Recourse Partnership Liabilities and Related Party Rules, 95108-95116 [2024-27840]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 89, Number 231 (Monday, December 2, 2024)]
[Rules and Regulations]
[Pages 95108-95116]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-27840]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 10014]
RIN 1545-BL21


Recourse Partnership Liabilities and Related Party Rules

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final rule.

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SUMMARY: This document contains final regulations relating to recourse 
liabilities of a partnership and special rules for related persons. 
These regulations affect partnerships and their partners.

DATES: 
    Effective date: These regulations are effective on December 2, 
2024.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.704-2(l)(1)(vi), 1.752-2(l)(4), and 1.752-5(a).

FOR FURTHER INFORMATION CONTACT: Concerning these final regulations, 
contact Caroline Hay of the Office of Associate Chief Counsel 
(Passthroughs and Special Industries), (202) 317-6850 (not a toll-free 
number).

SUPPLEMENTARY INFORMATION:

Authority

    This document amends the Income Tax Regulations (26 CFR part 1) 
under

[[Page 95109]]

section 752 of the Internal Revenue Code (Code) regarding a partner's 
share of a recourse partnership liability (final regulations).
    The final regulations are issued under the express delegation of 
authority under section 7805(a) of the Code, which provides that 
``[t]he Secretary shall prescribe all needful rules and regulations for 
the enforcement of [the Code], including all rules and regulations as 
may be necessary by reason of any alteration of law in relation to 
internal revenue.''

Background

    Section 752(a) provides, in general, that an increase in a 
partner's share of partnership liabilities (or an increase in a 
partner's individual liabilities by reason of the assumption by the 
partner of partnership liabilities) will be considered a contribution 
of money by the partner to the partnership. Conversely, section 752(b) 
provides that a decrease in a partner's share of partnership 
liabilities (or a decrease in a partner's individual liabilities by 
reason of the assumption by the partnership of the individual 
liabilities) will be considered a distribution of money to the partner 
by the partnership.
    When determining a partner's share of partnership liabilities, the 
existing regulations under section 752 (existing Sec. Sec.  1.752-1 
through 1.752-3) distinguish between two categories of liabilities--
recourse and nonrecourse. In general, a partnership liability is 
recourse to the extent that a partner or related person bears the 
economic risk of loss (EROL) as provided in existing Sec.  1.752-2 and 
nonrecourse to the extent that no partner or related person bears the 
EROL under existing Sec.  1.752-2. See existing Sec.  1.752-1(a)(1) and 
(2). A partner bears the EROL for a partnership liability if the 
partner or related person: (1) has a payment obligation as provided in 
existing Sec.  1.752-2(b) (except as provided in existing Sec.  1.752-
2(d)(2)); (2) is a lender to the partnership as provided in existing 
Sec.  1.752-2(c) (except as provided in existing Sec.  1.752-2(d)(1)); 
(3) guarantees payment of interest on a partnership nonrecourse 
liability as described in existing Sec.  1.752-2(e); or (4) pledges 
property as security for a partnership liability as provided in 
existing Sec.  1.752-2(h).
    On December 16, 2013, the Department of the Treasury (Treasury 
Department) and the IRS published in the Federal Register (78 FR 76092) 
a notice of proposed rulemaking (REG-136984-12) that would amend the 
existing regulations under section 752 relating to a partner's share of 
a recourse partnership liability and the rules for related persons 
(proposed regulations). The provisions of the proposed regulations are 
explained in greater detail in the preamble to the proposed 
regulations. The Treasury Department and the IRS received two comments 
responding to the proposed regulations. A public hearing on the 
proposed regulations was not requested or held.
    The Treasury Department and the IRS are mindful that the proposed 
regulations were issued approximately eleven years ago. However, no 
intervening legislative changes regarding allocations of partnership 
liabilities have been made, no subsequent changes to regulatory rules 
concerning allocations of partnership liabilities address the issues in 
the proposed regulations, and the issues raised by the commenters 
continue to remain relevant. For these reasons, the Treasury Department 
and the IRS have determined that a new notice of proposed rulemaking or 
a further opportunity for public comment would be unlikely to generate 
different comments. Furthermore, issuing the same rules again as a 
notice of proposed rulemaking would unnecessarily delay further this 
rulemaking to the continued detriment of taxpayers desiring to apply 
these rules to allocate their partnership liabilities.
    Accordingly, after full consideration of the comments received, 
these final regulations adopt the proposed regulations with certain 
modifications in response to the comments described in the Summary of 
Comments and Explanation of Revisions.

Summary of Comments and Explanation of Revisions

I. Overlapping Economic Risk of Loss

    Under existing Sec.  1.752-2(a), a partner's share of a recourse 
partnership liability equals the portion of that liability, if any, for 
which the partner or related person bears the EROL. The proposed 
regulations would have provided a proportionality rule to determine how 
partners share a partnership liability when multiple partners bear the 
EROL for the same liability (overlapping EROL). Under the 
proportionality rule, the EROL borne by a partner would be the amount 
of the partnership liability (or portion thereof) multiplied by a 
fraction obtained by dividing the amount of EROL borne by the partner 
by the sum of the EROL borne by all partners with respect to that 
liability.
    One commenter suggested that the final regulations should not adopt 
the proportionality rule but should instead allocate liabilities among 
partners with overlapping EROL in a manner analogous to the manner in 
which a nonrecourse liability is allocated under Sec.  1.752-3. 
Specifically, the commenter suggested that such liabilities should be 
allocated in a manner consistent with the partner's interest in 
partnership profits. The commenter stated that this allocation approach 
more closely reflects the partners' economic arrangements and permits 
losses attributable to the liability to be allocated among the partners 
without any of the losses being suspended under section 704(d) of the 
Code.
    Under the existing section 752 regulations, a recourse partnership 
liability is shared among partners that bear the EROL for the 
liability. Conversely, with a nonrecourse partnership liability, no 
partner bears economic risk with respect to the liability; therefore, 
the liability is generally allocated in accordance with a partner's 
share of partnership profits. Adopting a framework applicable to a 
nonrecourse partnership liability for purposes of determining how a 
recourse partnership liability should be shared under section 752 could 
cause the liability to be allocated disproportionally among those 
partners depending upon their profit-sharing ratios even though the 
partners bear the same amount of EROL for the liability. The 
proportionality rule provides a reasonable approach in addressing how a 
recourse partnership liability should be shared when partners have 
overlapping EROL. Therefore, the final regulations do not adopt the 
commenter's suggestion.
    Another commenter requested clarification on the effect of local 
law and separate agreements between partners in determining whether 
partners have overlapping EROL. Under existing Sec.  1.752-2(b)(3), all 
statutory and contractual obligations relating to a partnership 
liability are taken into account for purposes of determining a 
partner's EROL. Therefore, the proportionality rule applies to cases in 
which partners have overlapping EROL after taking into account all 
statutory and contractual obligations relating to the partnership 
liability. The final regulations illustrate in Sec.  1.752-2(f)(9) that 
these obligations are considered in determining whether the partners 
have overlapping EROL.

