Disregarded entities.

On Jan. 30, 2006, the AICPA asked the IRS to withdraw proposed regulations on the treatment of disregarded entities in allocating partnership liabilities under Sec. 752.

Under the proposed regulations (issued in August 2004), when determining economic risk of loss for Sec. 752 purposes, a disregarded entity's payment obligation should be taken into account only to the extent of the entity's net value. According to the AICPA, however, the proposal, in application, will "create significant compliance burdens for taxpayers" and will "result in inconsistent treatment" for different entities.

There may be situations in which partnership interests are held through disregarded entities for nontax considerations. Under the current regulations, it is assumed that all partners with obligations to make payments intend to actually perform those obligations (regardless of their actual net worth); if the facts and circumstances indicate a plan to circumvent or avoid the obligation, a partner's obligation may be disregarded. Under the proposed regulations, however, this "intent element" is removed, leaving a regime that apples a net value standard when a disregarded entity holds a partnership interest while an intent standard is used in all other situations.

Rather than this proposal, the AICPA believes that the existing ant-abuse rule should be expanded, to make clear that the rule addresses the concerns at which the proposed regulations are aimed.

Lesli S. Laffie, J.D., LL.M.