Page 78 - North American Clean Energy January February 2015

investing in clean energy

How Treasury’s Proposed Liability Regulations

Affect clean energy investments
By Thomas Astore, CPA JD

In early 2014, Treasury issued complex proposed regulations dealing with the allocation of partnership recourse debt. hese

proposed regulations are a radical departure from the current rules. In fact, many commentators believe these regulations
are not only over-reaching, but are a reaction to problems that don’t actually exist under current rules.

If adopted, these new rules could have a severe impact on a partner’s allocation of losses 4. he payment obligation does not require that the primary obligor, or any obligor with

and investment tax credits. As many clean energy investments (a solar partnership lip respect to the partnership liability, directly or indirectly hold money or other liquid
structure, for example) are structured as partnerships, or as limited liability companies assets in an amount that exceeds the reasonable needs of the obligor;
that are taxed as partnerships, these regulations are of great concern to clean energy 5. he partner or related person received arm’s length consideration for assuming the
developers and investors.
payment obligation;

As of the print date, these proposed regulations do not have the current efect of law 6. In the case of a guarantee or similar arrangement, the partner or related person is or
and, therefore, won’t afect current debt arrangements. hey can also be withdrawn or would be liable up to the full amount of such partner’s or related person's payment
modiied in whole or in part before being inalized—but, they are a cause for concern.
obligation if, and to the extent that, any amount of the partnership liability is not
Current law provides that, in general, an increase in a partner’s share of liabilities is otherwise satisied; and

considered a contribution of cash by that partner to the partnership. he opposite is also 7. In the case of an indemnity, reimbursement agreement, or a similar arrangement, the
true in that a decrease in a partner’s share of liabilities is considered a distribution of cash partner or related person is or would be liable up to the full amount of such partner’s
to that partner. In addition, a partner is considered “at risk” for recourse liabilities. By or related person’s payment obligation if, and to the extent that, any amount of the
increasing one’s “at risk” tax basis, an individual partner can deduct losses against this “at indemnitee’s or other beneited party’s payment obligation is satisied.

risk” amount. Because a decrease in the allocation of a liability is considered a distribution
of money to the partner, a partner could have taxable income if his “at risk” tax basis is he proposed regulations will apply to liabilities incurred or assumed on or after such
decreased.
are inalized. herefore, it appears that current debt arrangements may be grandfathered
Recourse liabilities, those in which a partner (or a related party) bears the risk of loss for under the regulations, although this isn’t entirely certain.

the liability, are allocated to the partner bearing such risk. A partner bears the risk of loss he regulations also provide transitional relief to partners with negative capital accounts
for a speciic debt if, based on a hypothetical analysis, the partnership’s assets are deemed (say, a partner whose share of partnership liabilities under current law exceed his adjusted
worthless. hen, the liability becomes due, and the partner is obligated to pay such liability. basis) and, thereby, soften the immediate impact of the new rules. Under the regulations, a
his is a mechanical test, and so a partner’s net worth is not considered under this analysis.
partner with a negative capital account can continue to apply the current regulations for up

Under the proposed regulations, however, a partner or related person guaranteeing
to seven years to the extent of his negative capital account.
a debt (and increasing his “at risk” basis) would need to meet seven tests—including a In short, Treasury is seeking to replace the current hypothetical liquidation test (a test
subjective net worth test, to be considered “at risk” for that debt. If a partner fails any of that is well developed and understood by practitioners) with a test based, in part, on a

these tests, a liability (which under current rules would be recourse) could be considered subjective analysis of net worth and potentially onerous documentation requirements.
non-recourse and, therefore, trigger potential tax consequences.
Many clean energy investments are predicated on one partner guarantying debt to
increase his “at risk” basis to deduct losses. hese regulations could completely change this
The seven tests
economic relationship.

he test that a partner or related person guaranteeing a debt would need to meet are as he process to inalize regulations can be time-consuming and are subject to public
follows:
comments, so it isn’t likely that adoption will occur in the near term. However, if the
regulations are inalized as currently written, all partnerships,
1. he partner or related person is required to maintain a commercially reasonable net including clean energy partnerships, will need to evaluate their future

worth throughout the term of the debt obligation, or be subject to commercially debt guarantee arrangements to assure compliance with these complex,
reasonable restrictions on transfer of assets for inadequate consideration;
highly subjective new rules.
2. he partner or related person is required to periodically provide commercially
reasonable documentation regarding his inancial condition;
homas Astore, CPA JD is a Partner at Rodman & Rodman, P.C., and

3. he term of the obligation must not end prior to the term the partnership liability;
practice leader of the CPA irm’s “Green Team” Renewable Energy Practice.

Rodman & Rodman, P.C. | www.rodmancpa.com

78 JANUARY/FEBRUARY 2015 nacleanenergy.com