Liabilities Recognized as Recourse Partnership Liabilities Under Section 752, 54014-54026 [2019-22031]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 84, Number 196 (Wednesday, October 9, 2019)]
[Rules and Regulations]
[Pages 54014-54026]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22031]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9877 ]
RIN 1545-BM83


Liabilities Recognized as Recourse Partnership Liabilities Under 
Section 752

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations addressing when 
certain obligations to restore a deficit balance in a partner's capital 
account are disregarded under section 704 of the Internal Revenue Code 
(Code), when partnership liabilities are treated as recourse 
liabilities under section 752, and how bottom dollar payment 
obligations are treated under section 752. These final regulations 
provide guidance necessary for a partnership to allocate its 
liabilities among its partners. These regulations affect partnerships 
and their partners.

DATES: 
    Effective date: These regulations are effective on October 9, 2019.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.704-1(b)(1)(ii)(a), 1.752-1(d)(2), and 1.752-2(l).

FOR FURTHER INFORMATION CONTACT: Caroline E. Hay at (202) 317-5279 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

1. Overview

    This Treasury decision contains amendments to the Income Tax

[[Page 54015]]

Regulations (26 CFR part 1) under sections 704 and 752 of the Code. On 
January 30, 2014, the Department of the Treasury (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 (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. On October 5, 2016, after consideration of, and in response 
to, the comments on the 2014 Proposed Regulations, the Treasury 
Department and the IRS published in the Federal Register (81 FR 69291) 
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 for disguised sale purposes 
(T.D. 9787). Also on October 5, 2016, the Treasury Department and the 
IRS published in the Federal Register (81 FR 69282) final and temporary 
regulations under sections 707 and 752 (T.D. 9788) implementing a new 
rule concerning the allocation of liabilities for section 707 purposes 
(707 Temporary Regulations) and rules concerning the treatment of 
``bottom dollar payment obligations'' (752 Temporary Regulations). 
Finally, in the Federal Register (81 FR 69301) on October 5, 2016, the 
Treasury Department and the IRS withdrew the 2014 Proposed Regulations 
under Sec.  1.752-2 and published new proposed regulations (REG-122855-
15) cross-referencing the 707 Temporary Regulations (707 Proposed 
Regulations) and the 752 Temporary Regulations and 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 (752 
Proposed Regulations). On November 17, 2016, the Treasury Department 
and the IRS published in the Federal Register (81 FR 80993 and 81 FR 
80994) two correcting amendments to T.D. 9788 (the temporary 
regulations as so corrected, 707 Temporary Regulations).
    In the Federal Register (83 FR 28397) on June 19, 2018, the 
Treasury Department and the IRS subsequently withdrew the 707 Proposed 
Regulations, and published proposed regulations (REG-131186-17) 
proposing to reinstate the regulations under section 707 concerning how 
partnership liabilities are allocated for disguised sale purposes that 
were in effect prior to the 707 Temporary Regulations. In addition to 
these final regulations under sections 704 and 752, the Treasury 
Department and the IRS are publishing in this issue of the Federal 
Register final regulations under section 707 (T.D. 9876) that are the 
same as the regulations that were in effect prior to the 707 Temporary 
Regulations.
    A public hearing on the 752 Proposed Regulations was not requested 
or held, but the Treasury Department and the IRS received written 
comments. After consideration of the comments, this Treasury decision 
adopts the rules in the 752 Temporary Regulations and the 752 Proposed 
Regulations with some changes. These changes, and comments received on 
the 752 Temporary Regulations and the 752 Proposed Regulations, are 
discussed in the Summary of Comments and Explanations of Revisions 
section of the preamble that follows.

2. Summary of Applicable Law

    Section 752 separates partnership liabilities into two categories: 
Recourse liabilities and nonrecourse liabilities. Section 1.752-1(a)(1) 
provides that a partnership liability is a recourse liability to the 
extent that any partner or related person bears the economic risk of 
loss (EROL) for that liability under Sec.  1.752-2. 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 to 
any person within the meaning of Sec.  1.752-2(b). For purposes of 
determining the extent to which a partner or related person has an 
obligation to make a payment, an obligation to restore a deficit 
capital account upon liquidation of the partnership under the section 
704(b) regulations is taken into account (deficit restoration 
obligation). Further, for this purpose, Sec.  1.752-2(b)(6) of the 
existing regulations presumes that partners and related persons who 
have payment obligations actually perform those obligations, 
irrespective of their net worth, unless the facts and circumstances 
indicate a plan to circumvent or avoid the obligation (the satisfaction 
presumption). However, the satisfaction presumption is subject to an 
anti-abuse rule in Sec.  1.752-2(j) pursuant to which a payment 
obligation of a partner or related person may be disregarded or treated 
as an obligation of another person if facts and circumstances indicate 
that a principal purpose of the arrangement is to eliminate the 
partner's EROL with respect to that obligation or create the appearance 
of the partner or related person bearing the EROL when the substance is 
otherwise. Under the existing rules, the satisfaction presumption is 
also subject to a disregarded entity net value requirement under Sec.  
1.752-2(k) pursuant to which, for purposes of determining the extent to 
which a partner bears the EROL for a partnership liability, a payment 
obligation of a disregarded entity is taken into account only to the 
extent of the net value of the disregarded entity as of the allocation 
date that is allocated to the partnership liability.

Summary of Comments and Explanations of Revisions

1. Bottom Dollar Payment Obligations

A. Obligations Treated as Bottom Dollar Payment Obligations
    The 752 Temporary Regulations provide that a bottom dollar payment 
obligation is not recognized as a payment obligation for purposes of 
Sec.  1.752-2. The 752 Temporary Regulations provide that a bottom 
dollar payment obligation is the same as or similar to one of the 
following three types of payment obligations or arrangements: (1) 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; (2) 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 is recognized; and (3) 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

[[Page 54016]]

