved]. For further guidance, see Sec.  1.707-5T(a)(2).
* * * * *
    (f) * * *

    Example 2.  [Reserved]. For further guidance, see Sec.  1.707-
5T(f) Example 2.
    Example 3.  [Reserved]. For further guidance, see Sec.  1.707-
5T(f) Example 3.
* * * * *
    Example 7.  [Reserved]. For further guidance, see Sec.  1.707-
5T(f) Example 7.
    Example 8.  [Reserved]. For further guidance, see Sec.  1.707-
5T(f) Example 8.
* * * * *

0
Par. 3. Section 1.707-5T is added to read as follows:


Sec.  1.707-5T  Disguised sales of property to partnership; special 
rules relating to liabilities (temporary).

    (a)(1) [Reserved]. For further guidance, see Sec.  1.707-5(a)(1).
    (2) Partner's share of liability--(i) In general. For purposes of 
Sec.  1.707-5, a partner's share of a liability of a partnership, as 
defined in Sec.  1.752-1(a) (whether a recourse liability or a 
nonrecourse liability) is determined by applying the same percentage 
used to determine the partner's share of the excess nonrecourse 
liability under Sec.  1.752-3(a)(3) (as limited in its application to 
this paragraph (a)(2)), without including in such partner's share any 
amount of the liability for which another partner bears the economic 
risk of loss for the partnership liability under Sec.  1.752-2.
    (ii) Partner's share of Sec.  1.752-7 liability. [Reserved].
    (a)(3) through (e) [Reserved]. For further guidance, see Sec.  
1.707-5(a)(3) through (e).
    (f) Example 1 [Reserved]. For further guidance, see Sec.  1.707-
5(f) Example 1.

    Example 2.  Partnership's assumption of recourse liability 
encumbering transferred property. (i) C transfers property Y to a 
partnership in which C has a 50 percent interest. At the time of its 
transfer to the partnership, property Y has a fair market value of 
$10,000,000 and is subject to an $8,000,000 liability that C 
incurred and guaranteed, immediately before transferring property Y 
to the partnership, in order to finance other expenditures. Upon the 
transfer of property Y to the partnership the partnership assumed 
the liability encumbering that property. Under section 752 and the 
regulations thereunder, immediately after the partnership's 
assumption of the liability encumbering property Y, the liability is 
a recourse liability of the partnership and C's share of that 
liability is $8,000,000.
    (ii) Under the facts of this example, the liability encumbering 
property Y is not a qualified liability. Accordingly, the 
partnership's assumption of the liability results in a transfer of 
consideration to C in connection with C's transfer of property Y to 
the partnership. Notwithstanding C's share of the liability for 
section 752 purposes, for disguised sale purposes, C's share of the 
liability immediately after the partnership's assumption is 
$4,000,000 (50 percent of $8,000,000) under paragraph (a)(2) of this 
section (which determines a partner's share of a liability using the 
percentage under Sec.  1.752-3(a)(3)). Therefore, the amount of 
consideration to C is $4,000,000 (the excess of the liability 
assumed by the partnership ($8,000,000) over C's share of the 
liability for purposes of Sec.  1.707-5(a) immediately after the 
assumption ($4,000,000)). See Sec.  1.707-5(a)(1) and paragraph 
(a)(2) of this section.
    Example 3.  Subsequent reduction of transferring partner's share 
of liability. (i) The facts are the same as in Example 2. In 
addition, property Y is a fully leased office building, the rental 
income from property Y is sufficient to meet debt service, and the 
remaining term of the liability is ten years. It is anticipated 
that, three years after the partnership's assumption of the 
liability, C's share of the liability under paragraph (a)(2) of this 
section will be reduced to $2,000,000 because of a shift in the 
allocation of partnership profits pursuant to the terms of the 
partnership agreement which provide that C's share of the 
partnership profits will be 25 percent at that time. Under the 
partnership agreement, this shift in the allocation of partnership 
profits is dependent solely on the passage of time.
    (ii) Under Sec.  1.707-5(a)(3), if the reduction in C's share of 
the liability was anticipated at the time of C's transfer, was not 
subject to the entrepreneurial risks of partnership operations, and 
was part of a plan that has as one of its principal purposes 
minimizing the extent of sale treatment under Sec.  1.707-3 (that 
is, a principal purpose of allocating a larger percentage of profits 
to C in the first three years when profits were not likely to be 
realized was to minimize the extent to which C's transfer would be 
treated as part of a sale), C's share of the liability immediately 
after the partnership's assumption is treated as equal to C's 
reduced share of $2,000,000. Therefore, the amount of consideration 
to C is $6,000,000 (the excess of the liability assumed by the 
partnership ($8,000,000) over

