The IRS today released in advance of being released for publication in the Federal Register two sets of final regulations concerning partnership liabilities. These final regulations were released by the U.S. Treasury Department and IRS to the Federal Register late in the day on October 4, 2019.
…the 2018 Proposed Regulations proposing to withdraw the 707 Temporary Regulations and reinstate the Prior 707 Regulations are adopted by this Treasury decision without change, except the applicability date has been revised. To avoid a lapse in rules for allocating partnership liabilities for disguised sale purposes, these final regulations apply to any transaction with respect to which all transfers occur on or after October 4, 2019, the date that the 707 Temporary Regulations expire.
… this Treasury decision adopts the rules in the 752 Temporary Regulations and the 752 Proposed Regulations with some changes.
Bottom dollar payment obligation: Notably, the final regulations revise the definition of a bottom dollar payment obligation to specifically address capital contribution obligations and deficit restoration obligations. A bottom dollar payment obligation now includes any payment obligation other than one in which the partner is or would be required to make the full amount of the partner’s capital contribution or to restore the full amount of the partner’s deficit capital account.
The final regulations also amend the regulations under Reg. section 1.752-2(k) and clarify how the satisfaction presumption in Reg. section 1.752-2(b)(6) relates to Reg. section 1.752-2(k). Specifically, Reg. section 1.752-2(b)(6) now provides that for purposes of determining the extent to which a partner or related person has a payment obligation and the economic risk of loss, it is assumed that all partners and related persons who have obligations to make payments actually perform those obligations, irrespective of their actual net worth, unless the facts and circumstances indicate a plan to circumvent or avoid the obligation under Reg. section 1.752-2(j) (related to the anti-abuse rule which includes a list of factors indicating a plan to circumvent or avoid an obligation and examples) or there is not a commercially reasonable expectation that the payment obligor will have the ability to make the required payments under the term of the obligation if the obligation becomes due and payable as described in Reg. section 1.752-2(k). Amended Reg. section 1.752-2(k) applies to all partners of a partnership, including partners that are disregarded entities or grantor trusts.
The final regulations generally apply to liabilities incurred or assumed by a partnership and to payment obligations imposed or undertaken with respect to a partnership liability on or after the date of publication in the Federal Register, other than liabilities incurred or assumed by a partnership and payment obligations imposed or under taken pursuant to a written binding contract in effect prior to that date. The scheduled date of publication in the Federal Register is October 9, 2019.
The final regulations provide specific applicability dates and transition rules for bottom dollar obligations.
The regulations released by the IRS today were submitted to the Office of the Federal Register (OFR) and according to a statement that appears at the top of each regulation package “may vary slightly from the published documents if minor editorial changes are made during the OFR review process.” The documents published in the Federal Register will be the official documents: T.D. 9876 [PDF 244 KB] (nine pages) and T.D. 9877 [PDF 330 KB] (51 pages).
The purpose of this report is to provide text of the regulations released today. A more detailed discussion of these regulations will be provided in the future by KPMG.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.