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. 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, 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. The 752 Temporary Regulations 
also provide an exception to the non-recognition rule of bottom dollar 
payment obligations. That is, a bottom dollar payment obligation is 
recognized when a partner or related person is liable for at least 90 
percent of the partner's or related person's initial payment obligation 
despite an indemnity, a reimbursement agreement, or a similar 
arrangement.
    One commenter stated that the 752 Temporary Regulations are 
conceptually flawed, result in inconsistent answers, and are directly 
contrary to Congressional intent. That commenter explained that the 
prior regulations appropriately followed Congress's mandate that debt 
is allocated by a partnership to the partners who bear the EROL with 
respect to the debt. See Section 79 of the Deficit Reduction Act of 
1984 (Pub. L. 98-369) overruling the decision in Raphan v. United 
States, 3 Cl. Ct. 457 (1983) (holding that a guarantee on a partnership 
liability by a general partner did not require that partner to be 
treated as personally liable for that liability and did not preclude 
the other partners who did not guarantee the loan from sharing in the 
step up in basis on account of the debt). The commenter argued that the 
752 Temporary Regulations instead treat all guarantees as bottom dollar 
payment obligations which do not create EROL unless the partner is 
liable for the full amount of that partner's or related person's 
payment obligation if, and to the extent that, any amount of the 
partnership liability is not otherwise satisfied. The commenter 
asserted that, under the 752 Temporary Regulations, all guarantees 
below 90 percent of a payment obligation are ignored, even if the 
partnership and the partners believe that the guaranteeing partner 
bears the EROL with respect to the payment obligation.
    As an example of these concerns, the commenter pointed to the 
different results in Examples 10 and 11 in Sec.  1.752-2T(f). In 
Examples 10 and 11, A, B, and C are equal members of a partnership, 
ABC. ABC borrows $1,000 from Bank. In Example 10, A guarantees up to 
$300 of the liability if any amount of the $1,000 liability is not 
recovered by Bank, while B guarantees payment of up to $200, but only 
if Bank otherwise recovers less than $200. In Example 11, C 
additionally agrees to indemnify A for up to $100 that A pays with 
respect to A's guarantee. The comment explained that, in Example 10, 
$300 of the liability is recognized and allocated (to A), but in 
Example 11, only $100 is recognized and allocated (in the amount 
indemnified by C). The full $300 payment obligation would have been 
recognized and allocated if made by one partner, but splitting it 
across two partners caused $200 of the collective payment obligation to 
be ignored. This result is notwithstanding that $300 of the same first-
dollars of the $1,000 partnership liability in the example was 
guaranteed by the partners.
    Although recommending revocation of the 752 Temporary Regulations, 
this commenter recognized that prior regulations under section 752 
allow partners that have no practical economic risk to be allocated 
debt. As a compromise, this commenter proposed that if the Treasury 
Department and the IRS are concerned with bottom dollar payment 
obligations that lack economic reality, the temporary regulations 
should be replaced with a rule that does not recognize obligations 
below a certain threshold. The commenter recommended, as an example, 
that obligations limited to the bottom one-third of a debt obligation 
not be recognized, but once the obligation is above that threshold, the 
entire obligation is recognized. The commenter argued that such a rule 
would provide greater certainty than the 752 Temporary Regulations and 
recognize that the guarantor has risk.
    The 752 Temporary Regulations and these final regulations implement 
Congressional intent. Bottom dollar payment obligations do not 
represent real EROL because those payment obligations are structured to 
insulate the obligor from having to pay their obligations. Moreover, 
bottom dollar guarantees are not relevant to loan risk underwriting 
generally. These obligations generally lack a significant non-tax 
commercial business purpose. Therefore, bottom dollar payment 
obligations should not be recognized as payment obligations. Despite 
the commenter's assertion that there could be some risk to partners 
with bottom dollar payment obligations, the Treasury Department and the 
IRS received no comments (including from this commenter) on the 752 
Temporary Regulations or the 752 Proposed Regulations demonstrating 
that bottom dollar payment obligations have a significant non-tax 
commercial business purpose. Nor did any commenter propose an 
alternative that resolves the concerns raised in the preamble to the 
752 Temporary Regulations that, under the prior section 752 
regulations, partners and related persons entered into payment 
obligations that were not commercial solely to achieve an allocation of 
a partnership liability. The compromise proposal offered by this 
commenter would significantly lower the threshold for the amount 
required to be economically at risk from 90 percent of a partner's or 
related person's initial payment obligation to 33 percent without 
explaining why the lower threshold is more appropriate. Indeed, the 
compromise could still allow a partner with no practical economic risk 
to be allocated debt. These final regulations comport with Congress' 
directive in response to Raphan. Moreover, Examples 10 and 11 in Sec.  
1.752-2(f) are not inconsistent with one another, but show how an 
otherwise recognized payment obligation can become a bottom dollar 
payment obligation when the initial payment obligor no longer bears the 
real EROL as a result of a subsequent indemnity. For these reasons, the 
Treasury Department and the IRS do not adopt the commenter's 
suggestions.
    The 752 Temporary Regulations further require taxpayers to disclose 
bottom dollar payment obligations by filing Form 8275, Disclosure 
Statement, or any successor form, with the return of the partnership 
for the taxable year in which a bottom dollar payment obligation is 
undertaken or modified. These final regulations clarify that 
identifying the payment obligation with respect to which disclosure is 
made includes stating whether the obligation is a guarantee, a 
reimbursement, an indemnity, or deficit restoration obligation.
B. Capital Contribution and Deficit Restoration Obligations
    Generally, the regulations under section 752 provide a description 
of obligations recognized as payment obligations under Sec.  1.752-
2(b)(1). The

[[Page 54017]]

752 Temporary Regulations further provide that all statutory and 
contractual obligations relating to the partnership liability are taken 
into account for purposes of applying Sec.  1.752-2, including 
obligations to the partnership that are imposed by the partnership 
agreement, such as the obligation to make a capital contribution and a 
deficit restoration obligation. See Sec.  1.752-2T(b)(3).
    A commenter expressed concerns that, although it is clear that a 
capital contribution obligation and a deficit restoration obligation 
are types of payment obligations to which Sec.  1.752-2 applies, the 
definition of a bottom dollar payment obligation provides no guidance 
as to how to determine whether a capital contribution obligation or a 
deficit restoration obligation is a bottom dollar payment obligation. 
For example, a deficit restoration obligation does not relate to a 
particular partnership liability and the proceeds of the deficit 
restoration obligation may be paid to creditors of the partnership or 
distributed to other partners. See Sec.  1.704-1(b)(2)(ii)(b)(3). These 
final regulations thus revise the definition of a bottom dollar payment 
obligation to specifically address capital contribution obligations and 
deficit restoration obligations. Section 1.752-2(b)(3)(ii)(C)(1)(iii) 
in these final regulations provides that a bottom dollar payment 
obligation includes, with respect to a capital contribution obligation 
and a deficit restoration obligation, any payment obligation other than 
one in which the partner is or would be required to make the full 
amount of the partner's capital contribution or to restore the full 
amount of the partner's deficit capital account.
C. Anti-Abuse Rule in Sec.  1.752-2(j)(2)
    The 752 Temporary Regulations provide that irrespective of the form 
of the contractual obligation, the Commissioner may treat a partner as 
bearing the EROL with respect to a partnership liability, or portion 
thereof, to the extent that: (1) The partner or related person 
undertakes one or more contractual obligations so that the partnership 
may obtain or retain a loan; (2) 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 portion thereof; and (3) with respect to the contractual obligations 
described in (1) or (2), (i) one of the principal purposes of using the 
contractual obligation 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 (ii) another partner, or person related to another 
partner, enters into a payment obligation and a principal purpose of 
the arrangement is to cause the payment obligation to be disregarded. 
See Sec.  1.752-2T(j)(2).
    A commenter argued that because this anti-abuse rule is at the 
Commissioner's discretion, taxpayers are uncertain how to treat certain 
liabilities that would otherwise be bottom dollar payment obligations. 
One of the purposes of the 752 Temporary Regulations is to ensure that 
only genuine commercial payment obligations, including guarantees and 
indemnities, affect the allocation of partnership liabilities. Indeed, 
commenters to the 2014 Proposed Regulations noted that partners can 
manipulate contractual arrangements to achieve a federal income tax 
result that is not consistent with the economics of an arrangement. 
This is true both of a payment obligation that does not represent a 
real EROL as well as an agreement that purposefully creates the 
appearance of a bottom dollar payment obligation even if that taxpayer 
(or a person related to that taxpayer) bears the EROL. The anti-abuse 
rule, therefore, is appropriate. However, in response to comments 
regarding uncertainty caused because the anti-abuse rule in the 752 
Temporary Regulations applied at the Commissioner's discretion, the 
final regulations remove the discretionary language consistent with the 
rule in the regulations under section 752 prior to the 752 Temporary 
Regulations.
D. Applicability Date and Transitional Rule
    The 752 Temporary Regulations for bottom dollar payment obligations 
generally 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. Under the 752 Temporary Regulations, a transitional rule 
applies to any partner whose allocable share of partnership liabilities 
under Sec.  1.752-2 exceeded its adjusted basis in its partnership 
interest as determined under Sec.  1.705-1 on October 5, 2016 
(Grandfathered Amount). To the extent of that excess, those partners 
may continue to apply the prior regulations under Sec.  1.752-2 with 
respect to a partnership liability for a seven-year period. The amount 
of partnership liabilities subject to transition relief decreases for 
certain reductions in the amount of liabilities allocated to that 
partner under the transitional rule and, upon the sale of any 
partnership property, for any tax gain (including section 704(c) gain) 
allocated to the partner less that partner's share of amount realized.
    A commenter explained that the rule in Sec.  1.704-2(g)(3) 
regarding conversions of recourse or partner nonrecourse liabilities 
into nonrecourse liabilities may overlap and potentially conflict with 
the transitional rule. This commenter noted that the transitional rule 
may be unnecessary, but, regardless, believes that the transitional 
rule should be coordinated with Sec.  1.704-2(g)(3).
    Section 1.704-2(g)(3) provides that a partner's share of 
partnership minimum gain is increased to the extent provided in Sec.  
1.704-2(g)(3) if a recourse or partner nonrecourse liability becomes 
partially or wholly nonrecourse. If a recourse liability becomes a 
nonrecourse liability, a partner has a share of the partnership's 
minimum gain that results from the conversion equal to the partner's 
deficit capital account (determined under Sec.  1.704-1(b)(2)(iv)) to 
the extent the partner no longer bears the economic burden for the 
entire deficit capital account as a result of the conversion. The 
determination of the extent to which a partner bears the economic 
burden for a deficit capital account is made by determining the 
consequences to the partner in the case of a complete liquidation of 
the partnership immediately after the conversion applying the rules 
described in Sec.  1.704-1(b)(2)(iii)(c) that deem the value of 
partnership property to equal its basis, taking into account section 
7701(g) in the case of property that secures nonrecourse indebtedness. 
If a partner nonrecourse debt becomes a nonrecourse liability, the 
partner's share of partnership minimum gain is increased to the extent 
the partner is not subject to the minimum gain chargeback requirement 
under Sec.  1.704-2(i)(4). The commenter asserts that Sec.  1.704-
2(g)(3) increases a partner's share of minimum gain which increases the 
partner's capital account to reflect the same result as if nonrecourse 
deductions had been taken all along. The gain, if it would have been 
triggered as a result of a partner's negative section 704(b) account 
with no deficit reduction obligation, is deferred because under Sec.  
1.704-2(g)(3), the partner's share of minimum gain increases. The 
commenter argues that Sec.  1.752-3(a)(1) or (2) would apply to 
allocate the