[[Page 69288]]

C's share of the liability for purposes of Sec.  1.707-5(a) 
immediately after the assumption ($2,000,000)), taking into account 
the anticipated reduction in C's share of the liability pursuant to 
the terms of the partnership agreement. See Sec.  1.707-5(a)(1) and 
(3) and paragraph (a)(2) of this section.

    Examples 4 through 6 [Reserved]. For further guidance, see Sec.  
1.707-5(f) Examples 4 through 6.

    Example 7.  Partnership's assumptions of liabilities encumbering 
properties transferred pursuant to a plan. (i) Pursuant to a plan, G 
and H transfer property 1 and property 2, respectively, to an 
existing partnership in exchange for a one-third interest each in 
the partnership. At the time the properties are transferred to the 
partnership, property 1 has a fair market value of $10,000 and an 
adjusted tax basis of $6,000, and property 2 has a fair market value 
of $10,000 and an adjusted tax basis of $4,000. At the time 
properties 1 and 2 are transferred to the partnership, a $6,000 
nonrecourse liability (liability 1) is secured by property 1 and a 
$9,000 recourse liability of H (liability 2) is secured by property 
2. Properties 1 and 2 are transferred to the partnership, and the 
partnership takes property 1 subject to liability 1 and assumes 
liability 2. After the transfer of liability 2 to the partnership, H 
bears the economic risk of loss for the entire amount of liability 2 
under Sec.  1.752-2. G and H incurred liabilities 1 and 2 
immediately prior to transferring properties 1 and 2 to the 
partnership and used the proceeds for personal expenditures. The 
liabilities are not qualified liabilities. For disguised sale 
purposes, assume that G's and H's share of liability 1 is $2,000 
each in accordance with paragraph (a)(2) of this section (which 
determines a partner's share of a liability using the percentage 
under Sec.  1.752-3(a)(3) without including in such partner's share 
any amount of the liability for which another partner bears the 
economic risk of loss for the liability under Sec.  1.752-2). Also, 
in accordance with paragraph (a)(2) of this section, G's share of 
liability 2 is zero and H's share of liability 2 is $3,000.
    (ii) G and H transferred properties 1 and 2 to the partnership 
pursuant to a plan. Accordingly, pursuant to Sec.  1.707-5(a)(1) and 
(4), the partnership's taking property 1 subject to liability 1 is 
treated as a transfer of only $4,000 of consideration to G (the 
amount by which liability 1 ($6,000) exceeds G's share of 
liabilities 1 and 2 ($2,000)), and the partnership's assumption of 
liability 2 is treated as a transfer of only $4,000 of consideration 
to H (the amount by which liability 2 ($9,000) exceeds H's share of 
liabilities 1 and 2 ($5,000)). Under the rule in Sec.  1.707-3, G is 
treated as having sold $4,000 of the fair market value of property 1 
in exchange for the partnership's taking property 1 subject to 
liability 1, and H is treated as having sold $4,000 of the fair 
market value of property 2 in exchange for the partnership's 
assumption of liability 2.
    Example 8. Partnership's assumption of liability pursuant to a 
plan to avoid sale treatment of partnership assumption of another 
liability. (i) The facts are the same as in Example 7, except that--
    (A) Liability 2 is a nonrecourse liability;
    (B) H transferred the proceeds of liability 2 to the 
partnership; and
    (C) H incurred liability 2 in an attempt to reduce the extent to 
which the partnership's taking of property 1 subject to liability 1 
would be treated as a transfer of consideration to G (and thereby 
reduce the portion of G's transfer of property 1 to the partnership 
that would be treated as part of a sale).
    (ii) Because the partnership assumed liability 2 with a 
principal purpose of reducing the extent to which the partnership's 
taking of property 1 subject to liability 1 would be treated as a 
transfer of consideration to G, liability 2 is ignored in applying 
Sec.  1.707-5(a)(1). See Sec.  1.707-5(a)(4). Accordingly, the 
partnership's taking of property 1 subject to liability 1 is treated 
as a transfer of $4,000 of consideration to G (the amount by which 
liability 1 ($6,000) exceeds G's share of liability 1 ($2,000)). 
Under Sec.  1.707-5(d), the partnership's assumption of liability 2 
is not treated as a transfer of any consideration to H because the 
amount of liability 2 that the partnership is treated as assuming is 
reduced by the money H transferred to the partnership ($9,000).