II. Tiered Partnerships

    Another overlapping EROL issue under section 752 relates to tiered 
partnerships. The proposed regulations would have provided guidance on 
how a lower-tier partnership (LTP) must allocate a liability in cases 
in which a

[[Page 95110]]

partner of an upper-tier partnership (UTP) is also a partner of the LTP 
and that partner bears the EROL with respect to the LTP's liability. 
Under the proposed regulations, the LTP would be required to allocate 
the liability directly to the partner.
    One commenter, while acknowledging that the rule in the proposed 
regulations provides certainty and is administrable, expressed concerns 
that this rule could cause the partner in both the UTP and the LTP to 
recognize gain. The commenter recommended that the final regulations 
allow the LTP to allocate the liability in any reasonable manner 
between the partner and the UTP. The final regulations do not adopt 
this suggestion. The rule in the proposed regulations is the most 
administrable, especially in a case in which an LTP may not be aware 
that one of its partners is also a partner in a UTP that is removed 
from the LTP. Therefore, under the final regulations, an LTP must 
allocate the liability directly to the partner that bears the EROL with 
respect to the LTP's liability. Section Sec.  1.752-2(i)(2) of the 
final regulations also clarifies how the tiered partnership rule 
applies in a case in which there is overlapping EROL among unrelated 
partners as provided in Sec.  1.752-2(a)(2). Finally, the final 
regulations add an example to illustrate the application of the 
proportionality rule when there are tiered partnerships.
    Another commenter suggested that a gap might exist between 
Sec. Sec.  1.704-2 and 1.752-2 concerning partner nonrecourse 
deductions when a partner of a UTP (that is not also a partner of an 
LTP) bears the EROL for a liability of the LTP. Existing Sec.  1.704-
2(i) requires the partnership to allocate partner nonrecourse 
deductions to the partner that bears the EROL. Existing Sec.  1.704-
2(k)(5) treats an LTP's liability that is treated as a UTP's liability 
under Sec.  1.752-4(a) also as a liability of the UTP for purpose of 
applying the rules under Sec.  1.704-2(i). Under existing Sec.  1.752-
2(i), the LTP allocates its liability to the UTP when a partner of the 
UTP bears the EROL for the LTP's liability. The commenter asserted 
that, although existing Sec.  1.752-2(i) requires the LTP to allocate 
the liability to the UTP, existing Sec.  1.704-2 does not explicitly 
direct the LTP to allocate partner nonrecourse deductions attributable 
to that liability to the UTP. Thus, in the commenter's view, the 
existing rules do not treat the UTP as bearing the EROL for the LTP's 
liability for purposes of Sec.  1.704-2(i). Contrary to this 
commenter's suggestion, existing Sec. Sec.  1.704-2(i) and 1.704-
2(k)(5) implicitly require an LTP to allocate partner nonrecourse 
deductions attributable to a liability of the LTP to a UTP if a partner 
in the UTP bears the EROL for the LTP's liability. To eliminate any 
uncertainty, the final regulations add a sentence to Sec.  1.704-
2(k)(5) to clarify that a UTP is treated as bearing the EROL for an 
LTP's liability that is treated as the UTP's liability under Sec.  
1.752-4(a). Therefore, partner nonrecourse deductions attributable to 
the LTP's liability are allocated to the UTP under Sec.  1.704-2(i).

III. General Issues of EROL

    As previously stated, existing Sec.  1.752-2(a) generally provides 
that a partner's share of a recourse partnership liability equals the 
portion of that liability, if any, for which the partner or related 
person bears the EROL. A partner bears the EROL for a partnership 
liability if the partner or related person has a payment obligation 
under Sec.  1.752-2(b), is a lender as provided in Sec.  1.752-2(c), 
guarantees payment of interest on a partnership nonrecourse liability 
as described in Sec.  1.752-2(e), or pledges property as a security as 
provided in Sec.  1.752-2(h). In describing when a partner bears the 
EROL for a partnership liability, the proposed regulations 
inadvertently failed to include situations under Sec.  1.752-2(e) and 
(h). A commenter also suggested that references to Sec.  1.752-2(c) 
relating to when a partner or related person is the lender take into 
account a de minimis rule under Sec.  1.752-2(d)(1). Existing Sec.  
1.752-2(d)(1) provides that the general rule in Sec.  1.752-2(c)(1) 
does not apply if a partner or related person whose interest (directly 
or indirectly through one or more partnerships and including the 
interest of any related person) in each item of partnership income, 
gain, loss, deduction, or credit for every taxable year that the 
partner is a partner in the partnership is 10 percent or less, makes a 
loan to the partnership that constitutes qualified nonrecourse 
financing within the meaning of section 465(b)(6) (determined without 
regard to the type of activity financed). To incorporate the rules in 
Sec.  1.752-2(d)(1), the commenter suggested that the final regulations 
broadly refer to Sec.  1.752-2 when describing situations that give 
rise to EROL instead of listing specific applicable paragraphs in Sec.  
1.752-2.
    The final regulations correct the oversight in the proposed 
regulations by listing in one section of the regulations all the 
situations under Sec.  1.752-2 in which a person directly bears the 
EROL, including by taking into account the de minimis exceptions in 
Sec.  1.752-2(d). A person directly bears the EROL if that person, and 
not a related person, meets the requirements of the listed situations.