[[Page 54018]]

nonrecourse liability to the partner and, therefore, the partner would 
still be allocated a share of the partnership liability eliminating the 
need for the transitional rule.
    Notwithstanding the rule in Sec.  1.704-2(g)(3), the transitional 
rule is necessary to address certain situations when Sec.  1.704-
2(g)(3) would not apply because, for example, before these regulations 
were finalized, a bottom dollar deficit restoration obligation is 
regarded for section 704 purposes, but is disregarded for section 752 
purposes. In that case, a partner could recognize gain under section 
731 without the transitional rule. Additionally, because Sec.  1.752-
3(a)(1) and (2) do not apply in determining a partner's share of a 
partnership nonrecourse liability for disguised sale purposes, a 
disguised sale could occur if a partner's share of liabilities under 
Sec.  1.752-3(a)(3) does not cover the Grandfathered Amount.
    To the extent that the transitional rule applies to a partner's 
share of a recourse partnership liability as a result of the partner 
bearing the EROL under Sec.  1.752-2(b), the partner's share of the 
liability can continue to be determined under Sec.  1.752-2 and is not 
converted into a nonrecourse liability under Sec.  1.752-3. In this 
situation, because a recourse or partner nonrecourse liability does not 
become partially or wholly nonrecourse as a result of the transitional 
rule, the rule in Sec.  1.704-2(g)(3) would not apply until the 
expiration of the seven-year period. If a partner does not want to 
apply the transitional rule in determining its share of a partnership 
liability because it believes that the rule in Sec.  1.704-2(g)(3) 
effectively defers any negative tax consequences that could occur when 
a recourse or partner nonrecourse liability becomes partially or wholly 
nonrecourse, the partner must then apply the rules under Sec.  1.752-2, 
as amended after October 5, 2016, in determining its share of a 
partnership liability.
    This commenter also noted that the transitional rule should clarify 
whether it applies to refinanced liabilities. The bottom dollar payment 
obligation rules do not apply to liabilities incurred or assumed by a 
partnership and payment obligations imposed or undertaken pursuant to a 
written binding contract in effect before October 5, 2016. The preamble 
to the 752 Temporary Regulations explains that commenters on the 2014 
Proposed Regulations had recommended that partnership liabilities or 
payment obligations that are modified or refinanced continue to be 
subject to the provisions of the previous regulations to the extent of 
the amount and duration of the pre-modification (or refinancing) 
liability or payment obligation. The preamble explains that 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, but instead provided transition 
relief. Under the transitional rule, if a debt entered into before 
October 5, 2016, is not refinanced, these final regulations do not 
apply. If the debt is refinanced, then these regulations apply, but the 
partner could instead choose to apply the transitional rule to the 
extent of the Grandfathered Amount. Although the transitional rule in 
the 752 Temporary Regulations applies to modified or refinanced 
obligations, these final regulations further clarify that the 
transitional rule applies to modified and refinanced liabilities.

2. Additional Guidance on Disregarding Purported Payment Obligations

A. Deficit Restoration Obligation Factors
    The 752 Proposed Regulations add a list of factors to Sec.  1.704-
1(b)(2)(ii)(c) that are similar to the factors in the proposed anti-
abuse rule under Sec.  1.752-2(j) (discussed in Section 2.B. of the 
Summary of Comments and Explanations of Revisions in this preamble), 
but specific to deficit restoration obligations, to indicate when a 
plan to circumvent or avoid an obligation exists. If a plan to 
circumvent or avoid an obligation exists, the obligation is disregarded 
for purposes of sections 704 and 752. Under proposed Sec.  1.704-
1(b)(2)(ii)(c), the following factors indicate a plan to circumvent or 
avoid an obligation: (1) The partner is not subject to commercially 
reasonable provisions for enforcement and collection of the obligation; 
(2) the partner is not required to provide (either at the time the 
obligation is made or periodically) commercially reasonable 
documentation regarding the partner's financial condition to the 
partnership; (3) the obligation ends or could, by its terms, be 
terminated before the liquidation of the partner's interest in the 
partnership or when the partner's capital account as provided in Sec.  
1.704-1(b)(2)(iv) is negative; and (4) the terms of the obligation are 
not provided to all the partners in the partnership in a timely manner.
    The Treasury Department and the IRS are aware that a partner's 
transfer of its deficit restoration obligation to a transferee who 
agrees to the same deficit restoration obligation could run afoul of 
the third factor and cause the partner's deficit restoration obligation 
to be disregarded. However, under these final regulations, the weight 
to be given to any particular factor depends on the particular facts 
and the presence or absence of any particular factor is not, in itself, 
necessarily indicative of whether or not the obligation is respected. 
The fact that a transferee agrees to the same deficit restoration 
obligation should be taken into account when determining whether a plan 
to circumvent or avoid an obligation exists. In addition, these final 
regulations add an exception to this factor when a transferee partner 
assumes the obligation.
B. Anti-Abuse Factors Under Sec.  1.752-2(j)(3)
    The 2014 Proposed Regulations included a list of factors to 
determine whether a partner's or related person's obligation to make a 
payment with respect to a partnership liability (excluding those 
imposed by state law) would be recognized for purposes of section 752. 
In response to comments, the 752 Proposed Regulations moved the list of 
factors to an anti-abuse rule in Sec.  1.752-2(j)(3), other than the 
recognition factors concerning bottom dollar guarantees and 
indemnities, which are addressed in the 752 Temporary Regulations. 
Under the anti-abuse rule in the 752 Proposed Regulations, the 
following non-exclusive factors are weighed to determine whether a 
payment obligation should be respected: (1) The partner or related 
person is not subject to commercially reasonable contractual 
restrictions that protect the likelihood of payment, (2) the partner or 
related person is not required to provide commercially reasonable 
documentation regarding the partner's or related person's financial 
condition to the benefited party, (3) the term of the payment 
obligation ends prior to the term of the partnership liability, or the 
partner or related person has a right to terminate its payment 
obligation, (4) there exists a plan or arrangement in which the primary 
obligor or any other obligor with respect to the partnership liability 
directly or indirectly holds money or other liquid assets in an amount 
that exceeds the reasonable foreseeable needs of such obligor, (5) the 
payment obligation does not permit the creditor to promptly pursue 
payment following a payment default on the partnership liability, or 
other arrangements with respect to the partnership liability or payment 
obligation otherwise indicate a plan to