    Examples 9 through 13 [Reserved]. For further guidance, see Sec.  
1.707-5(f) Examples 9 through 13.
    (g) Expiration date. This section expires on October 4, 2019.

0
Par. 4. Section 1.707-9 is amended by adding paragraphs (a)(4) and (5) 
to read as follows:


Sec.  1.707-9  Effective dates and transitional rules.

    (a) * * *
    (4) Section 1.707-5(a)(2) and (f) Examples 2, 3, 7, and 8. Section 
1.707-5(a)(2) and (f) Examples 2, 3, 7, and 8, as contained in 26 CFR 
part 1 revised as of April 1, 2016, apply to any transaction with 
respect to which any transfers occur before January 3, 2017. For any 
transaction with respect to which all transfers occur on or after 
January 3, 2017, see Sec.  1.707-9T(a)(5).
    (5) [Reserved]. For further guidance, see Sec.  1.707-9T(a)(5).
* * * * *

0
 Par. 5. Section 1.707-9T is added to read as follows:


Sec.  1.707-9T  Effective dates and transitional rules (temporary).

    (a)(1) through (a)(4) [Reserved]. For further guidance, see Sec.  
1.707-9(a)(1) through (4).
    (5) Section 1.707-5T(a)(2) and (f) Examples 2, 3, 7, and 8. Section 
1.707-5T(a)(2) and (f) Examples 2, 3, 7, and 8 apply to any transaction 
with respect to which all transfers occur on or after January 3, 2017. 
For any transaction with respect to which any transfers occur before 
January 3, 2017, see Sec.  1.707-5(a)(2) and (f) Examples 2, 3, 7, and 
8 as contained in 26 CFR part 1, revised as of April 1, 2016.
    (b) [Reserved]. For further guidance, see Sec.  1.707-9(b).
    (c) Expiration date. This section expires on October 4, 2019.

0
Par. 6. Section 1.752-2 is amended by:
0
1. Revising paragraph (b)(3).
0
2. Adding Examples 9, 10, and 11 to paragraph (f).
0
3. Revising paragraph (j)(2).
0
4. Removing paragraph (j)(4).
0
5. Redesignating paragraph (l) as (l)(1) and revising the heading to 
paragraph
    (l).
0
6. Adding paragraphs (l)(2) and (3).
    The revisions and additions read as follows:


Sec.  1.752-2  Partner's share of recourse liabilities.