IV. Related Party Rules

A. Constructive Ownership Rules
    Under existing Sec.  1.752-4(b)(1), a person is related to a 
partner if the person and the partner bear a relationship to each other 
that is specified in section 267(b) or section 707(b)(1) of the Code, 
except that ``80 percent or more'' is substituted for ``more than 50 
percent'' in each of those sections, a person's family is determined by 
excluding siblings, and section 267(e)(1) and (f)(1)(A) are 
disregarded. In determining whether a partner and a person bear a 
relationship to each other that is specified in section 267(b) or 
section 707(b)(1), the constructive stock ownership rules in section 
267(c) apply. See sections 267(c) and 707(b)(3). The proposed 
regulations would disregard the constructive stock ownership rules 
under section 267(c)(1) in determining whether to treat stock of a 
corporation owned, directly or indirectly, by or for a partnership as 
owned proportionately by or for its partners if the corporation is a 
lender under Sec.  1.752-2(c) or has a payment obligation with respect 
to a liability of its partnership owner. The preamble to the proposed 
regulations explained that a partner's EROL that is limited to the 
partner's equity investment in the partnership should be treated 
differently than the risk of loss beyond that investment.
    Commenters agreed with the rationale underlying the proposed 
regulations and suggested that the final regulations disregard two 
other constructive ownership situations in determining relatedness 
under Sec.  1.752-4(b)(1). First, commenters suggested that the final 
regulations also disregard section 267(c)(1) in determining whether to 
treat a UTP's direct or indirect interest in an LTP as owned 
proportionately by or for the UTP's partners if the LTP is a lender or 
has a payment obligation with respect to a liability of the UTP. 
Commenters expressed the view that in this situation, like the one 
described in the proposed regulations, a partner should not be treated 
as bearing the EROL for a partnership liability merely as a result of 
the UTP's investment in an LTP that has a payment obligation with 
respect to a liability of the UTP.
    Second, commenters suggested that the final regulations disregard 
section 1563(e)(2) of the Code in determining relatedness under Sec.  
1.752-4(b)(1). For purposes of Sec.  1.752-4(b)(1), a person is related 
to a partner if the two parties bear a relationship to each other as

[[Page 95111]]

described in section 267(b)(3). Under section 267(b)(3), a corporate 
partner and another corporation that are members of the same controlled 
group (as defined in section 267(f)) are treated as related for 
purposes of Sec.  1.752-4(b)(1). Section 267(f) gives ``controlled 
group'' the same meaning as in section 1563(a). Under section 1563(a), 
a controlled group of corporations includes a parent-subsidiary 
controlled group and a brother-sister controlled group. Section 1563(e) 
provides attribution rules that apply in determining whether a 
corporation is a member of a parent-subsidiary controlled group or of a 
brother-sister controlled group. Specific to partnerships, section 
1563(e)(2) provides that stock owned, directly or indirectly, by or for 
a partnership is considered as owned by any partner having an interest 
of 5 percent or more in either the capital or profits of the 
partnership in proportion to the partner's interest in capital or 
profits, whichever is greater. Therefore, in applying the attribution 
rules under section 1563(e)(2), a corporate partner in a partnership 
could be treated as a member of a parent-subsidiary controlled group or 
of a brother-sister controlled group, and thus, related to a 
corporation in that group that is owned by the partnership. If the 
corporate subsidiary of the partnership has a payment obligation with 
respect to a liability of the partnership, the corporate partner is 
treated as bearing the EROL for that liability. Commenters recommended 
not treating the corporate partner as bearing the EROL merely as a 
result of applying the attribution rules under section 1563(e)(2) 
because the partner's risk is limited to the investment in the 
partnership.
    The final regulations adopt these suggestions. Thus, in determining 
relatedness under Sec.  1.752-4(b)(1), the final regulations disregard: 
(1) section 267(c)(1) in determining whether a UTP's interest in an LTP 
is owned proportionately by or for the UTP's partners when an LTP 
directly bears the EROL for a liability of the UTP and (2) section 
1563(e)(2) in determining whether a corporate partner in a partnership 
and a corporation owned by the partnership are members of the same 
controlled group when the corporation directly bears the EROL for a 
liability of the owner partnership. In both of these situations, a 
partner should not be treated as bearing the EROL when the partner's 
risk is limited to the partner's equity investment in the partnership.
B. Related Partner Exception to Related Party Rules
    Under the proposed regulations, if a person who owns (directly or 
indirectly through one or more partnerships) an interest in a 
partnership is a lender or has a payment obligation with respect to a 
partnership liability, or portion thereof, then other persons owning 
interests directly or indirectly (through one or more partnerships) in 
that partnership would not be treated as related to that person for 
purposes of determining the EROL borne by each of them for the 
partnership liability, or portion thereof (related partner exception).
    One commenter recommended that the final regulations clarify the 
meaning of the phrase ``not treated as related'' as used in proposed 
examples illustrating the related partner exception. The phrase ``not 
treated as related'' is intended to mean that, under Sec.  1.752-
4(b)(1), the partner and the other person are not treated as bearing a 
relationship to each other that is specified in section 267(b) or 
section 707(b)(1) (taking into account any applicable attribution 
rules). Accordingly, the phrase ``not treated as related'' should be 
broadly interpreted. For instance, in Sec.  1.752-4(b)(5)(iii) of the 
final regulations, A wholly owns corporations X and Y. X and Y are 
members of Partnership, an entity treated as a partnership for Federal 
tax purposes. The partnership agreement provides that X and Y share 
equally in all items of income, gain, loss, deduction, and credit of 
Partnership. X owns 79 percent of Z, a corporation, and Y owns 21 
percent of Z. Each of X and Z guarantees the entire amount of a 
liability of Partnership. Under this example, X and Y are not treated 
as related for purposes of determining the EROL borne by each of them 
for the partnership's liability, and, because neither X nor Y owns an 
80 percent or more interest in Z, X and Y are not treated as related to 
Z under Sec.  1.752-4(b)(1). In other words, X and Y are not related to 
Z within the meaning of Sec.  1.752-4(b)(1), which takes into account 
any applicable attribution rules.
    Another commenter suggested that the related partner exception 
should apply only to turn off relatedness so that the direct EROL borne 
by one partner is not attributed to another partner. This commenter 
recommended that the rule should not turn off the relationship between 
a partner that directly bears the EROL for a partnership liability and 
another partner for purposes of determining whether those partners are 
related to a non-partner that also bears EROL for the partnership's 
liability. If the related partner exception did not apply in this 
situation, both partners would be treated as bearing the EROL for the 
partnership liability and share the liability under the proportionality 
rule.
    The proposed regulations would implement the result in IPO II v. 
Commissioner, 122 T.C. 295 (2004), which applied the related partner 
exception to turn off the relationship between the partners and 
allocated the entirety of a partnership's liability to the partner that 
directly bore the EROL for the partnership's liability despite a non-
partner related person also bearing the EROL. Therefore, the final 
regulations do not adopt this suggestion.
C. Person Related to Multiple Partners (Multiple Partner Rule)
    The proposed regulations provide that if a person is a lender or 
has a payment obligation with respect to a partnership liability and is 
related to more than one partner, then those partners that are related 
to that person (related partners) share the liability equally. One 
commenter suggested that the multiple partner rule may be unnecessary 
and recommended that the final regulations only include the 
proportionality rule in proposed Sec.  1.752-2(a) to address how to 
allocate EROL when there is overlapping EROL, including because 
multiple partners are related to a person with a payment obligation. 
The final regulations do not adopt this suggestion. The multiple 
partner rule is necessary because, without this rule, the partners 
might share EROL incorrectly. For example, corporations X, Y, and Z are 
partners in an entity treated as a partnership for Federal tax 
purposes. The partnership agreement provides that the partners share 
equally in all items of income, gain, loss, deduction, and credit of 
XYZ partnership. A, an individual, wholly owns X and Y. Z is an 
unrelated third party. Partnership borrows $1,000 from a bank and A and 
Z both guarantee the entire amount of the liability. Without the 
multiple partner rule, each of X and Y has $1,000 of EROL from A's 
$1,000 guarantee and Z has $1,000 of EROL from its guarantee. Each 
would be allocated one-third of the liability under the proportionality 
rule. In contrast, by applying the multiple partner rule, each of X and 
Y has $500 of EROL. When the proportionality rule is applied, X and Y 
are each allocated one-fourth of the liability and Z is allocated one-
half of the liability. This is the correct result because there is one 
guarantee from A's related group and one guarantee by Z.
    The commenter also recommended that if the final regulations retain 
the