[[Page 54019]]

delay collection, (6) in the case of a guarantee or similar 
arrangement, the terms of the partnership liability would be 
substantially the same had the partner or related person not agreed to 
provide the guarantee, and (7) the creditor or other party benefiting 
from the obligation did not receive executed documentation with respect 
to the payment obligation from the partner or related person before, or 
within a commercially reasonable period of time after, the creation of 
the obligation. The weight to be given to any particular factor depends 
on the particular case and the presence or absence of any particular 
factor, in itself, is not necessarily indicative of whether or not a 
payment obligation is recognized under Sec.  1.752-2(b).
    A commenter expressed concerns with the listed factors asserting 
that they are drafted to make an obligation fail (that the debt will be 
nonrecourse) because an obligation is unlikely to satisfy all seven 
factors. The commenter also argued that the factors are subject to 
manipulation by taxpayers who desire nonrecourse debt treatment. 
Finally, the commenter was concerned with the subjective and 
speculative inquiry regarding the fourth and sixth factors.
    The seven factors are appropriate considerations in determining 
whether a plan to circumvent or avoid an obligation exists. The 2014 
Proposed Regulations provided that a payment obligation with respect to 
a partnership liability was not recognized under Sec.  1.752-2(b)(3) 
unless all of the factors were met. At commenters' requests and due to 
concerns that the rule was too strict, the 752 Proposed Regulations 
moved the list of factors from the operative rule to the anti-abuse 
rule where they are now just factors to examine in determining whether 
a plan to circumvent or avoid an obligation exists. In response to the 
comment on the 752 Proposed Regulations, however, these final 
regulations add clarification to the fourth factor that amounts are not 
held in excess of the reasonably foreseeable needs of an obligor if the 
partnership purchases standard commercial insurance, such as casualty 
insurance. Additionally, these final regulations list certain types of 
commercially reasonable documentation (balance sheets and financial 
statements) as examples of documents a lender would typically require.
    A commenter also requested that the final regulations clarify how 
the assumption rule in Sec.  1.752-1(d) relates to the factors in Sec.  
1.752-2(j). Under Sec.  1.752-1(b), any increase in a partner's share 
of partnership liabilities, or any increase in a partner's individual 
liabilities by reason of the partner's assumption of partnership 
liabilities, is treated as a contribution of money by that partner to 
the partnership. Conversely, Sec.  1.752-1(c) provides that any 
decrease in a partner's share of partnership liabilities, or any 
decrease in a partner's individual liabilities by reason of the 
partnership's assumption of the individual liabilities of the partner, 
is treated as a distribution of money by the partnership to that 
partner. The assumption rule in Sec.  1.752-1(d) applies to determine 
whether a partner has assumed a partnership liability (treated as a 
contribution under section 752(a)), or the partnership has assumed a 
partner liability (treated as a distribution under section 752(b)). 
Generally under Sec.  1.752-1(d), a person is considered to assume a 
liability only to the extent that (1) the assuming person is personally 
obligated to pay the liability; and (2) if a partner or related person 
assumes a partnership liability, the person to whom the liability is 
owed knows of the assumption and can directly enforce the partner's or 
related person's obligation for the liability, and no other partner or 
person that is a related person to another partner would bear the EROL 
for the liability immediately after the assumption. Sections 1.752-2 
and 1.752-3 provide the rules for determining a partner's share of 
partnership recourse and nonrecourse liabilities.
    The analysis for determining whether a partner or person that is a 
related person to a partner bears the EROL for a liability for purposes 
of the assumption rule in Sec.  1.752-1(d) should be the same analysis 
for determining whether a partner or related person bears the EROL 
under Sec.  1.752-2, including the factors in Sec.  1.752-2(j) for 
payment obligations. Therefore, these final regulations add a cross 
reference in Sec.  1.752-1(d) to clarify that an assumption will be 
treated as giving rise to a payment obligation only to the extent no 
other partner or a person related to another partner bears the EROL for 
the liability as determined under Sec.  1.752-2.
C. Reasonable Expectation of Ability To Satisfy Obligation
    The satisfaction presumption in Sec.  1.752-2(b)(6) of the existing 
regulations is subject to a disregarded entity net value requirement 
under existing Sec.  1.752-2(k). The 2014 Proposed Regulations expanded 
the scope of the net value requirement and provided that, in 
determining the extent to which a partner or related person other than 
an individual or a decedent's estate bears the EROL for a partnership 
liability other than a trade payable, a payment obligation is 
recognized only to the extent of the net value of the partner or 
related person that, as of the allocation date, is allocated to the 
liability, as determined under Sec.  1.752-2(k). The 2014 Proposed 
Regulations also required a partner to provide a statement concerning 
the net value of a person with a payment obligation (a payment obligor) 
to the partnership. The preamble to the 2014 Proposed Regulations 
requested comments concerning whether the net value rule should also 
apply to individuals and estates and whether the regulations should 
consolidate these rules under Sec.  1.752-2(k).
    Comments on the 2014 Proposed Regulations suggested that if the net 
value rule is retained, Sec.  1.752-2(k) should be extended to all 
partners and related persons other than individuals. A commenter 
expressed concerns that a partner who may be treated as bearing the 
EROL with respect to a partnership liability would have to provide 
information regarding the net value of a payment obligor, which is 
unnecessarily intrusive. Another commenter believed that if the rules 
requiring net value were extended to all partners in partnerships, the 
attempt to achieve more realistic substance would be accompanied by a 
corresponding increase in the potential for manipulation.
    The preamble to the 752 Proposed Regulations explains that the 
Treasury Department and the IRS remain concerned with ensuring that a 
partner or related person be presumed to satisfy its payment obligation 
only to the extent that such partner or related person would be able to 
pay the obligation. After consideration of the comments to the 2014 
Proposed Regulations, however, the Treasury Department and the IRS 
agreed that expanding the application of the net value rules under 
Sec.  1.752-2(k) may lead to more litigation and may unduly burden 
taxpayers. Furthermore, net value as provided in Sec.  1.752-2(k) may 
not accurately take into account future earnings of a business entity, 
which normally factor into lending decisions. Therefore, the 752 
Proposed Regulations proposed to remove Sec.  1.752-2(k) of the 
existing regulations and instead create a new presumption under the 
anti-abuse rule in Sec.  1.752-2(j).
    Under the presumption in the 752 Proposed Regulations, evidence of 
a plan to circumvent or avoid an obligation is deemed to exist if the 
facts and circumstances indicate that there is not a reasonable 
expectation that the payment obligor will have the ability to