* * * * *
    (b) * * *
    (3) [Reserved]. For further guidance, see Sec.  1.752-2T(b)(3).
* * * * *
    (f) * * *

    Example 9.  [Reserved].
    Example 10.  [Reserved]. For further guidance, see Sec.  1.752-
2T(f) Example 10.
    Example 11.  [Reserved]. For further guidance, see Sec.  1.752-
2T(f) Example 11.
* * * * *
    (j) * * *
    (2) [Reserved]. For further guidance, see Sec.  1.752-2T(j)(2).
* * * * *
    (l) Effective/applicability dates. * * *
* * * * *
    (2) [Reserved]. For further guidance, see Sec.  1.752-2T(l)(2).
    (3) [Reserved]. For further guidance, see Sec.  1.752-2T(l)(3).

0
 Par. 7. Section 1.752-2T is added to read as follows:


Sec.  1.752-2T  Partner's share of recourse liabilities (temporary).

    (a) through (b)(2) [Reserved]. For further guidance, see Sec.  
1.752-2(a) through (b)(2).
    (3) Obligations recognized--(i) In general. The determination of 
the extent to which a partner or related person has an obligation to 
make a payment under Sec.  1.752-2(b)(1) is based on the facts and 
circumstances at the time of the determination. To the extent that the 
obligation of a partner or related person to make a payment with 
respect to a partnership liability is not recognized under this 
paragraph (b)(3), Sec.  1.752-2(b) is applied as if the obligation did 
not exist. All statutory and contractual obligations relating to the 
partnership liability are taken into account for purposes of applying 
this section, including--

[[Page 69289]]

