The Internal Revenue Service (IRS) has issued temporary and proposed regulations (Temporary Regulations, Proposed Regulations, respectively, and collectively, the New Regulations) that change the rules regarding allocation of partnership liabilities.See T.D. 9787; 81 Fed. Reg. 69,291 (Oct. 5, 2016). In 2014, the IRS issued proposed regulations (the 2014 Proposed Regulations) that would have significantly modified the rules for determining whether partnership debt is recourse or nonrecourse to a particular partner, in most cases making it much harder for debt to qualify as recourse debt. The 2014 Proposed Regulations would have prevented the use of bottom-dollar guarantees to increase the contributing partner’s share of partnership debt and limited the flexibility of partnerships in allocating partnership nonrecourse liabilities among partners.See Reg-119305-11; 79 Fed. Reg. 4,826 (Jan. 30, 2014). The New Regulations were issued in part in response to a number of comments received in respect of the 2014 Proposed Regulations.

The Temporary and Proposed Regulations do not recognize non-commercial guarantees and similar arrangements (including bottom-dollar guarantees), and would add and expand an anti-abuse rule that would limit when a partner’s guarantee of a partnership’s liability would be respected for purposes of treating such liability as recourse to the partner. See T.D. 9787; 81 Fed. Reg. 69,291 (Oct. 5, 2016).

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