[[Page 54020]]

make the required payments if the payment obligation becomes due and 
payable (Presumed Anti-abuse Rule). A payment obligor includes 
disregarded entities (including grantor trusts). If evidence of a plan 
to circumvent or avoid the obligation exists or is deemed to exist, the 
obligation is not recognized under Sec.  1.752-2(b) and therefore the 
partnership liability is treated as a nonrecourse liability under Sec.  
1.752-1(a)(2).
    Commenters argued that Sec.  1.752-2(k) should be retained, 
however, because it provides clarity and certainty to taxpayers. One 
commenter suggested that if the government believes that the Presumed 
Anti-abuse Rule is necessary, Sec.  1.752-2(k) should still be 
retained, or, alternatively, expanded to all partners and related 
persons other than individuals. This commenter noted that the Presumed 
Anti-abuse Rule creates uncertainty as it is not clear that taxpayers 
may proactively assert the Presumed Anti-abuse Rule. The commenter 
suggested that the final regulations clarify that motive and intent are 
irrelevant in determining whether the Presumed Anti-abuse Rule applies 
and that no actual plan to circumvent or avoid an obligation needs to 
exist.
    Expanding the application of Sec.  1.752-2(k) in the existing 
regulations would unduly burden taxpayers and would not accurately 
reflect economics. A more accurate reflection of economics is to 
determine whether a debtor will have the ability to make payments when 
due, not necessarily to whether the debtor has sufficient assets to 
satisfy an obligation currently. The Treasury Department and the IRS 
agree with the commenter, however, that the Presumed Anti-abuse Rule 
could create confusion and uncertainty. These final regulations, 
therefore, amend Sec.  1.752-2(k) and clarify how the satisfaction 
presumption in Sec.  1.752-2(b)(6) relates to Sec.  1.752-2(k) in these 
final regulations. Amended Sec.  1.752-2(k) applies to all partners of 
a partnership, including partners that are disregarded entities or 
grantor trusts.
    Under these final regulations, it is assumed that all payment 
obligors actually perform those obligations, irrespective of their 
actual net worth, unless the facts and circumstances indicate that at 
the time the partnership determines a partner's share of partnership 
liabilities under Sec. Sec.  1.705-1(a) and 1.752-4(d) there is not a 
commercially reasonable expectation that the payment obligor will have 
the ability to make the required payments under the terms of the 
obligation if the obligation becomes due and payable. A partner or 
related person's ability to pay may be based on documents such as, but 
not limited to, balance sheets, income statements, cash flow 
statements, credit reports, and projected future financial results.
D. General Applicability Date
    Except as provided in Section 1.D. of the Summary of Comments and 
Explanations of Revisions in this preamble relating to bottom dollar 
payments obligations, these final regulations apply to liabilities 
incurred or assumed by a partnership and to payment obligations imposed 
or undertaken with respect to a partnership liability on or after 
October 9, 2019, 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.

3. Additional Issues Concerning Partnership Liabilities That Are 
Outside the Scope of These Regulations

    A commenter recommended guidance in determining a partner's amount 
at risk under section 465 for deficit restoration obligations. This 
commenter noted that under Hubert Enterprises, Inc. v. Commissioner, 
T.C. Memo. 2008-46, a deficit restoration obligation was not treated as 
giving a partner at risk basis because the obligation was contingent 
(because it was dependent upon the partner liquidating his interest) 
and the amount was uncertain (the deficit restoration obligation 
covered only the deficit in the partner's capital account at the time 
of liquidation and did not cover the entire debt obligation at issue). 
The commenter also recommended providing guidance under section 465 
similar to that provided in these final regulations regarding when 
guarantees will be recognized. Providing guidance concerning section 
465 is beyond the scope of these regulations. The Treasury Department 
and the IRS request comments, however, concerning whether guidance is 
needed to address issues under section 465.
    The commenter recommended that these regulations incorporate 
standards to determine when a debt is recourse to a partnership under 
section 1001. The commenter questioned whether that test under section 
1001 is performed at the partnership or partner level. These final 
regulations provide guidance as to how liabilities are allocated to 
partners in a partnership and do not concern how liabilities are 
characterized to the partnership under section 1001. This comment is 
thus outside the scope of these regulations.
    This commenter also suggested that the Treasury Department and the 
IRS consider whether the rules in section 357(d) should have been 
adopted for partnerships since section 357(d)(3) states that the 
Secretary may also prescribe regulations which provide that the manner 
in which a liability is treated as assumed under section 357(d) is 
applied, where appropriate, elsewhere in Title 26. Section 357(d)(1)(A) 
provides that a recourse liability (or portion thereof) shall be 
treated as having been assumed if, as determined on the basis of all 
facts and circumstances, the transferee has agreed to, and is expected 
to, satisfy such liability (or portion), whether or not the transferor 
has been relieved of such liability. Section 357(d)(1)(B) provides that 
except as provided in section 357(d)(2), a nonrecourse liability shall 
be treated as having been assumed by the transferee of any asset 
subject to such liability. This recommended change is beyond the scope 
of these regulations, which are concerned with whether a partnership 
debt is recourse or non-recourse to a partner in the partnership.
    The 752 Proposed Regulations requested comments concerning 
exculpatory liabilities in response to comments received on the 2014 
Proposed Regulations requesting guidance with respect to such 
liabilities. An exculpatory liability is a liability that is recourse 
to an entity under state law and section 1001, but no partner bears the 
EROL within the meaning of section 752. Thus, the liability is treated 
as nonrecourse for section 752 purposes. The Treasury Department and 
the IRS, after acknowledging that exculpatory liabilities are beyond 
the scope of the 752 Proposed Regulations, sought additional comments 
regarding the proper treatment of an exculpatory liability under 
regulations under section 704(b) and the effect of such a liability's 
classification under section 1001. Further, the Treasury Department and 
the IRS requested additional comments addressing the allocation of an 
exculpatory liability among multiple assets and possible methods for 
calculating minimum gain with respect to such liability, such as the 
so-called ``floating lien'' approach (whereby all the assets in the 
entity, including cash, are considered to be subject to the exculpatory 
liability) or a specific allocation approach. The Treasury Department 
and the IRS continue to consider the comments received concerning 
exculpatory liabilities under sections 704 and 752.

[[Page 54021]]

Special Analyses

    These final regulations are not subject to review under section 
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement 
(April 11, 2018) between the Treasury Department and the Office of 
Management and Budget regarding review of tax regulations. It is hereby 
certified that the collection of information in these regulations will 
not have a significant economic impact on a substantial number of small 
entities. This certification is based on the fact that the amount of 
time necessary to report the required information will be minimal in 
that it requires partnerships (including partnerships that may be small 
entities) to provide information they already maintain or can easily 
obtain to the IRS. Moreover, it should take a partnership no more than 
2 hours to satisfy the information requirement in these regulations. 
Accordingly, this rule will not have a significant economic impact on a 
substantial number of small entities pursuant to the Regulatory 
Flexibility Act (5 U.S.C. chapter 6). Pursuant to section 7805(f) of 
the Code, the notice of proposed rulemaking that preceded these final 
regulations was submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business, and no comments were received.

Paperwork Reduction Act

    The collection of information contained in these final 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.
    The collection of information in these final regulations under 
section 752 is in Sec.  1.752-2(b)(3)(ii)(D). This information is 
required by the IRS to ensure that section 752 of the Code and 
applicable regulations are properly applied for allocations of 
partnership liabilities. The respondents will be partners and 
partnerships.
    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.
    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.

Drafting Information

    The principal author of these regulations is Caroline E. Hay, 
Office of the Associate Chief Counsel (Passthroughs and Special 
Industries). 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

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.704-1 is amended by:

0
1. Adding two sentences to the end of paragraph (b)(1)(ii)(a).
0
2. Adding a sentence to the end of paragraph (b)(2)(ii)(b)(3) 
introductory text.
0
3. Removing the undesignated paragraph following paragraph 
(b)(2)(ii)(b)(3).
0
4. Adding paragraphs (b)(2)(ii)(b)(4) through (7).
0
5. Revising paragraph (b)(2)(ii)(c).
    The additions and revisions read as follows:


Sec.  1.704-1  Partner's distributive share.

