AICPA Comments to IRS on Proposed Partnership Rules Regarding Disguised Sales and Allocation of Partnership Liabilities

October 1, 2015

Washington, D.C. (Oct. 1, 2015) – The American Institute of CPAs (AICPA) submitted comments on Sept. 30 to the Internal Revenue Service (IRS) related to the guidance proposed by the IRS that affect partnerships and their partners under Internal Revenue Code (IRC) section 707 on disguised sales to or by a partnership and under IRC section 752 on the allocation of partnership liabilities.

Troy K. Lewis, chair of the AICPA Tax Executive Committee, noted that the proposed regulations under IRC section 707 clarify several disguised sale rules, and he commended the IRS for providing the clarifications and reducing the likelihood that a taxpayer will inadvertently enter into a disguised sale.  However, he wrote, “The AICPA believes that the IRS should continue to allow the application of the fair market value limitation on an aggregate of qualifying property basis.”  He explained that some partnerships, for legitimate business reasons, wish to avoid the expense of valuing each property held by the business and that this option should remain permissible.

Lewis stated that the proposed regulations under IRC section 752 recommend a number of significant changes to the existing regulations, which provide how recourse and nonrecourse liabilities are shared by partners.  Recourse debt holds the borrower personally liable; all other debts are considered nonrecourse loans, which do not hold the borrower personally liable.  “While these provisions are intended to prevent abuse of certain liability allocation rules, the AICPA believes most of these changes are unnecessary and administratively burdensome,” Lewis wrote. 

“The proposed changes to the section 752 regulations seemed designed to address a few abusive transactions while creating excessive and unnecessary burdens for all partners who need to share in partnership liabilities,” Lewis stated.  “The AICPA believes that the partnership liability rules are more appropriately improved by expanding the net value rule of existing Treas. Reg. § 1.752-2(k) and by eliminating certain extreme bottom liability guarantees.  We further believe that the IRS should retain the existing safe harbors in Treas. Reg. § 1.752-3.  Finally, we propose consideration of the proposed capital interest safe harbor for inclusion under the section 707 regulations concerning disguised sales.”