Under the IRC Section 707(a)(2)(B) rules, it is often important to determine the allocation of a liability assumed by a partnership, or a liability of a partnership used to fund a transfer of money to a partner, when determining if certain transfers are treated as consideration as part of a sale or property. In June 2018, the IRS issued a notice of proposed rulemaking (2018 Proposed Regulations) that proposed to withdraw the 707 Temporary Regulations and reinstate the rules previously in effect. The proposed regulations issued in 2016 included rules regarding when a payment obligation (other than a bottom dollar payment obligation) will be respected in determining whether a partner bears EROL with respect to a partnership liability (752 Proposed Regulations). The temporary regulations included rules concerning the treatment of "bottom dollar payment obligations" under IRC Section 752 (752 Temporary Regulations), as well as a new rule concerning the allocation of liabilities for purposes of IRC Section 707 (707 Temporary Regulations). In October 2016, after considering comments on the 2014 Proposed Regulations, the IRS issued final, temporary, and proposed regulations on disguised sales of property under IRC Section 707 and the treatment of partnership liabilities under IRC Section 752. In January 2014, the IRS issued proposed regulations on both the treatment of partnership liabilities under IRC Section 752 and disguised sales of property under IRC Section 707 (2014 Proposed Regulations). Under IRC Section 707(a)(2)(B) and its regulations, related transfers of money or other property to and by a partnership that, when viewed together, are more properly characterized as a sale or exchange of property, will be treated either as a transaction between the partnership and one who is not a partner or between two or more partners acting other than in their capacity as partners (disguised sales). Such obligations include an obligation to restore a deficit capital account upon liquidation of the partnership under the IRC Section 704(b) regulations. A partner generally bears the EROL for a partnership liability if the partner (or a related person) is obligated to make a payment to any person within the meaning of Treas. Under IRC Section 752 and its regulations, partnership liabilities are separated into two categories: (1) recourse liabilities (partnership liabilities for which a partner or related person bears the economic risk of loss (EROL)), and (2) nonrecourse liabilities (partnership liabilities for which no partner or related person bears EROL). The IRS has issued final regulations ( TD 9877, "752 Final Regulations") on partnership liabilities that are treated as recourse liabilities under IRC Section 752, on the treatment of bottom dollar payments under IRC Section 752, and on when certain obligations to restore a deficit balance in a partner's capital account are disregarded under IRC Section 704.Ĭoncurrently with the issuance of the 752 Final Regulations, the IRS issued final regulations ( TD 9876, "707 Final Regulations") withdrawing 2016 temporary regulations under IRC Section 707 on disguised sales of property to or by a partnership and reinstating the regulations previously in effect. IRS finalizes rules on partnership recourse liabilities and bottom dollar payments reinstates prior rules on disguised sales