* * * * *
    (b) * * *
    (1) * * *
    (ii) * * *
    (a) * * * Furthermore, the last sentence of paragraph 
(b)(2)(ii)(b)(3) of this section and paragraphs (b)(2)(ii)(b)(4) 
through (7) and (b)(2)(ii)(c) of this section apply to partnership 
taxable years ending on or after October 9, 2019. However, taxpayers 
may apply the last sentence of paragraph (b)(2)(ii)(b)(3) of this 
section and paragraphs (b)(2)(ii)(b)(4) through (7) and (b)(2)(ii)(c) 
of this section for partnership taxable years ending on or after 
October 5, 2016. For partnership taxable years ending before October 9, 
2019, see Sec.  1.704-1 as contained in 26 CFR part 1 revised as of 
April 1, 2019.
* * * * *
    (2) * * *
    (ii) * * *
    (b) * * *
    (3) * * * Notwithstanding the partnership agreement, an obligation 
to restore a deficit balance in a partner's capital account, including 
an obligation described in paragraph (b)(2)(ii)(c)(1) of this section, 
will not be respected for purposes of this section to the extent the 
obligation is disregarded under paragraph (b)(2)(ii)(c)(4) of this 
section.
    (4) For purposes of paragraphs (b)(2)(ii)(b)(1) through (3) of this 
section, a partnership taxable year shall be determined without regard 
to section 706(c)(2)(A).
    (5) The requirements in paragraphs (b)(2)(ii)(b)(2) and (3) of this 
section are not violated if all or part of the partnership interest of 
one or more partners is purchased (other than in connection with the 
liquidation of the partnership) by the partnership or by one or more 
partners (or one or more persons related, within the meaning of section 
267(b) (without modification by section 267(e)(1)) or section 
707(b)(1), to a partner) pursuant to an agreement negotiated at arm's 
length by persons who at the time such agreement is entered into have 
materially adverse interests and if a principal purpose of such 
purchase and sale is not to avoid the principles of the second sentence 
of paragraph (b)(2)(ii)(a) of this section.
    (6) The requirement in paragraph (b)(2)(ii)(b)(2) of this section 
is not violated if, upon the liquidation of the partnership, the 
capital accounts of the partners are increased or decreased pursuant to 
paragraph (b)(2)(iv)(f) of this section as of the date of such 
liquidation and the partnership makes liquidating distributions within 
the time set out in the requirement in paragraph (b)(2)(ii)(b)(2) of 
this section in the ratios of the partners' positive capital accounts, 
except that it does not distribute reserves reasonably required to 
provide for liabilities (contingent or otherwise) of the partnership 
and installment obligations owed to the partnership, so long as such 
withheld amounts are distributed as soon as practicable and in the 
ratios of the partners' positive capital account balances.
    (7) See Examples 1.(i) and (ii), 4.(i), 8.(i), and 16.(i) of 
paragraph (b)(5) of this section for issues concerning paragraph 
(b)(2)(ii)(b) of this section.
    (c) Obligation to restore deficit--(1) Other arrangements treated 
as obligations to restore deficits. If a partner is not expressly 
obligated to restore the deficit balance in such partner's capital 
account, such partner nevertheless will be treated as obligated to 
restore the deficit balance in his capital account (in accordance with 
the requirement in paragraph (b)(2)(ii)(b)(3) of this section and 
subject to paragraph

[[Page 54022]]

(b)(2)(ii)(c)(2) of this section) to the extent of--
    (A) The outstanding principal balance of any promissory note (of 
which such partner is the maker) contributed to the partnership by such 
partner (other than a promissory note that is readily tradable on an 
established securities market), and
    (B) The amount of any unconditional obligation of such partner 
(whether imposed by the partnership agreement or by state or local law) 
to make subsequent contributions to the partnership (other than 
pursuant to a promissory note of which such partner is the maker).
    (2) Satisfaction requirement. For purposes of paragraph 
(b)(2)(ii)(c)(1) of this section, a promissory note or unconditional 
obligation is taken into account only if it is required to be satisfied 
at a time no later than the end of the partnership taxable year in 
which such partner's interest is liquidated (or, if later, within 90 
days after the date of such liquidation). If a promissory note referred 
to in paragraph (b)(2)(ii)(c)(1) of this section is negotiable, a 
partner will be considered required to satisfy such note within the 
time period specified in this paragraph (b)(2)(ii)(c)(2) if the 
partnership agreement provides that, in lieu of actual satisfaction, 
the partnership will retain such note and such partner will contribute 
to the partnership the excess, if any, of the outstanding principal 
balance of such note over its fair market value at the time of 
liquidation. See paragraph (b)(2)(iv)(d)(2) of this section. See 
Examples 1.(ix) and (x) of paragraph (b)(5) of this section.
    (3) Related party notes. For purposes of paragraph (b)(2) of this 
section, if a partner contributes a promissory note to the partnership 
during a partnership taxable year beginning after December 29, 1988, 
and the maker of such note is a person related to such partner (within 
the meaning of Sec.  1.752-4(b)(1)), then such promissory note shall be 
treated as a promissory note of which such partner is the maker.
    (4) Obligations disregarded--(A) General rule. A partner in no 
event will be considered obligated to restore the deficit balance in 
his capital account to the partnership (in accordance with the 
requirement in paragraph (b)(2)(ii)(b)(3) of this section) to the 
extent such partner's obligation is a bottom dollar payment obligation 
that is not recognized under Sec.  1.752-2(b)(3) or is not legally 
enforceable, or the facts and circumstances otherwise indicate a plan 
to circumvent or avoid such obligation. See paragraphs (b)(2)(ii)(f), 
(b)(2)(ii)(h), and (b)(4)(vi) of this section for other rules regarding 
such obligation. To the extent a partner is not considered obligated to 
restore the deficit balance in the partner's capital account to the 
partnership (in accordance with the requirement in paragraph 
(b)(2)(ii)(b)(3) of this section), the obligation is disregarded and 
paragraph (b)(2) of this section and Sec.  1.752-2 are applied as if 
the obligation did not exist.
    (B) Factors indicating plan to circumvent or avoid obligation. In 
the case of an obligation to restore a deficit balance in a partner's 
capital account upon liquidation of a partnership, paragraphs 
(b)(2)(ii)(c)(4)(B)(i) through (iv) of this section provide a non-
exclusive list of factors that may indicate a plan to circumvent or 
avoid the obligation. For purposes of making determinations under this 
paragraph (b)(2)(ii)(c)(4), the weight to be given to any particular 
factor depends on the particular case and the presence or absence of 
any particular factor is not, in itself, necessarily indicative of 
whether or not the obligation is respected. The following factors are 
taken into consideration for purposes of this paragraph (b)(2):
    (i) The partner is not subject to commercially reasonable 
provisions for enforcement and collection of the obligation.
    (ii) The partner is not required to provide (either at the time the 
obligation is made or periodically) commercially reasonable 
documentation regarding the partner's financial condition to the 
partnership.
    (iii) The obligation ends or could, by its terms, be terminated 
before the liquidation of the partner's interest in the partnership or 
when the partner's capital account as provided in Sec.  1.704-
1(b)(2)(iv) is negative other than when a transferee partner assumes 
the obligation.
    (iv) The terms of the obligation are not provided to all the 
partners in the partnership in a timely manner.
* * * * *

0
Par. 3. Section 1.752-0 is amended by:
0
1. Adding entries for Sec.  1.752-1(d)(1) and (2).
0
2. Adding entries for Sec.  1.752-2(b)(3)(i) and (ii), (b)(3)(ii)(A) 
through (C), (b)(3)(ii)(C)(1) through (3), (b)(3)(ii)(D), and 
(b)(3)(iii).
0
3. Adding entries for Sec.  1.752-2(j)(2)(i) and (ii).
0
4. Adding entries for Sec.  1.752-2(j)(3)(i) through (ii).
0
5. Revising the entries for Sec.  1.752-2(j)(3) and (4).
0
6. Adding entries for Sec.  1.752-2(k) and (k)(1) and (2).
0
7. Adding an entry for Sec.  1.752-2(l).
    The additions and revisions read as follows:


Sec.  1.752-0  Table of contents.

