[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.752-1]

[Page 554-556]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.752-1  Treatment of partnership liabilities.

    (a) Definitions. For purposes of section 752, the following 
definitions apply:
    (1) Recourse liability defined. A partnership liability is a 
recourse liability to the extent that any partner or related person 
bears the economic risk of loss for that liability under Sec. 1.752-2.
    (2) Nonrecourse liability defined. A partnership liability is a 
nonrecourse liability to the extent that no partner or related person 
bears the economic risk of loss for that liability under Sec. 1.752-2.
    (3) Related person. Related person means a person having a 
relationship to a partner that is described in Sec. 1.752-4(b).
    (b) Increase in partner's share of liabilities. Any increase in a 
partner's share of partnership liabilities, or any increase in a 
partner's individual liabilities by reason of the partner's assumption 
of partnership liabilities, is treated as a contribution of money by 
that partner to the partnership.
    (c) Decrease in partner's share of liabilities. Any decrease in a 
partner's share of partnership liabilities, or any decrease in a 
partner's individual liabilities by reason of the partnership's 
assumption of the individual liabilities of the partner, is treated as a 
distribution of money by the partnership to that partner.
    (d) Assumption of liability. Except as otherwise provided in 
paragraph (e) of this section, a person is considered to assume a 
liability only to the extent that:
    (1) The assuming person is personally obligated to pay the 
liability; and
    (2) If a partner or related person assumes a partnership liability, 
the person to whom the liability is owed knows of the assumption and can 
directly enforce the partner's or related person's obligation for the 
liability, and no other partner or person that is a related person to 
another partner would bear the economic risk of loss for the liability 
immediately after the assumption.
    (e) Property subject to a liability. If property is contributed by a 
partner to the partnership or distributed by the partnership to a 
partner and the property is subject to a liability of the transferor, 
the transferee is treated as having assumed the liability, to the extent 
that the amount of the liability does not exceed the fair market value 
of the property at the time of the contribution or distribution.
    (f) Netting of increases and decreases in liabilities resulting from 
same transaction. If, as a result of a single transaction, a partner 
incurs both an increase in the

[[Page 555]]

partner's share of the partnership liabilities (or the partner's 
individual liabilities) and a decrease in the partner's share of the 
partnership liabilities (or the partner's individual liabilities), only 
the net decrease is treated as a distribution from the partnership and 
only the net increase is treated as a contribution of money to the 
partnership. Generally, the contribution to or distribution from a 
partnership of property subject to a liability or the termination of the 
partnership under section 708(b) will require that increases and 
decreases in liabilities associated with the transaction be netted to 
determine if a partner will be deemed to have made a contribution or 
received a distribution as a result of the transaction. When two or more 
partnerships merge or consolidate under section 708(b)(2)(A), as 
described in Sec. 1.708-1(c)(3)(i), increases and decreases in 
partnership liabilities associated with the merger or consolidation are 
netted by the partners in the terminating partnership and the resulting 
partnership to determine the effect of the merger under section 752.
    (g) Example. The following example illustrates the principles of 
paragraphs (b), (c), (e), and (f) of this section.

    Example 1. Property contributed subject to a liability; netting of 
increase and decrease in partner's share of liability. B contributes 
property with an adjusted basis of $1,000 to a general partnership in 
exchange for a one-third interest in the partnership. At the time of the 
contribution, the partnership does not have any liabilities outstanding 
and the property is subject to a recourse debt of $150 and has a fair 
market value in excess of $150. After the contribution, B remains 
personally liable to the creditor and none of the other partners bears 
any of the economic risk of loss for the liability under state law or 
otherwise. Under paragraph (e) of this section, the partnership is 
treated as having assumed the $150 liability. As a result, B's 
individual liabilities decrease by $150. At the same time, however, B's 
share of liabilities of the partnership increases by $150. Only the net 
increase or decrease in B's share of the liabilities of the partnership 
and B's individual liabilities is taken into account in applying section 
752. Because there is no net change, B is not treated as having 
contributed money to the partnership or as having received a 
distribution of money from the partnership under paragraph (b) or (c) of 
this section. Therefore B's basis for B's partnership interest is $1,000 
(B's basis for the contributed property).
    Example 2. Merger or consolidation of partnerships holding property 
encumbered by liabilities. (i) B owns a 70 percent interest in 
partnership T. Partnership T's sole asset is property X, which is 
encumbered by a $900 liability. Partnership T's adjusted basis in 
property X is $600, and the value of property X is $1,000. B's adjusted 
basis in its partnership T interest is $420. B also owns a 20 percent 
interest in partnership S. Partnership S's sole asset is property Y, 
which is encumbered by a $100 liability. Partnership S's adjusted basis 
in property Y is $200, the value of property Y is $1,000, and B's 
adjusted basis in its partnership S interest is $40.
    (ii) Partnership T and partnership S merge under section 
708(b)(2)(A). Under section 708(b)(2)(A) and Sec. 1.708-1(c)(1), 
partnership T is considered terminated and the resulting partnership is 
considered a continuation of partnership S. Partnerships T and S 
undertake the form described in Sec. 1.708-1(c)(3)(i) for the 
partnership merger. Under Sec. 1.708-1(c)(3)(i), partnership T 
contributes property X and its $900 liability to partnership S in 
exchange for an interest in partnership S. Immediately thereafter, 
partnership T distributes the interests in partnership S to its partners 
in liquidation of their interests in partnership T. B owns a 25 percent 
interest in partnership S after partnership T distributes the interests 
in partnership S to B.
    (iii) Under paragraph (f) of this section, B nets the increases and 
decreases in its share of partnership liabilities associated with the 
merger of partnership T and partnership S. Before the merger, B's share 
of partnership liabilities was $650 (B had a $630 share of partnership 
liabilities in partnership T and a $20 share of partnership liabilities 
in partnership S immediately before the merger). B's share of S's 
partnership liabilities after the merger is $250 (25 percent of S's 
total partnership liabilities of $1,000). Accordingly, B has a $400 net 
decrease in its share of S's partnership liabilities. Thus, B is treated 
as receiving a $400 distribution from partnership S under section 
752(b). Because B's adjusted basis in its partnership S interest before 
the deemed distribution under section 752(b) is $460 ($420 + $40), B 
will not recognize gain under section 731. After the merger, B's 
adjusted basis in its partnership S interest is $60.

    (h) Sale or exchange of a partnership interest. If a partnership 
interest is sold or exchanged, the reduction in the transferor partner's 
share of partnership liabilities is treated as an amount realized under 
section 1001 and the regulations thereunder. For example, if a partner 
sells an interest in a partnership for $750 cash and transfers to the

[[Page 556]]

purchaser the partner's share of partnership liabilities in the amount 
of $250, the seller realizes $1,000 on the transaction.
    (i) Bifurcation of partnership liabilities. If one or more partners 
bears the economic risk of loss as to part, but not all, of a 
partnership liability represented by a single contractual obligation, 
that liability is treated as two or more separate liabilities for 
purposes of section 752. The portion of the liability as to which one or 
more partners bear the economic risk of loss is a recourse liability and 
the remainder of the liability, if any, is a nonrecourse liability.

[T.D. 8380, 56 FR 66351, Dec. 23, 1991, as amended by T.D. 8925, 66 FR 
723, Jan. 4, 2001]