[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: 26CFR1.752-4]

[Page 565-566]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.752-4  Special rules.

    (a) Tiered partnerships. An upper-tier partnership's share of the 
liabilities of a lower-tier partnership (other than any liability of the 
lower-tier partnership that is owed to the upper-tier partnership) is 
treated as a liability of the upper-tier partnership for purposes of 
applying section 752 and the regulations thereunder to the partners of 
the upper-tier partnership.
    (b) Related person definition--(1) In general. A person is related 
to a partner if the person and the partner bear a relationship to each 
other that is specified in section 267(b) or 707(b)(1), subject to the 
following modifications:
    (i) Substitute ``80 percent or more'' for ``more than 50 percent'' 
each place it appears in those sections;
    (ii) A person's family is determined by excluding brothers and 
sisters; and
    (iii) Disregard sections 267(e)(1) and 267(f)(1)(A).
    (2) Person related to more than one partner--(i) In general. If, in 
applying the related person rules in paragraph (b)(1) of this section, a 
person is related to more than one partner, paragraph (b)(1) of this 
section is applied by treating the person as related only to the partner 
with whom there is the highest percentage of related ownership. If two 
or more partners have the same percentage of related ownership and no 
other partner has a greater percentage, the liability is allocated 
equally among the partners having the equal percentages of related 
ownership.
    (ii) Natural persons. For purposes of determining the percentage of 
related ownership between a person and a partner, natural persons who 
are related by virtue of being members of the same family are treated as 
having a percentage relationship of 100 percent with respect to each 
other.
    (iii) Related partner exception. Notwithstanding paragraph (b)(1) of 
this section (which defines related person), persons owning interests 
directly or indirectly in the same partnership are not treated as 
related persons for purposes of determining the economic risk of loss 
borne by each of them for the liabilities of the partnership. This 
paragraph (iii) does not apply when determining a partner's interest 
under the de minimis rules in Sec. Sec. 1.752-2 (d) and (e).
    (iv) Special rule where entity structured to avoid related person 
status--(A) In general. If--
    (1) A partnership liability is owed to or guaranteed by another 
entity that is a partnership, an S corporation, a C corporation, or a 
trust;
    (2) A partner or related person owns (directly or indirectly) a 20 
percent or more ownership interest in the other entity; and
    (3) A principal purpose of having the other entity act as a lender 
or guarantor of the liability was to avoid the determination that the 
partner that owns the interest bears the economic risk of loss for 
federal income tax purposes for all or part of the liability;

then the partner is treated as holding the other entity's interest as a 
creditor or guarantor to the extent of the partner's or related person's 
ownership interest in the entity.
    (B) Ownership interest. For purposes of paragraph (b)(2)(iv)(A) of 
this section, a person's ownership interest in:
    (1) A partnership equals the partner's highest percentage interest 
in any item of partnership loss or deduction for any taxable year;
    (2) An S corporation equals the percentage of the outstanding stock 
in the S corporation owned by the shareholder;
    (3) A C corporation equals the percentage of the fair market value 
of the issued and outstanding stock owned by the shareholder; and
    (4) A trust equals the percentage of the actuarial interests owned 
by the beneficial owner of the trust.

    (C) Example. Entity structured to avoid related person status. A, B, 
and C form a general partnership, ABC. A, B, and C are equal partners, 
each contributing $1,000 to the partnership. A and B want to loan money 
to ABC and have the loan treated as nonrecourse for purposes of section 
752. A and B form partnership AB to which each contributes $50,000. A 
and B share losses equally in partnership AB. Partnership AB loans 
partnership ABC $100,000 on a nonrecourse basis secured by the property 
ABC buys with the loan. Under these facts and circumstances, A and B 
bear the economic risk of loss with respect to the partnership liability 
equally based on their percentage interest in losses of partnership AB.

    (c) Limitation. The amount of an indebtedness is taken into account 
only

[[Page 566]]

once, even though a partner (in addition to the partner's liability for 
the indebtedness as a partner) may be separately liable therefor in a 
capacity other than as a partner.
    (d) Time of determination. A partner's share of partnership 
liabilities must be determined whenever the determination is necessary 
in order to determine the tax liability of the partner or any other 
person. See Sec. 1.705-1(a) for rules regarding when the adjusted basis 
of a partner's interest in the partnership must be determined.

[T.D. 8380, 56 FR 66356, Dec. 23, 1991]