IRS Final Regulations Addressing Partnership Recourse Liability and Related Party Rules

On Dec. 2, 2024, the IRS and Treasury released final regulations for partnership recourse liability, debt allocations, and third-party rules. Tax counsel and advisers must understand these final regulations and tax rules applicable to allocating partnership liabilities and their impact on tax basis and planning strategies.

A partner must calculate outside basis in various situations such as the receipt of a routine distribution of money, allocation of losses, redemption of an interest in a liquidation, or a sale of a partnership interest. Since recourse debt can increase a partner's loss deduction and allow for receipt of higher untaxed distributions, tax advisers must understand how to classify and allocate partnership liabilities.

The final regulations provide clarity in addressing how to allocate partnership liabilities and when a partner's obligation results in the economic risk of loss under Section 752. Notably, the final regulations modify core rules relating to recourse liabilities with a focus on disregarding constructive ownership rules applicable to partnership subsidiaries, the related partner exception, and when a person is related to more than one partner.

In light of these final regulations, practitioners will continue to struggle with reconciling allocations in partnership agreements with the requirement that the tax allocation has substantial economic effect under IRC Section 704(b).

Listen as our experienced panel provides a critical look at the final regulations, explains how to allocate partnership recourse and nonrecourse debt, and offers practical guidance on reviewing and structuring current partnership obligations.

1. Overview of Sections 704 and 752
2. Final IRS regulations
3. Recourse versus nonrecourse debts
4. Allocation of liabilities
5. Bottom-dollar guarantees
6. Disguised sales
7. Key considerations for partnership agreements

This panel will review these and other important topics:

• Key components of the final regulations on partnership recourse liability and related party rules
• Distinguishing recourse from nonrecourse partnership debt
• Application of debt allocation rules to everyday business transactions such as leveraged partnerships and asset drop-down transactions
• Allocating liabilities between partners
• Identifying disguised sales under the current tax law and final regulations
• Key considerations for partnership agreements

Learning Objectives

After completing this course, you will be able to:

• Recognize key components of IRS final regulations for partnership recourse liability and related party rules
• Determine the allocation of partnership debt to a partner contributing leveraged property under the Section 707 disguised sale rules
• Identify planning opportunities arising from the current regulations in using leveraged partnerships or other debt structures to defer gain on partnership contributions
• Discern how to apply the economic risk of loss analysis in allocating partnership debt
• Recognize tax reporting requirements under the current regulations

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing complex tax forms and schedules, supervising other preparers/accountants. Specific knowledge and understanding of partnership structure, operating agreements and liquidation, including partner capital accounts, debt allocation and distributions; familiarity with the debt allocation provisions of Section 752; familiarity with the disguised sales provisions of IRC Section 707 and the rules governing transactions between a partnership and its partner(s).

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IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).