Tag201606027

IRS Reverses Position on Bad Boy Guarantees

By:  Amanda Wilson

As previously discussed (here), the IRS recently released a chief counsel advice memorandum that concluded that bad boy guarantees turned what would otherwise be a nonrecourse debt into a recourse debt for Section 752 purposes.  This was an extremely unpopular decision, and received significant backlash from the real estate community.  Responding to this pressure, the IRS has now completely reversed its position.  In a generic legal advice memorandum issued Friday, the IRS makes it clear that common bad boy guarantees will not cause a nonrecourse loan to be classified as recourse.

Bad Boy Guarantee Makes Loan Recourse?

Magnifying Glass and TaxBy:  Amanda Wilson

The IRS recently released IRS legal memorandum 201606027.  In this memorandum, the IRS considered the impact of a bad boy guarantee on allocating partnership liabilities under Section 752.  Traditionally, bad boy guarantees have not been viewed as resulting in a partnership liability being allocated to the guarantor, as the guarantee obligation has been viewed as subject to contingencies that make it unlikely that the guarantee would ever come into play.

However, the IRS disagreed in this memorandum, and determined that the liability should be treated as recourse as the guarantor should be treated as bearing the economic risk of loss for the liability as a result of the bad boy guarantee.  This memorandum is creating a fire storm in the real estate area, as it potentially means that  billions of dollars of liabilities may have been incorrectly allocated.

 

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