[[Page 95112]]

multiple partner rule, the final regulations allow the related partners 
to agree among themselves how to allocate the liability, provided that 
the allocation is consistently applied. The commenter explained that 
allowing related partners to choose among themselves who receives the 
allocation could prevent related partners from recognizing an 
uneconomic gain. To address the commenter's underlying concern, the 
final regulations under Sec.  1.752-4(b)(3) treat related partners as 
bearing the EROL for a partnership liability in proportion to each 
related partner's interest in partnership profits.

V. Ordering Rule

    The proposed regulations had different rules regarding allocations 
of partnership liabilities for related and unrelated parties. In 
particular, the proportionality rule in proposed Sec.  1.752-2(a) 
addressed when partners have overlapping EROL, the related partner 
exception in proposed Sec.  1.752-4(b)(2) described when partners with 
direct EROL are not treated as related to other partners, and the 
multiple partner rule in proposed Sec.  1.752-4(b)(3) provided how EROL 
is shared when multiple partners are related to a person that is a 
lender or has a payment obligation. One commenter expressed confusion 
regarding how these rules interact and suggested that the final 
regulations include an ordering rule.
    The final regulations adopt this suggestion. An ordering rule is 
warranted to clarify how the proportionality rule interacts with the 
multiple partner rule and how the multiple partner rule interacts with 
the related partner exception. Therefore, under Sec.  1.752-4(e), the 
first step is to determine whether any partner (direct or indirect) 
directly bears the EROL for the partnership liability and apply the 
related partner exception in Sec.  1.752-4(b)(2). After applying the 
related partner exception (if applicable), the next step is to 
determine the amount of EROL each partner is considered to bear under 
Sec.  1.752-4(b)(3) when multiple partners are related to a person that 
directly bears the EROL for a partnership liability. The final step is 
to apply the proportionality rule in Sec.  1.752-2(a)(2) to determine 
the amount of EROL that each partner is considered to bear when the 
amount of EROL that multiple partners bear exceed the amount of the 
partnership liability. The final regulations include an example to 
illustrate the ordering rule in Sec.  1.752-4(e).

VI. Liquidating Distributions of Partnership Interests

    The preamble to the proposed regulations requested comments 
concerning the proper treatment of liabilities when a UTP bears the 
EROL for an LTP's liability and distributes, in a liquidating 
distribution, its interest in the LTP to one of its partners, but the 
transferee partner does not bear the EROL. As a result of this 
transaction, the LTP's recourse liability became a nonrecourse 
liability for purposes of section 752. The preamble requested comments 
specifically on the timing of the liability reallocation relative to 
the transaction that caused the liability to change from recourse to 
nonrecourse.
    The Treasury Department and the IRS received thoughtful comments 
regarding this issue in response to the request for comments and are 
continuing to consider whether additional guidance regarding the issue 
is warranted.

VII. Applicability Date

    Under the proposed regulations the rules would apply to any 
liability incurred or assumed by a partnership on or after the date the 
regulations are published as final regulations in the Federal Register. 
Commenters suggested that the final regulations allow a taxpayer to 
apply the final regulations to all liabilities incurred or assumed by a 
partnership (even liabilities incurred or assumed before the date of 
publication of these regulations), with respect to all returns, 
including amended returns, filed after the date these regulations are 
published. The final regulations adopt this suggestion, but clarify 
that a partnership must apply these rules consistently to all of its 
partnership liabilities and may not pick and choose which rules apply 
to them. Allowing taxpayers to apply these regulations before the 
publication date will provide greater certainty for partnerships and 
their partners and allow uniform rules to apply to all partnership 
liabilities. As a result, these final regulations allow a partnership 
to apply the rules to all liabilities with respect to returns filed on 
or after December 2, 2024, provided the partnership consistently 
applies all the rules in these final regulations to those liabilities.
    A commenter also suggested that the final regulations permit 
partnership liabilities that are modified or refinanced and payment 
obligations that are modified to continue to be subject to the 
provisions of the regulations in effect prior to the applicability date 
of the final regulations, but only to the extent of the amount and 
duration of the pre-modification (or refinancing) liability or payment 
obligation. The commenter identified Sec.  1.707-5(c) as a model for a 
special refinancing rule. The commenter noted that without such a rule, 
the applicability date in the proposed regulations might discourage 
partnerships from refinancing debts or subject partners to unexpected 
adverse results.
    The final regulations adopt this suggestion. Accordingly, the final 
regulations do not apply to refinanced debts to the extent of the 
amount and duration of the pre-modification liability. Instead, the 
rules in the regulations as in effect prior to December 2, 2024, 
continue to apply to those liabilities. For example, assume a 
partnership borrowed $1,000 on January 28, 2024, from Bank, and X, a 
person related to Partners A and B, guaranteed the entire amount of 
that liability. Further assume that this liability was refinanced after 
December 2, 2024 so that the liability is now $2,000 and X continues to 
guarantee the entire amount of the liability. The rules in effect prior 
to December 2, 2024 would continue to apply to the $1,000 of pre-
modification liability and X's guarantee of the $1,000 when determining 
which partner bears the EROL. The rules in effect after December 2, 
2024 would apply to the remaining $1,000.

