Attorney Comments on Proposed Regs on Treatment of Disregarded Entities

Dear Sir or Madam:

We write to express our concern over the Service's Proposed Regulation section 1.752-2 regarding the allocation of recourse partnership debt to a disregarded entity. We understand that the Service's purpose in proposing the new regulation is to conform current practices to section 752's overriding principle of allocating liabilities based on partners' economic risk of loss. Under the proposed regulation, the presumption that a partner is solvent and able to perform its obligations is eliminated for partners that are disregarded entities.

Specifically, we are concerned that the proposed regulation:

The Service's estimated total annual reporting burden for the proposed regulation is 500 hours. The Service estimates a nationwide total of 500 respondents requiring an average of one hour of time to comply with the new rules. We fear the reporting burden is severely underestimated. While at first blush this reporting burden may appear reasonable, valuation and allocation are often difficult areas of practice, and it often requires many hours to gather the information necessary to determine an entity's appropriate value.

II. The proposed regulation ignores existing safeguards in current regulations that effectively deter the abuse the Service seeks to address with the proposed regulation.

The current regulations provide three safeguards that effectively deter abusive allocations of liabilities. First, Reg. § 1.752-2(b)(6) iterates a facts and circumstances test for determining "a plan to circumvent or avoid the obligation." Second, Reg. § 1.752-2(j)(1) sets forth a facts and circumstances test for determining whether "a principal purpose of the arrangement between the parties is to eliminate the partner's economic risk of loss with respect to that obligation or create the appearance of the partner or related person bearing the economic risk of loss when, in fact, the substance of the arrangement is otherwise." Finally, Reg. § 1.752-2(j)(3) provides a facts and circumstances test for evidencing "a plan to circumvent or avoid the obligation." Notwithstanding these three safeguards, the anti-abuse rules of Reg. § 1.701-2 may also apply. The proposed regulation ignores these adequate and effective safeguards and attempts to draw a bright-line rule that will be neither adequate nor effective.

We appreciate the opportunity to comment on the proposed regulation and respectfully request the matter be set for public hearing. Should you have any questions, please contact William R. Culp, Jr. at 704.973.5333, Mark L. Richardson at 704.973.5339, or Holly B. Norvell at 704.973.5338.

cc: Mark L. Richardson, Esquire