    (A) Contractual obligations outside the partnership agreement such 
as guarantees, indemnifications, reimbursement agreements, and other 
obligations running directly to creditors, to other partners, or to the 
partnership;
    (B) Obligations to the partnership that are imposed by the 
partnership agreement, including the obligation to make a capital 
contribution and to restore a deficit capital account upon liquidation 
of the partnership as described in Sec.  1.704-1(b)(2)(ii)(b)(3) 
(taking into account Sec.  1.704-1(b)(2)(ii)(c)); and
    (C) Payment obligations (whether in the form of direct remittances 
to another partner or a contribution to the partnership) imposed by 
state or local law, including the governing state or local law 
partnership statute.
    (ii) Special rules for bottom dollar payment obligations--(A) In 
general. For purposes of Sec.  1.752-2, a bottom dollar payment 
obligation (as defined in paragraph (b)(3)(ii)(C) of this section) is 
not recognized under this paragraph (b)(3).
    (B) Exception. If a partner or related person has a payment 
obligation that would be recognized under this paragraph (b)(3) 
(initial payment obligation) but for the effect of an indemnity, 
reimbursement agreement, or similar arrangement, such bottom dollar 
payment obligation is recognized under this paragraph (b)(3) if, taking 
into account the indemnity, reimbursement agreement, or similar 
arrangement, the partner or related person is liable for at least 90 
percent of the partner's or related person's initial payment 
obligation.
    (C) Definition of bottom dollar payment obligation--(1) In general. 
Except as provided in paragraph (b)(3)(ii)(C)(2) of this section, a 
bottom dollar payment obligation is a payment obligation that is the 
same as or similar to a payment obligation or arrangement described in 
this paragraph (b)(3)(ii)(C)(1).
    (i) With respect to a guarantee or similar arrangement, any payment 
obligation other than one in which the partner or related person is or 
would be liable up to the full amount of such partner's or related 
person's payment obligation if, and to the extent that, any amount of 
the partnership liability is not otherwise satisfied.
    (ii) With respect to an indemnity or similar arrangement, any 
payment obligation other than one in which the partner or related 
person is or would be liable up to the full amount of such partner's or 
related person's payment obligation, if, and to the extent that, any 
amount of the indemnitee's or benefited party's payment obligation that 
is recognized under this paragraph (b)(3) is satisfied.
    (iii) An arrangement with respect to a partnership liability that 
uses tiered partnerships, intermediaries, senior and subordinate 
liabilities, or similar arrangements to convert what would otherwise be 
a single liability into multiple liabilities if, based on the facts and 
circumstances, the liabilities were incurred pursuant to a common plan, 
as part of a single transaction or arrangement, or as part of a series 
of related transactions or arrangements, and with a principal purpose 
of avoiding having at least one of such liabilities or payment 
obligations with respect to such liabilities being treated as a bottom 
dollar payment obligation as described in paragraph (b)(3)(ii)(C)(1)(i) 
or (ii) of this section.
    (2) Exceptions. A payment obligation is not a bottom dollar payment 
obligation merely because a maximum amount is placed on the partner's 
or related person's payment obligation, a partner's or related person's 
payment obligation is stated as a fixed percentage of every dollar of 
the partnership liability to which such obligation relates, or there is 
a right of proportionate contribution running between partners or 
related persons who are co-obligors with respect to a payment 
obligation for which each of them is jointly and severally liable.
    (3) Benefited party defined. For purposes of Sec.  1.752-2, a 
benefited party is the person to whom a partner or related person has 
the payment obligation.
    (D) Disclosure of bottom dollar payment obligations. A partnership 
must disclose to the Internal Revenue Service a bottom dollar payment 
obligation (including a bottom dollar payment obligation that is 
recognized under paragraph (b)(3)(ii)(B) of this section) with respect 
to a partnership liability on a completed Form 8275, Disclosure 
Statement, or successor form, attached to the return of the partnership 
for the taxable year in which the bottom dollar payment obligation is 
undertaken or modified, that includes all of the following information:
    (1) A caption identifying the statement as a disclosure of a bottom 
dollar payment obligation under section 752.
    (2) An identification of the payment obligation with respect to 
which disclosure is made.
    (3) The amount of the payment obligation.
    (4) The parties to the payment obligation.
    (5) A statement of whether the payment obligation is treated as 
recognized for purposes of this paragraph (b)(3).
    (6) If the payment obligation is recognized under paragraph 
(b)(3)(ii)(B) of this section, the facts and circumstances that clearly 
establish that a partner or related person is liable for up to 90 
percent of the partner's or related person's initial payment obligation 
and, but for an indemnity, reimbursement agreement, or similar 
arrangement, the partner's or related person's initial payment 
obligation would have been recognized under this paragraph (b)(3).
    (iii) Special rule for indemnities and reimbursement agreements. An 
indemnity, reimbursement agreement, or similar arrangement will be 
recognized under this paragraph (b)(3) only if, before taking into 
account the indemnity, reimbursement agreement, or similar arrangement, 
the indemnitee's or other benefited party's payment obligation is 
recognized under this paragraph (b)(3), or would be recognized under 
this paragraph (b)(3) if such person were a partner or related person.
    (b)(4) through (e) [Reserved]. For further guidance, see Sec.  
1.752-2(b)(4) through (e).
    (f) Examples 1 through 9 [Reserved]. For further guidance, see 
Sec.  1.752-2(f) Examples 1 through 9.

    Example 10.  Guarantee of first and last dollars. (i) A, B, and 
C are equal members of a limited liability company, ABC, that is 
treated as a partnership for federal tax purposes. ABC borrows 
$1,000 from Bank. A guarantees payment of up to $300 of the ABC 
liability if any amount of the full $1,000 liability is not 
recovered by Bank. B guarantees payment of up to $200, but only if 
the Bank otherwise recovers less than $200. Both A and B waive their 
rights of contribution against each other.
    (ii) Because A is obligated to pay up to $300 if, and to the 
extent that, any amount of the $1,000 partnership liability is not 
recovered by Bank, A's guarantee is not a bottom dollar payment 
obligation under paragraph (b)(3)(ii)(C) of this section. Therefore, 
A's payment obligation is recognized under paragraph (b)(3) of this 
section. The amount of A's economic risk of loss under Sec.  1.752-
2(b)(1) is $300.
    (iii) Because B is obligated to pay up to $200 only if and to 
the extent that the Bank otherwise recovers less than $200 of the 
$1,000 partnership liability, B's guarantee is a bottom dollar 
payment obligation under paragraph (b)(3)(ii)(C) of this section 
and, therefore, is not recognized under paragraph (b)(3)(ii)(A) of 
this section. Accordingly, B bears no economic risk of loss under 
Sec.  1.752-2(b)(1) for ABC's liability.
    (iv) In sum, $300 of ABC's liability is allocated to A under 
Sec.  1.752-2(a), and the remaining $700 liability is allocated to 
A, B, and C under Sec.  1.752-3.