Special Analyses

I. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) 
generally requires that a Federal agency obtain the approval of the 
Office of Management and Budget before collecting information from the 
public, whether such collection of information is mandatory, voluntary, 
or required to obtain or retain a benefit. These regulations do not 
impose a collection of information and, therefore, the PRA does not 
apply.

II. Regulatory Flexibility Act

    The Treasury Department and the IRS have determined the rule will 
not have a significant economic impact on a substantial number of small 
entities. Although the rules affect small entities, data is not readily 
available about the number of taxpayers affected. Section 752 affects 
the allocation of partnership liabilities among partners in a 
partnership. The economic impact of these regulations is not likely to 
be significant, because the regulations will make it easier for 
taxpayers to comply with section 752. Pursuant to the Regulatory 
Flexibility Act (5 U.S.C. chapter 6), the Secretary hereby certifies 
that these regulations will not have a

[[Page 95113]]

significant economic impact on a substantial number of small entities.
    Pursuant to section 7805(f) of the Code, the proposed regulations 
that preceded these final regulations were submitted to the Chief 
Counsel for the Office of Advocacy of the Small Business Administration 
(SBA) for comment on its impact on small business. The Chief Counsel 
for the Office of Advocacy of the SBA did not provide any comments on 
the proposed regulations.

III. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a State, 
local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. This rule does not include any Federal mandate that may 
result in expenditures by State, local, or Tribal governments, or by 
the private sector in excess of that threshold.

IV. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. These final regulations do not have 
federalism implications and do not impose substantial direct compliance 
costs on state and local governments or preempt State law within the 
meaning of the Executive order.

V. Regulatory Planning and Review

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

VI. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs has designated this 
rule as not a ``major rule,'' as defined by 5 U.S.C. 804(2).

Statement of Availability of IRS Documents

    Guidance cited in this preamble is published in the Internal 
Revenue Bulletin and is available from the Superintendent of Documents, 
U.S. Government Publishing Office, Washington, DC 20402, or by visiting 
the IRS website at https://www.irs.gov.

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

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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


0
Par. 2. Section 1.704-2 is amended by:
0
1. Adding a sentence after the first sentence of paragraph (k)(5).
0
2. Adding paragraph (l)(1)(vi).
    The additions read as follows:


Sec. 1.704-2  Allocations attributable to nonrecourse liabilities.

* * * * *
    (k) * * *
    (5) * * * In addition, for purposes of applying paragraph (i) of 
this section, the upper-tier partnership is treated as bearing the 
economic risk of loss for the lower-tier partnership's liabilities that 
are treated as the upper-tier partnership's liabilities under Sec.  
1.752-4(a). * * *
    (l) * * *
    (1) * * *
    (vi) The second sentence of paragraph (k)(5) of this section 
applies on or after December 2, 2024.
* * * * *

0
Par. 3. Section 1.752-0 is amended by:
0
1. In Sec.  1.752-2:
0
i. Revising the entry (a); and
0
ii. Adding entries (a)(1) through (3) and (i)(1) through (3).
0
2. In Sec.  1.752-4:
0
i. Revising the entry (b)(2);
0
ii. Removing the entries (b)(2)(i) though (iii);
0
iii. Redesignating the entries (b)(2)(iv), (b)(2)(iv)(A) and (B) as 
(b)(4), (b)(4)(i) and (ii), respectively;
0
iv. Removing the entry (b)(2)(iv)(C); and
0
v. Adding the entries (b)(3) and (5), (e), and (f).
    The revisions and additions read as follows:


1.752-0  Table of contents.

* * * * *
Sec.  1.752-2 Partner's share of recourse liabilities.
    (a) Partner's share of recourse liabilities.
    (1) In general.
    (2) Overlapping economic risk of loss.
    (3) Direct economic risk of loss.
* * * * *
    (i) * * *
    (1) In general.
    (2) Coordination with overlapping economic risk of loss.
    (3) Example.
* * * * *
Sec.  1.752-4 Special rules.
* * * * *
    (b) * * *
    (2) Related partner exception.
    (3) Person related to more than one partner.
* * * * *
    (5) Examples.
* * * * *
    (e) Ordering rule.
    (f) Example.
* * * * *

0
Par. 4. Section 1.752-2 is amended by:
0
1. Revising paragraphs (a).
0
2. Revising the headings for paragraphs (f)(1) through (8).
0
3. Revising paragraphs (f)(9), and (i).
0
4. In the first sentence of paragraph (l)(1), removing the language 
``Paragraphs (a)'' and adding the language ``Paragraphs (a)(1)'' in its 
place.
0
5. In the first sentence of paragraph (l)(3), removing the language 
``Sec.  1.752-2(a)'' and adding ``Sec.  1.752-2(a)(1)'' in its place.
0
6. Adding paragraph (l)(4).
    The revisions and addition read as follows:


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

    (a) Partner's share of recourse liabilities--(1) In general. A 
partner's share of recourse partnership liability equals the portion of 
that liability, if any, for which the partner or related person bears 
the economic risk of loss. The determination of the extent to which a 
partner bears the economic risk of loss for a partnership liability is 
made under the rules in paragraphs (b) through (k) of this section.
    (2) Overlapping economic risk of loss. For purposes of determining 
a partner's

[[Page 95114]]

