Treasury finalizes §752 regulations after 11 years
After 11 years, Treasury issued final regulations under §752 on November 29, 2024. (
See TD 10014.) The final regulations follow the proposed regulations, with clarifications. Among other elucidations, the final regulations clarify the circumstances and degree to which a partner is treated as assuming the economic risk of loss for a partnership liability, especially in instances involving multiple partners sharing this risk.
Reg. §1.752-2(a) defines a partner’s share of a recourse liability as the portion of the liability for which the partner or related persons bear the economic risk of loss (“EROL”). Recall that a partner generally bears the EROL when the partner (or a person related to the partner) is the “payor of last resort.” (
Hubert Enterprises, TC Memo 2008-46,
supplementing 125 TC 72 (2005),
aff’d in part and remanded, 230 Fed. Appx. 526 (6th Cir. 2007).) Because the current regulations failed to address how partners should share a liability of the partnership if multiple partners bear EROL with respect to the partnership liability, the regulations adopted the overlapping risk of loss rule or the “proportionality rule” of Prop. Reg. §1.752-2(a)(2) and added new Reg. 1.752-2(a)(3) that enumerates “all the situations under §1.752-2 in which a person directly bears the EROL….” (
See TD 10014.) Situations enumerated in Reg. §1.752-2(a)(3) include, subject to de minimis exceptions, a person who (i) has a payment obligation, (ii) is a lender, (iii) guarantees payment of a partnership nonrecourse liability, or (iv) pledges property as security.
In response to a comment about the effect of “local law and separate agreements between partners in determining if partners have overlapping EROL,” Treasury clarified that Reg. §1.752-2(b)(3) provides guidance in that “all statutory and contractual obligations” are considered when determining the EROL of a partner. Treasury adopted Reg. §1.752-2(f)(9) from the proposed regulations, which illustrates this concept by way of an example. Once the EROL of a partner is determined, the proportionality rule ensures the amount of the partnership liability is taken into account only once by dividing the EROL of a partner by the sum of the EROL for all partners. The quotient is multiplied by this liability of the partnership.
Here is one example of how the regulation operates. Ryan and David, who are unrelated, own AB LLC equally. AB LLC borrows $10,000,000 from Friendly Bank and Ryan guarantees the full liability while David guarantees payment up to a cap of $5,000,000 if the full $10,000,000 is not recovered by Friendly Bank. Ryan and David have not entered into a loss-sharing agreement addressing their status as co-guarantors, and their responsibility for the debt is not clear under local law. Because the aggregate amount of the EROL is $15,000,000, which exceeds the $10,000,000 liability of AB LLC, the proportionality rule applies. Ryan’s EROL equals $6,666,667 ($10,000,000 x ($10,000,000 / $15,000,000)) and David’s EROL equals $3,333,333 ($10,000,000 x ($5,000,000 / $15,000,000)).