[[Page 69290]]

    Example 11.  Indemnification of guarantees. (i) The facts are 
the same as in Example 10, except that, in addition, C agrees to 
indemnify A up to $100 that A pays with respect to its guarantee and 
agrees to indemnify B fully with respect to its guarantee.
    (ii) The determination of whether C's indemnity is recognized 
under paragraph (b)(3) of this section is made without regard to 
whether C's indemnity itself causes A's guarantee not to be 
recognized. Because A's obligation would be recognized but for the 
effect of C's indemnity and C is obligated to pay A up to the full 
amount of C's indemnity if A pays any amount on its guarantee of 
ABC's liability, C's indemnity of A's guarantee is not a bottom 
dollar payment obligation under paragraph (b)(3)(ii)(C) of this 
section and, therefore, is recognized under paragraph (b)(3) of this 
section. The amount of C's economic risk of loss under Sec.  1.752-
2(b)(1) for its indemnity of A's guarantee is $100.
    (iii) Because C's indemnity is recognized under paragraph (b)(3) 
of this section, A is treated as liable for $200 only to the extent 
any amount beyond $100 of the partnership liability is not 
satisfied. Thus, A is not liable if, and to the extent, any amount 
of the partnership liability is not otherwise satisfied, and the 
exception in paragraph (b)(3)(ii)(B) of this section does not apply. 
As a result, A's guarantee is a bottom dollar payment obligation 
under paragraph (b)(3)(ii)(C) of this section and is not recognized 
under paragraph (b)(3)(ii)(A) of this section. Therefore, A bears no 
economic risk of loss under Sec.  1.752-2(b)(1) for ABC's liability.
    (iv) Because B's obligation is not recognized under paragraph 
(b)(3)(ii) of this section independent of C's indemnity of B's 
guarantee, C's indemnity is not recognized under paragraph 
(b)(3)(iii) of this section. Therefore, C bears no economic risk of 
loss under Sec.  1.752-2(b)(1) for its indemnity of B's guarantee.
    (v) In sum, $100 of ABC's liability is allocated to C under 
Sec.  1.752-2(a) and the remaining $900 liability is allocated to A, 
B, and C under Sec.  1.752-3.