share of a recourse partnership liability, the amount of the 
partnership liability is taken into account only once. If the aggregate 
amount of the economic risk of loss that all partners are determined to 
bear for a partnership liability (or portion thereof) under paragraph 
(a)(1) of this section (without regard to this paragraph (a)(2)) 
exceeds the amount of such liability (or portion thereof), then the 
economic risk of loss borne by each partner for such liability equals 
the amount determined by multiplying--
    (i) The amount of such liability (or portion thereof) by
    (ii) The fraction obtained by dividing the amount of the economic 
risk of loss that such partner is determined to bear for that liability 
(or portion thereof) under paragraph (a)(1) of this section, by the sum 
of such amounts for all partners.
    (3) Direct economic risk of loss. For purposes of this section and 
Sec.  1.752-4, a person directly bears the economic risk of loss for a 
partnership liability if that person has a payment obligation under 
paragraph (b) of this section (except as provided in paragraph (d)(2) 
of this section for certain partner guarantees), is a lender as 
provided in paragraph (c) of this section (except as provided in 
paragraph (d)(1) of this section for certain partner loans), guarantees 
payment of interest on a partnership nonrecourse liability as described 
in paragraph (e) of this section, or pledges property as a security as 
provided in paragraph (h) of this section.
* * * * *
    (f) * * *
    (1) Example 1. Determining when a partner bears the economic risk 
of loss. * * *
    (2) Example 2. Recourse liability; deficit restoration obligation. 
* * *
    (3) Example 3. Guarantee by limited partner; partner deemed to 
satisfy obligation. * * *
    (4) Example 4. Partner guarantee with right of subrogation. * * *
    (5) Example 5. Bifurcation of partnership liability; guarantee of 
part of nonrecourse liability. * * *
    (6) Example 6. Wrapped debt. * * *
    (7) Example 7. Guarantee of interest by partner treated as part 
recourse and part nonrecourse. * * *
    (8) Example 8. Continent obligation not recognized. * * *
    (9) Example 9. Overlapping economic risk of loss. (i) A and B are 
unrelated equal members of limited liability company, AB. AB is treated 
as a partnership for Federal tax purposes. AB borrows $1,000 from Bank. 
A guarantees payment for the entire amount of AB's $1,000 liability and 
B guarantees payment of up to $500 of the liability, if any amount of 
the full $1,000 liability is not recovered by Bank. Under paragraph 
(b)(1) of this section, A bears $1,000 of economic risk of loss for 
AB's liability and B bears $500 of economic risk of loss for AB's 
liability. A and B have not entered into a loss-sharing agreement 
addressing their status as co-guarantors, and local law does not 
clearly establish responsibility as between them for the liability.
    (ii) Because the aggregate amount of A's and B's economic risk of 
loss under paragraph (a)(1) of this section ($1,500) exceeds the amount 
of AB's liability ($1,000), the economic risk of loss borne by each of 
A and B is determined under paragraph (a)(2) of this section. Under 
paragraph (a)(2) of this section, A's economic risk of loss equals 
$1,000 multiplied by $1,000/$1,500, or $667, and B's economic risk of 
loss equals $1,000 multiplied by $500/$1,500, or $333.
* * * * *
    (i) Treatment of recourse liabilities in tiered partnerships--(1) 
In general. If a partnership (upper-tier partnership) owns (directly or 
indirectly through one or more partnerships) an interest in another 
partnership (lower-tier partnership), the liabilities of the lower-tier 
partnership are allocated to the upper-tier partnership in an amount 
equal to the sum of the following--
    (i) The amount of liabilities with respect to which the upper-tier 
partnership directly bears the economic risk of loss as described in 
paragraph (a)(3) of this section; and
    (ii) The amount of any other liabilities with respect to which a 
partner of the upper-tier partnership bears the economic risk of loss, 
provided the partner is not also a partner in the lower-tier 
partnership.
    (2) Coordination with overlapping economic risk of loss. A lower-
tier partnership takes into account paragraph (a)(2) of this section 
prior to the application of this paragraph (i).
    (3) Example. (i) A and B (which is unrelated to A) contribute 
$810,000 and $90,000 to UTP, a limited liability company treated as a 
partnership for Federal tax purposes, in exchange for a 90 percent and 
10 percent interest in UTP, respectively. UTP contributes the $900,000 
to LTP, a partnership for Federal tax purposes, in exchange for a 90 
percent interest in LTP and A contributes $100,000 directly to LTP in 
exchange for a 10 percent interest in LTP. UTP and LTP both reported 
losses in their initial years that reduced the partners' bases in UTP 
and LTP to zero. LTP borrows $10 million. UTP and LTP both had no 
income in the year at issue. At the request of the lender, A and B both 
provide their personal guaranty for the entire amount of LTP's 
liability.
    (ii) Under paragraph (b)(1) of this section, A has $10 million of 
economic risk of loss for LTP's liability and B has $10 million of 
economic risk of loss for LTP's liability. Under paragraph (i)(2) of 
this section, LTP takes into account paragraph (a)(2) of this section 
prior to determining the amount of liabilities allocated to UTP under 
paragraph (i)(1) of this section. Under paragraph (a)(2) of this 
section, A is considered to bear $5 million (($10 million/$20 million) 
x $10 million) of economic risk of loss and B is considered to also 
bear $5 million (($10 million/$20 million) x $10 million) of economic 
risk of loss for LTP's liability. Pursuant to paragraph (a)(1) of this 
section, LTP allocates $5 million to A for A's direct interest in LTP's 
liability. Under paragraph (i)(1) of this section, LTP allocates $5 
million to UTP ($5 million attributable to B's economic risk of loss 
for LTP's liability).
    (iii) Pursuant to Sec.  1.752-4(a), UTP treats its share of LTP's 
liability ($5 million) as a liability of UTP. Because A bears the 
economic risk of loss for LTP's liability and is a partner in LTP, 
under paragraph (i)(1)(ii) of this section, UTP's share of LTP's 
liability ($5 million) only includes the amount of LTP's liabilities 
with respect to which B bears the economic risk of loss. Therefore, 
under paragraph (a)(1) of this section, UTP allocates $5 million of 
UTP's share of LTP's liability to B and none to A.
* * * * *
    (l) * * *
    (4) Paragraphs (a)(2) and (3), (f)(9), and (i) of this section 
apply to liabilities incurred or assumed by a partnership on or after 
December 2, 2024, other than liabilities incurred or assumed by a 
partnership pursuant to a written binding contract in effect prior to 
that date. To the extent that the proceeds of a partnership liability 
(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, the refinancing debt will 
be treated as though it was incurred or assumed by the partnership 
prior to December 2, 2024, to the extent of the amount and duration of 
the pre-modification liability. A partnership may apply paragraphs 
(a)(2) and (3), (f)(9), and (i) of this section to all of its 
liabilities (including liabilities incurred or assumed by a partnership 
prior to December 2, 2024), for any return filed

[[Page 95115]]

on or after December 2, 2024 provided the partnership consistently 
applies all the rules in paragraphs (a)(2) and (3), (f)(9), and (i) of 
this section and Sec.  1.752-4(b)(1)(iv) and (v), (b)(2) and (3), 
(b)(5)(i) through (iv), (e), and (f) to those liabilities.

0
Par. 5. Section 1.752-4 is amended by:
0
1. In paragraph (b)(1)(i), removing the language ``sections;'' and 
adding the language ``sections.'' in its place.
0
2. In paragraph (b)(1)(ii), removing the language ``sisters; and'' and 
adding the language ``sisters.'' in its place.
0
3. Adding paragraphs (b)(1)(iv) and (v).
0
4. Revising paragraph (b)(2).
0
5. Adding paragraphs (b)(3) through (5), (e), and (f).
    The additions and revision read as follows:


Sec.  1.752-4  Special rules.

