IRC Section 752 Regulations Article by Denver Tax Lawyer

The 752 Regulations are used in determining a partner’s economic risk of loss for partnership debt.  These regulations apply a test Denver Tax Lawyerto determine economic risk of loss by reviewing what the economic consequences would be to each partner if the partnership liquidated.  Thus, the partners risk is examined as if the partnership went through a “constructive liquidation.”  A tax attorney at The McGuire Law Firm is familiar with these regulations and their application.  The article below should help provide additional information.

Under this applicable constructive liquidation, the 752 Regulations hold that the following are deemed to have occurred:

–         All partnership liabilities are payable in full;

–         All partnership assets (including cash) have no value with the exception of partnership property that was contributed to secure a partnership debt or liability;

–      The partnership disposes of all partnership property in a taxable transaction but receives no consideration, but receives relief from certain debts of which the creditor(s) right to repayment is limited to one or more partnership assets;

–     All allocable items such as gain, income, deductions, losses are allocated amongst the partners;

–          The partnership is liquidated.

The 752 Regulations can be difficult in their application to Limited Liability Companies (LLCs) due to the fact that in general no member or partner of the LLC is liable for the debts of the LLC regardless of whether the LLC debt is deemed recourse or nonrecourse debt.  Therefore, most partnership debt should be considered nonrecourse.  Exceptions apply if a member/partner agrees to assume a separate obligation for the liability apart from the partnership (LLC), or if a partner guarantees more than 25% of the interest that would accrue on a nonrecourse partnership liability and it can be deemed with reasonable certainty that the partner will be required to pay the interest that was guaranteed.  If a partner provides their property, other than their partnership interest as collateral to secure a partnership debt, the liability would be treated as recourse.  Moreover, debts of the LLC partners that were recourse prior to the formation of the LLC retain the classification of recourse debt.  Most state LLC statutes provide that a conversion from a partnership to an LLC does not provide relief from liability to those that had previously guaranteed a debt.  Thus, the prior partnership liabilities would be treated as recourse liabilities under I.R.C. Section 752.

Most state law statutes regarding creditors rights against an LLC only allow the creditor to pursue the assets of the LLC, and no right to the assets of the individual LLC members.  Therefore, such debts would appear to constitute nonrecourse debts to the LLC members for purposes of Section 752, and is supported by the prior 752 temporary regulations.

A tax attorney and business attorney from the McGuire Law Firm can work with partnerships and LLCs, in addition to the individual partners regarding partnership issues from formation and taxation to the sale and transfer of partnership interests.

Contact The McGuire Law Firm and schedule a free consultation with a tax attorney in Denver.