    (g) through (j)(1) [Reserved]. For further guidance, see Sec.  
1.752-2(g) through (j)(1).
    (2) Arrangements tantamount to a guarantee--(i) In general. 
Irrespective of the form of a contractual obligation, the Commissioner 
may treat a partner as bearing the economic risk of loss with respect 
to a partnership liability, or a portion thereof, to the extent that--
    (A) The partner or related person undertakes one or more 
contractual obligations so that the partnership may obtain or retain a 
loan;
    (B) The contractual obligations of the partner or related person 
significantly reduce the risk to the lender that the partnership will 
not satisfy its obligations under the loan, or a portion thereof; and
    (C) With respect to the contractual obligations described in 
paragraphs (j)(2)(i)(A) and (B) of this section--
    (1) One of the principal purposes of using the contractual 
obligations is to attempt to permit partners (other than those who are 
directly or indirectly liable for the obligation) to include a portion 
of the loan in the basis of their partnership interests; or
    (2) Another partner, or a person related to another partner, enters 
into a payment obligation and a principal purpose of the arrangement is 
to cause the payment obligation described in paragraphs (j)(2)(i)(A) 
and (B) of this section to be disregarded under paragraph (b)(3) of 
this section.
    (ii) Economic risk of loss. For purposes of this paragraph (j)(2), 
partners are considered to bear the economic risk of loss for a 
liability in accordance with their relative economic burdens for the 
liability pursuant to the contractual obligations. For example, a lease 
between a partner and a partnership that is not on commercially 
reasonable terms may be tantamount to a guarantee by the partner of the 
partnership liability.
    (j)(3) through (l)(1) [Reserved]. For further guidance, see Sec.  
1.752-2(j)(3) through (l)(1).
    (2) Paragraph (b)(3), paragraph (f) Examples 10 and 11, and 
paragraph (j)(2) of this section apply to liabilities incurred or 
assumed by a partnership and payment obligations imposed or undertaken 
with respect to a partnership liability on or after October 5, 2016, 
other than liabilities incurred or assumed by a partnership and payment 
obligations imposed or undertaken pursuant to a written binding 
contract in effect prior to that date. Partnerships may apply paragraph 
(b)(3), paragraph (f) Examples 10 and 11, and paragraph (j)(2) of this 
section to all of their liabilities as of the beginning of the first 
taxable year of the partnership ending on or after October 5, 2016. The 
rules applicable to liabilities incurred or assumed (or subject to a 
written binding contract in effect) prior to October 5, 2016 are 
contained in Sec.  1.752-2 in effect prior to October 5, 2016 (see 26 
CFR part 1 revised as of April 1, 2016).
    (3) If a partner has a share of a recourse partnership liability 
under Sec.  1.752-2(a) as a result of bearing the economic risk of loss 
under Sec.  1.752-2(b) immediately prior to October 5, 2016 (Transition 
Partner), the partnership (Transition Partnership) may choose not to 
apply paragraph (b)(3), paragraph (f) Examples 10 and 11, and paragraph 
(j)(2)(i)(C)(2) of this section to the extent the amount of the 
Transition Partner's share of liabilities under Sec.  1.752-2(a) as a 
result of bearing the economic risk of loss under Sec.  1.752-2(b) 
immediately prior to October 5, 2016 exceeds the amount of the 
Transition Partner's adjusted basis in its partnership interest as 
determined under Sec.  1.705-1 at such time (Grandfathered Amount). A 
Transition Partner that is a partnership, S corporation, or a business 
entity disregarded as an entity separate from its owner under section 
856(i) or 1361(b)(3) or Sec. Sec.  301.7701-1 through 301.7701-3 of 
this chapter ceases to qualify as a Transition Partner if the direct or 
indirect ownership of that Transition Partner changes by 50 percent or 
more. The Transition Partnership may continue to apply the rules under 
Sec.  1.752-2 in effect prior to October 5, 2016, with respect to a 
Transition Partner for payment obligations described in Sec.  1.752-
2(b) to the extent of the Transition Partner's adjusted Grandfathered 
Amount for the seven-year period beginning October 5, 2016. The 
termination of a Transition Partnership under section 708(b)(1)(B) and 
applicable regulations does not affect the Grandfathered Amount of a 
Transition Partner that remains a partner in the new partnership (as 
described in Sec.  1.708-1(b)(4)), and the new partnership is treated 
as a continuation of the Transition Partnership for purposes of this 
paragraph (l)(3). However, a Transition Partner's Grandfathered Amount 
is reduced (not below zero), but never increased by--
    (i) Upon the sale of any property by the Transition Partnership, an 
amount equal to the excess of any gain allocated for federal income tax 
purposes to the Transition Partner by the Transition Partnership 
(including amounts allocated under section 704(c) and applicable 
regulations) over the product of the total amount realized by the 
Transition Partnership from the property sale multiplied by the 
Transition Partner's percentage interest in the partnership; and
    (ii) An amount equal to any decrease in the Transition Partner's 
share of liabilities to which the rules of this paragraph (l)(3) apply, 
other than by operation of paragraph (l)(3)(i) of this section.
    (m) Expiration date. This section expires on October 4, 2019.


[[Page 69291]]


John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: August 29, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-23388 Filed 10-4-16; 8:45 am]
 BILLING CODE 4830-01-P