In February 2016, the IRS released an internal memorandum
concluding that typical 'bad boy guaranties' provided by a
partner for partnership debt should be treated as a recourse
liability of the guarantor for purposes of allocating the debt, and
associated deductions, among the partners. That result could reduce
the amount of depreciation deductions that would be allocable to
the non-guarantor partners. The memorandum was severely criticized
in the tax community, as its conclusion was inconsistent with the
way in which most practitioners have treated such guaranties. See
Tax Alert for a summary of
the memorandum and its implications. The IRS reversed course and
concluded in a subsequent memorandum released April 15 that
such guaranties should not prevent debt from being
characterized as nonrecourse debt (both for purposes of the
partnership allocation rules and the at-risk rules).
The IRS concluded as follows:
[B]ecause it is not in the economic interest of the borrower or the guarantor to commit the bad acts described in the typical "nonrecourse carve-out" provisions, it is unlikely that the contingency (the bad act) will occur and the contingent payment obligation should be disregarded under §1.752-2(b)(4). Therefore, unless the facts and circumstances indicate otherwise, a typical "nonrecourse carve-out" provision that allows the borrower or the guarantor to avoid committing the enumerated bad act will not cause an otherwise nonrecourse liability to be treated as recourse for purposes of section 752 and §1.752-2(a) until such time as the contingency actually occurs.
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