* * * * *
    (b) * * *
    (1) * * *
    (iv) Disregard section 267(c)(1) in determining whether--
    (A) Stock of a corporation owned, directly or indirectly, by or for 
a partnership is considered as being owned proportionately by or for 
its partners when the corporation directly bears the economic risk of 
loss as described in Sec.  1.752-2(a)(3) for a liability of the 
partnership; and
    (B) A capital interest or a profits interest in a partnership 
(lower-tier partnership) owned, directly or indirectly, by or for a 
partnership (upper-tier partnership) is considered as being owned 
proportionately by or for the upper-tier partnership's partners when 
the lower-tier partnership directly bears the economic risk of loss as 
described in Sec.  1.752-2(a)(3) for a liability of the upper-tier 
partnership.
    (v) Disregard section 1563(e)(2) in determining whether a corporate 
partner and a corporation are members of the same controlled group (as 
defined in section 267(f)) under section 267(b)(3) when the corporation 
directly bears the economic risk of loss as described in Sec.  1.752-
2(a)(3) for a liability of the partnership.
    (2) Related partner exception. Notwithstanding paragraph (b)(1) of 
this section (which defines related person), if a person who owns 
(directly or indirectly through one or more partnerships) an interest 
in a partnership directly bears the economic risk of loss as described 
in Sec.  1.752-2(a)(3) for a partnership liability, or portion thereof, 
then other persons owning interests directly or indirectly (through one 
or more partnerships) in that partnership are not treated as related to 
that person for purposes of determining the economic risk of loss borne 
by each of them for such partnership liability, or portion thereof. 
This paragraph (b)(2) does not apply when determining a partner's 
interest under the de minimis rules in Sec.  1.752-2(d) and (e).
    (3) Person related to more than one partner. For purposes of 
determining a partner's economic risk of loss for a partnership 
liability, or a portion thereof, when a person who directly bears the 
economic risk of loss as described in Sec.  1.752-2(a)(3) for the 
partnership liability is related to more than one partner under 
paragraph (b)(1) of this section, each partner that is related to such 
person is considered to bear the economic risk of loss for the 
partnership liability, or portion thereof, in proportion to the 
partner's interest in partnership profits.
    (4) Special rule where entity structured to avoid related person 
status--(i) In general. If--
    (A) A partnership liability is owed to or guaranteed by another 
entity that is a partnership, an S corporation, a C corporation, or a 
trust;
    (B) A partner or related person owns (directly or indirectly) a 20 
percent or more ownership interest in the other entity; and
    (C) A principal purpose of having the other entity act as a lender 
or guarantor of the liability was to avoid the determination that the 
partner that owns the interest bears the economic risk of loss for 
federal income tax purposes for all or part of the liability; then the 
partner is treated as holding the other entity's interest as a creditor 
or guarantor to the extent of the partner's or related person's 
ownership interest in the entity.
    (ii) Ownership interest. For purposes of paragraph (b)(4)(i) of 
this section, a person's ownership interest in--
    (A) A partnership equals the partner's highest percentage interest 
in any item of partnership loss or deduction for any taxable year;
    (B) An S corporation equals the percentage of the outstanding stock 
in the S corporation owned by the shareholder;
    (C) A C corporation equals the percentage of the fair market value 
of the issued and outstanding stock owned by the shareholder; and
    (D) A trust equals the percentage of the actuarial interests owned 
by the beneficial owner of the trust.
    (5) Examples. The following examples illustrate the principles of 
paragraph (b) of this section.
    (i) Example 1: Person related to more than one partner. A, an 
individual, owns 100 percent of X, a corporation. X owns 100 percent of 
Y, a corporation. A owns a 40 percent capital and profits interest and 
X owns a 60 percent capital and profits interest in P, a limited 
liability company treated as a partnership for Federal tax purposes. P 
borrows $1,000 from Bank. Y guarantees payment of the entire $1,000 
debt owed to Bank. A and X do not directly bear the economic risk of 
loss as described in Sec.  1.752-2(a)(3) for the liability. Therefore, 
paragraph (b)(2) of this section does not apply for purposes of 
determining the economic risk of loss borne by A and X. Under paragraph 
(b)(1) of this section, Y is related to A and X. Therefore, under 
paragraph (b)(3) of this section, A bears the economic risk of loss of 
$400 and X bears the economic risk of loss of $600 for the $1,000 
liability.
    (ii) Example 2: Related partner exception. A, an individual, owns 
100 percent of two corporations, X and Y. A and Y are members of P, a 
limited liability company treated as a partnership for Federal tax 
purposes. P borrows $1,000 from Bank. Each of A and X guarantees 
payment of the entire $1,000 debt owed to Bank. A and Y are not treated 
as related to each other pursuant to paragraph (b)(2) of this section 
because A directly bears the economic risk of loss as described in 
Sec.  1.752-2(a)(3) for the $1,000 liability. Y is therefore not 
treated as related to X. Because A is the only partner that bears the 
economic risk of loss for P's $1,000 liability, A's share of the 
liability is $1,000 under Sec.  1.752-2(a)(1).
    (iii) Example 3: Related partner exception. A, an individual, owns 
100 percent of two corporations, X and Y. X owns 79 percent of a 
corporation, Z, and Y owns the remaining 21 percent of Z. X and Y are 
members of P, a limited liability company treated as a partnership for 
Federal tax purposes. The partnership agreement provides that X and Y 
share equally in all items of income, gain, loss, deduction, and credit 
of P. P borrows $2,000 from Bank. Each of X and Z guarantees payment of 
the entire $2,000 debt owed to Bank. X directly bears the economic risk 
of loss as described in Sec.  1.752-2(a)(3) for P's $2,000 liability; 
therefore, paragraph (b)(2) of this section applies and X and Y are not 
treated as related for purposes of determining the economic risk of 
loss borne by each of them for P's $2,000 liability. Because X and Y 
are not treated as related and neither owns an 80 percent or more 
interest in Z, neither X nor Y is treated as related to Z under 
paragraph (b)(1) of this section. Because

[[Page 95116]]