* * * * *
Sec.  1.752-1 Treatment of partnership liabilities.
* * * * *
    (d) * * *
    (1) In general.
    (2) Applicability date.
* * * * *
Sec.  1.752-2Partner's share of recourse liabilities.
* * * * *
    (b) * * *
    (3) * * *
    (i) In general.
    (ii) Special rules for bottom dollar payment obligations.
    (A) In general.
    (B) Exception.
    (C) Definition of bottom dollar payment obligation.
    (1) In general.
    (2) Exceptions.
    (3) Benefited party defined.
    (D) Disclosure of bottom dollar payment obligations.
    (iii) Special rule for indemnities and reimbursement agreements.
* * * * *
    (j) * * *
    (2) * * *
    (i) In general.
    (ii) Economic risk of loss.
    (3) Plan to circumvent or avoid an obligation.
    (i) General rule.
    (ii) Factors indicating plan to circumvent or avoid an 
obligation.
    (4) Example.
    (k) No reasonable expectation of payment.
    (1) In general.
    (2) Examples.
    (l) Applicability dates.
* * * * *

0
Par. 4. Section 1.752-1 is amended by:
0
1. Redesignating paragraphs (d)(1) and (2) as paragraphs (d)(1)(i) and 
(ii), respectively, and revising newly redesignated paragraph 
(d)(1)(ii).
0
2. Redesignating the text of paragraph (d) introductory text following 
its subject heading as paragraph (d)(1), revising the heading for 
paragraph (d), and adding a heading to newly redesignated paragraph 
(d)(1).
0
3. Adding paragraph (d)(2).
    The revisions and additions read as follows:


Sec.  1.752-1  Treatment of partnership liabilities.

* * * * *
    (d) * * *
    (1) In general. * * *
    (ii) If a partner or related person assumes a partnership 
liability, the person to whom the liability is owed

[[Page 54023]]

knows of the assumption and can directly enforce the partner's or 
related person's obligation for the liability, and no other partner or 
person that is a related person to another partner would bear the 
economic risk of loss for the liability under Sec.  1.752-2 immediately 
after the assumption.
    (2) Applicability date. Paragraph (d)(1)(ii) of this section 
applies to liabilities incurred or assumed by a partnership on or after 
October 9, 2019. The rules applicable to liabilities incurred or 
assumed prior to October 9, 2019, are contained in Sec.  1.752-1 in 
effect prior to October 9, 2019, (see 26 CFR part 1 revised as of April 
1, 2019).
* * * * *

0
Par. 5. Section 1.752-2 is amended by:
0
1. Revising paragraphs (b)(3) and (6).
0
2. Adding a sentence to the end of paragraph (f) introductory text.
0
3. Designating Example 1 through 11 of paragraph (f) as paragraph 
(f)(1) through (f)(11), respectively.
0
4. Removing and reserving newly redesignated paragraph (f)(9).
0
5. Revising newly redesignated paragraphs (f)(10) and (11).
0
6. Revising paragraphs (j)(2) and (3).
0
7. Adding paragraph (j)(4).
0
8. Revising paragraphs (k) and (l).
    The revisions and additions read as follows:


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

* * * * *
    (b) * * *
    (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--
    (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, a 
reimbursement agreement, or a 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) With respect to an obligation to make a capital contribution 
or 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)), any payment obligation other than 
one in which the partner is or would be required to make the full 
amount of the partner's capital contribution or to restore the full 
amount of the partner's deficit capital account.
    (iv) 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), (ii), or (iii) 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 (including whether the obligation is a 
guarantee, a reimbursement, an indemnity, or an obligation to restore a 
deficit balance in a partner's capital account).

[[Page 54024]]

    (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, a reimbursement agreement, or a 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, a reimbursement agreement, or a 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.
* * * * *
    (6) Deemed satisfaction of obligation. For purposes of determining 
the extent to 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 obligations to make payments (a 
payment obligor) actually perform those obligations, irrespective of 
their actual net worth, unless the facts and circumstances indicate--
    (i) A plan to circumvent or avoid the obligation under paragraph 
(j) of this section, or
    (ii) That there is not a commercially reasonable expectation that 
the payment obligor will have the ability to make the required payments 
under the terms of the obligation if the obligation becomes due and 
payable as described in paragraph (k) of this section.
* * * * *
    (f) Examples. * * * Unless otherwise provided, for purposes of 
paragraph (f)(1) through (9) of this section (Examples 1 through 9), 
assume that any obligation of a partner or related person to make a 
payment is recognized under paragraph (b)(3) of this section.
* * * * *
    (9) [Reserved].
    (10) 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.
    (11) Example 11. Indemnification of guarantees. (i) The facts 
are the same as in paragraph (f)(10) of this section (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.
* * * * *
    (j) * * *
    (2) Arrangements tantamount to a guarantee--(i) In general. 
Irrespective of the form of a contractual obligation, a partner is 
considered to bear 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.
    (3) Plan to circumvent or avoid an obligation--(i) General rule. An 
obligation of a partner or related person to make a payment is not 
recognized under paragraph (b) of this section if the facts and 
circumstances evidence a plan to circumvent or avoid the obligation.
    (ii) Factors indicating plan to circumvent or avoid an obligation. 
In the case of a payment obligation, other

[[Page 54025]]

than an obligation to restore a deficit capital account upon 
liquidation of a partnership, paragraphs (j)(3)(ii)(A) through (G) of 
this section provide a non-exclusive list of factors that may indicate 
a plan to circumvent or avoid the payment obligation. The presence or 
absence of a factor is based on all of the facts and circumstances at 
the time the partner or related person makes the payment obligation or 
if the obligation is modified, at the time of the modification. For 
purposes of making determinations under this paragraph (j)(3), the 
weight to be given to any particular factor depends on the particular 
case and the presence or absence of a factor is not necessarily 
indicative of whether a payment obligation is or is not recognized 
under paragraph (b) of this section.
    (A) The partner or related person is not subject to commercially 
reasonable contractual restrictions that protect the likelihood of 
payment, including, for example, restrictions on transfers for 
inadequate consideration or distributions by the partner or related 
person to equity owners in the partner or related person.
    (B) The partner or related person is not required to provide 
(either at the time the payment obligation is made or periodically) 
commercially reasonable documentation regarding the partner's or 
related person's financial condition to the benefited party, including, 
for example, balance sheets and financial statements.
    (C) The term of the payment obligation ends prior to the term of 
the partnership liability, or the partner or related person has a right 
to terminate its payment obligation, if the purpose of limiting the 
duration of the payment obligation is to terminate such payment 
obligation prior to the occurrence of an event or events that increase 
the risk of economic loss to the guarantor or benefited party (for 
example, termination prior to the due date of a balloon payment or a 
right to terminate that can be exercised because the value of loan 
collateral decreases). This factor typically will not be present if the 
termination of the obligation occurs by reason of an event or events 
that decrease the risk of economic loss to the guarantor or benefited 
party (for example, the payment obligation terminates upon the 
completion of a building construction project, upon the leasing of a 
building, or when certain income and asset coverage ratios are 
satisfied for a specified number of quarters).
    (D) There exists a plan or arrangement in which the primary obligor 
or any other obligor (or a person related to the obligor) with respect 
to the partnership liability directly or indirectly holds money or 
other liquid assets in an amount that exceeds the reasonably 
foreseeable needs of such obligor (but not taking into account standard 
commercial insurance, for example, casualty insurance).
    (E) The payment obligation does not permit the creditor to promptly 
pursue payment following a payment default on the partnership 
liability, or other arrangements with respect to the partnership 
liability or payment obligation otherwise indicate a plan to delay 
collection.
    (F) In the case of a guarantee or similar arrangement, the terms of 
the partnership liability would be substantially the same had the 
partner or related person not agreed to provide the guarantee.
    (G) The creditor or other party benefiting from the obligation did 
not receive executed documents with respect to the payment obligation 
from the partner or related person before, or within a commercially 
reasonable period of time after, the creation of the obligation.

