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.