IRS Finalizes Long-Awaited Regulations on Partnership Recourse Liabilities and Related-Party Rules

WASHINGTON, D.C., December 2, 2024 – The Internal Revenue Service (IRS) issued a final regulation on partnership resource obligations and ​related rules, ​which resulted in an 11-year ​process that began with the ​proposed regulations in 2013. These regulations provide final guidance on how partners share the economic risk of loss and the treatment of related party transactions within ​partnerships.

According to the IRS, the ​final rules adopt the proposed ​2013 rules with certain amendments to reflect public comments and changes in tax practices. A key aspect of this Regulation is the clarification of how partnership obligations are attributed to partners, particularly where several partners present an ​economic risk of overlapping loss. The IRS has reintroduced a rule of proportionality of the previous temporary regulations, stipulating that each member’s ​share ​of an appeal responsibility ​corresponds to ​the proportion ​of the total economic risk of loss it bears in relation to all the partners concerned.

Implications for phased partnerships

The rules also ​address the complexity of related partnership structures. In scenarios where a high-level association ​(UTP) has an interest in a low-level association (LTP) and a ​UTP partner also has ​a direct interest in the LTP, the final rules require that LTP obligations be directly attributed to the partner carrying the economic risk of loss. This approach aims to prevent duplication and ensure that ​the partner’s base accurately reflects ​its economic exposure.

Review of the Regulations of Related Parties

Significant changes were ​made to ​the related ​rules ​of the parties under section 752. The final regulation amends ​the application of constructive ownership rules, in particular on the stock of associations. Specifically, they ignore some constructive ownership provisions that previously treated ​partners as entities belonging to the association, thereby ​improving the determination of economic risk of loss in related contexts.

Approval of the proportionality regime

In response to public ​comments, the IRS adopted a proportionality rule ​to address situations where several partners share an economic risk of overlapping loss for an association responsibility. This rule assigns responsibility to partners based on the relationship between the economic risk of loss ​of each ​partner and the ​total risk ​of all partners. This method ensures a fair and transparent distribution ​of liabilities, aligning each partner’s share with its actual economic exposure.

Entry into force and transitional provisions

The ​final rules apply to association obligations entered into or assumed from 2 December 2024. However, there ​are provisions on obligations arising from binding contracts in force prior to that date, allowing certain ​existing arrangements to continue ​in ​accordance with previous rules. Associations have ​the opportunity to apply these final regulations ​to all reporting obligations ​submitted on ​December 2, 2024, provided that they ​systematically apply all aspects of the new rules.

This final settlement marks an ​important evolution in the taxation of partnerships, providing clarity ​and certainty to taxpayers who are going through the complexity of appeal obligations ​and related party transactions. By addressing long-standing ​ambiguities, the IRS aims to improve compliance and ensure that partnership obligations are distributed in a manner that reflects genuine economic arrangements among partners.