X bears the economic risk of loss for P's $2,000 liability, X's share 
of the liability is $2,000 under Sec.  1.752-2(a)(1).
    (iv) Example 4: Related partner exception and person related to 
more than one partner. Same facts as in paragraph (b)(5)(iii) of this 
section (Example 3), but X guarantees payment of up to $1,200 of the 
debt owed to Bank if any amount of the full $2,000 is not recovered by 
Bank and Z guarantees payment of $2,000. Pursuant to paragraph (b)(2) 
of this section, X and Y are not treated as related to the extent of 
X's $1,200 guarantee because X directly bears the economic risk of loss 
as described in Sec.  1.752-2(a)(3) for $1,200 of P's $2,000 liability. 
X's share of the liability is $1,200 under Sec.  1.752-2(a)(1). In 
addition, because paragraph (b)(2) of this section does not apply to 
the remaining portion of the liability that X did not guarantee, X and 
Y are treated as related for purposes of the remaining $800 of the 
liability pursuant to paragraph (b)(1) of this section. Therefore, Z is 
treated as related to X and Y under paragraph (b)(1) of this section. 
Pursuant to paragraph (b)(3) of this section, because X and Y each has 
a 50 percent interest in all items of income, gain, loss, deduction, 
and credit of P, X and Y each bear the economic risk of loss for $400 
of the remaining $800 liability, and thus each has a $400 share of the 
liability under Sec.  1.752-2(a)(1). In sum, X's share of P's $2,000 
liability is $1,600 ($1,200 plus $400) and Y's share of P's $2,000 
liability is $400.
    (v) Example 5: Entity structured to avoid related person status. A, 
B, and C form a general partnership, ABC. A, B, and C are equal 
partners, each contributing $1,000 to the partnership. A and B want to 
loan money to ABC and have the loan treated as nonrecourse for purposes 
of section 752. A and B form partnership AB to which each contributes 
$50,000. A and B share losses equally in partnership AB. Partnership AB 
loans partnership ABC $100,000 on a nonrecourse basis secured by the 
property ABC buys with the loan. Under these facts and circumstances, A 
and B bear the economic risk of loss with respect to the partnership 
liability equally based on their percentage interest in losses of 
partnership AB.
* * * * *
    (e) Ordering rule. In determining a partner's share of a recourse 
partnership liability, the rules in paragraph (b)(2) of this section, 
if applicable, apply before the rules in paragraph (b)(3) of this 
section. The rules in paragraph (b)(3) of this section apply before the 
rules in Sec.  1.752-2(a)(2).
    (f) Example. The following example illustrates the application of 
paragraph (e) of this section.
    (1) Facts. A, an individual, owns 100 percent of two corporations, 
X and Y. X, Y, and Z, a corporation, are members of P, a limited 
liability company treated as a partnership for Federal tax purposes. 
The partnership agreement provides that the partners share equally in 
all items of income, gain, loss, deduction, and credit of P. Z is not 
related to A, X, or Y. P borrows $1,000 from Bank. Each of A, X, and Z 
guarantees payment for the entire amount of P's $1,000 liability. Each 
of A, X, and Z has a payment obligation of $1,000 under Sec.  1.752-
2(b) for P's $1,000 liability.
    (2) Analysis. (i) Under paragraph (e) of this section, first apply 
the rules under paragraph (b)(2) of this section, then apply the rules 
under paragraph (b)(3) of this section, and finally apply the rules 
under Sec.  1.752-2(a)(2) to determine how to allocate P's $1,000 
liability among X, Y, and Z under Sec.  1.752-2(a)(1). Under paragraph 
(b)(2) of this section, X and Y are not treated as related to each 
other with respect to X's payment obligation for the $1,000 liability 
because X directly bears the economic risk of loss as described in 
Sec.  1.752-2(a)(3). Therefore, X is treated as bearing $1,000 of the 
economic risk of loss for P's liability.
    (ii) Because the rules in paragraph (b)(2) of this section do not 
affect A's relationship to X and Y, X and Y are related to A under 
paragraph (b)(1) of this section. Because A is related to both X and Y, 
each of X and Y is considered to bear the economic risk of loss for P's 
liability in proportion to X's and Y's interest in P. Because they both 
have a one-third interest in all items of income, gain, loss, 
deduction, and credit of P, each of X and Y bears $500 of economic risk 
of loss under paragraph (b)(3) of this section with respect to A's 
$1,000 payment obligation for P's liability.
    (iii) Z has a payment obligation with respect to the $1,000 
liability under Sec.  1.752-2(b)(1) and thus, bears $1,000 of the 
economic risk of loss for P's liability.
    (iv) After applying paragraphs (b)(2) and (3) of this section, X is 
considered to bear $1,500 of the economic risk of loss for P's 
liability and Y is considered to bear $500 of the economic risk of loss 
for P's liability. Z is considered to bear $1,000 of the economic risk 
of loss for P's liability. Because the aggregate amount of X's, Y's, 
and Z's economic risk of loss ($3,000) exceeds the amount of P's 
liability ($1,000), the economic risk of loss borne by X, Y, and Z is 
determined under Sec.  1.752-2(a)(2). Under Sec.  1.752-2(a)(2), X's 
economic risk of loss is $500 (($1,500/$3,000) x $1,000), Y's economic 
risk of loss is $167 (($500/$3,000) x $1,000), and Z's economic risk of 
loss is $333 (($1,000/$3,000) x $1,000). Therefore, under Sec.  1.752-
2(a)(1), X's share of P's liability is $500, Y's share is $167, and Z's 
share is $333.

0
Par. 6. Section 1.752-5 is amended by:
0
1. Revising the section heading.
0
2. Adding three sentences after the first sentence in paragraph (a).
0
3. In paragraph (a), removing the word ``However'' at the beginning of 
the fifth sentence and adding ``In addition'' in its place.
    The revision and additions read as follows:


Sec.  1.752-5  Applicability dates and transition rules.

    (a) * * * However, Sec.  1.752-4(b)(1)(iv) and (v), (b)(2) and (3), 
(b)(5)(i) through (iv), (e), and (f) apply to any liability incurred or 
assumed by a partnership on or after December 2, 2024, other than a 
liability incurred or assumed by a partnership pursuant to a written 
binding contract in effect prior to that date. To the extent that the 
proceeds of a partnership liability (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, the refinancing debt will be treated as though it was 
incurred or assumed by the partnership prior to December 2, 2024, to 
the extent of the amount and duration of the pre-modification 
liability. A partnership may apply Sec.  1.752-4(b)(1)(iv) and (v), 
(b)(2) and (3), (b)(5)(i) through (iv), (e), and (f) to all of its 
liabilities (including liabilities incurred or assumed by a partnership 
prior to December 2, 2024), for any return filed on or after December 
2, 2024 provided the partnership consistently applies all the rules in 
Sec.  1.752-2(a)(2) and (3), (f)(9), and (i) and Sec.  1.752-
4(b)(1)(iv) and (v), (b)(2) and (3), (b)(5)(i) through (iv), (e), and 
(f) to those liabilities. * * *
* * * * *

Douglas W. O'Donnell,
Deputy Commissioner.
    Approved: October 30, 2024.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-27840 Filed 11-29-24; 8:45 am]
BILLING CODE 4830-01-P