    (4) Example. The following example illustrates the principles of 
paragraph (j) of this section.
    (i) In 2020, A, B, and C form a domestic limited liability 
company (LLC) that is classified as a partnership for federal tax 
purposes. Also in 2020, LLC receives a loan from a bank. A, B, and C 
do not bear the economic risk of loss with respect to that 
partnership liability, and, as a result, the liability is treated as 
nonrecourse under Sec.  1.752-1(a)(2) in 2020. In 2022, A guarantees 
the entire amount of the liability. The bank did not request the 
guarantee and the terms of the loan did not change as a result of 
the guarantee. A did not provide any executed documents with respect 
to A's guarantee to the bank. The bank also did not require any 
restrictions on asset transfers by A and no such restrictions exist.
    (ii) Under paragraph (j)(3) of this section, A's 2022 guarantee 
(payment obligation) is not recognized under paragraph (b)(3) of 
this section if the facts and circumstances evidence a plan to 
circumvent or avoid the payment obligation. In this case, the 
following factors indicate a plan to circumvent or avoid A's payment 
obligation: the partner is not subject to commercially reasonable 
contractual restrictions that protect the likelihood of payment, 
such as restrictions on transfers for inadequate consideration or 
equity distributions; the partner is not required to provide (either 
at the time the payment obligation is made or periodically) 
commercially reasonable documentation regarding the partner's or 
related person's financial condition to the benefited party; in the 
case of a guarantee or similar arrangement, the terms of the 
liability are the same as they would have been without the 
guarantee; and the creditor did not receive executed documents with 
respect to the payment obligation from the partner or related person 
at the time the obligation was created. Absent the existence of 
other facts or circumstances that would weigh in favor of respecting 
A's guarantee, evidence of a plan to circumvent or avoid the 
obligation exists and, pursuant to paragraph (j)(3)(i) of this 
section, A's guarantee is not recognized under paragraph (b) of this 
section. As a result, LLC's liability continues to be treated as 
nonrecourse.

    (k) No reasonable expectation of payment--(1) In general. An 
obligation of any partner or related person to make a payment is not 
recognized under paragraph (b) of this section if the facts and 
circumstances indicate that at the time the partnership must determine 
a partner's share of partnership liabilities under Sec. Sec.  1.705-
1(a) and 1.752-4(d) there is not a commercially reasonable expectation 
that the payment obligor will have the ability to make the required 
payments under the terms of the obligation if the obligation becomes 
due and payable. Facts and circumstances to consider in determining a 
commercially reasonable expectation of payment include factors a third 
party creditor would take into account when determining whether to 
grant a loan. For purposes of this section, a payment obligor includes 
an entity disregarded as an entity separate from its owner under 
section 856(i), section 1361(b)(3), or Sec. Sec.  301.7701-1 through 
301.7701-3 of this chapter (a disregarded entity), and a trust to which 
subpart E of part I of subchapter J of chapter 1 of the Code applies.
    (2) Examples. The following examples illustrate the principles of 
paragraph (k) of this section.

    (i) Example 1. Undercapitalization. (A) In 2020, A forms a 
wholly owned domestic limited liability company, LLC, with a 
contribution of $100,000. A has no liability for LLC's debts, and 
LLC has no enforceable right to a contribution from A. Under Sec.  
301.7701-3(b)(1)(ii) of this chapter, LLC is treated for federal tax 
purposes as a disregarded entity. Also in 2020, LLC contributes 
$100,000 to LP, a limited partnership with a calendar year taxable 
year, in exchange for a general partnership interest in LP, and B 
and C each contributes $100,000 to LP in exchange for a limited 
partnership interest in LP. The partnership agreement provides that 
only LLC is required to restore any deficit in its capital account. 
On January 1, 2021, LP borrows $300,000 from a bank and uses 
$600,000 to purchase nondepreciable property. The $300,000 is 
secured by the property and is also a general obligation of LP. LP 
makes payments of only interest on its $300,000 debt during 2021. LP 
has a net taxable loss in 2021, and, under Sec. Sec.  1.705-1(a) and 
1.752-4(d), LP determines its partners' shares of the $300,000 debt 
at the end of its taxable year, December 31,

[[Page 54026]]

2021. As of that date, LLC holds no assets other than its interest 
in LP.
    (B) Because LLC is a disregarded entity, A is treated as the 
partner in LP for federal income tax purposes. Only LLC has an 
obligation to make a payment on account of the $300,000 debt if LP 
were to constructively liquidate as described in paragraph (b)(1) of 
this section. Therefore, paragraph (k) of this section is applied to 
the LLC and not to A. LLC has no assets with which to pay if the 
payment obligation becomes due and payable. Because there is no 
commercially reasonable expectation that LLC will be able to satisfy 
its payment obligation, LLC's obligation to restore its deficit 
capital account is not recognized under paragraph (b) of this 
section. As a result, LP's $300,000 debt is characterized as 
nonrecourse under Sec.  1.752-1(a)(2) and is allocated among A, B, 
and C under Sec.  1.752-3.
    (ii) Example 2. Disregarded entity with ability to pay. (A) The 
facts are the same as in paragraph (k)(2)(i) of this section 
(Example 1), except LLC also holds real property worth $475,000 
subject to a $200,000 liability. Additionally, LLC reasonably 
projects to earn $20,000 of net rental income per year from such 
real property.
    (B) Because LLC is a disregarded entity, A is treated as the 
partner in LP for federal income tax purposes. Only LLC has an 
obligation to make a payment on account of the $300,000 debt if LP 
were to constructively liquidate as described in paragraph (b)(1) of 
this section. Therefore, paragraph (k) of this section is applied to 
the LLC and not to A. Because there is a commercially reasonable 
expectation that LLC will be able to satisfy its payment obligation, 
LLC's obligation to restore its deficit capital account is 
recognized under paragraph (b) of this section. As a result, LP's 
$300,000 debt is characterized as recourse under Sec.  1.752-1(a)(1) 
and is allocated to A under Sec.  1.752-2.

    (l) Applicability dates. (1) Paragraphs (a) and (h)(3) of this 
section apply to liabilities incurred or assumed by a partnership on or 
after October 11, 2006, other than liabilities incurred or assumed by a 
partnership pursuant to a written binding contract in effect prior to 
that date. The rules applicable to liabilities incurred or assumed (or 
pursuant to a written binding contract in effect) prior to October 11, 
2006, are contained in Sec.  1.752-2 in effect prior to October 11, 
2006, (see 26 CFR part 1 revised as of April 1, 2006). Paragraphs 
(b)(6), (j)(3) and (4), and (k) of this section apply to liabilities 
incurred or assumed by a partnership and to payment obligations imposed 
or undertaken with respect to a partnership liability on or after 
October 9, 2019, 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. However, 
taxpayers may apply paragraphs (b)(6), (j)(3) and (4), and (k) 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 pursuant to a 
written binding contract in effect) prior to October 9, 2019, are 
contained in Sec.  1.752-2 in effect prior to October 9, 2019, (see 26 
CFR part 1 revised as of April 1, 2019).
    (2) Paragraphs (b)(3), (f)(10) and (11), and (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 paragraphs (b)(3), (f)(10) and (11), 
and (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), and such liability is modified or refinanced, the partnership 
(Transition Partnership) may choose not to apply paragraphs (b)(3), 
(f)(10) and (11), and (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). See 
also Sec.  1.704-2(g)(3). A liability is modified or refinanced for 
purposes of this paragraph (l) to the extent that the proceeds of a 
partnership liability (the refinancing debt) are allocable under the 
rules of Sec.  1.163-8T to payments discharging all or part of any 
other liability (pre-modification liability) of that partnership or 
there is a significant modification of that liability as provided under 
Sec.  1.1001-3. 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 prior 
to January 1, 2018, 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.


Sec.  1.752-2T  [Amended]

0
Par. 6. In Sec.  1.752-2T, paragraphs (a) and (b), (c)(1) and (2), (d) 
through (k), (l)(1) through (3), and (m)(1) are removed and reserved.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
    Approved: October 1, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-22031 Filed 10-4-19; 4:15 pm]
BILLING CODE 4830-01-P