For over 50 years, Bloomberg Tax’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...
April 18 — The IRS returned to the prevailing interpretation by the real estate industry and practitioners of the tax treatment of nonrecourse carve-out guarantees, commonly known as “bad boy guarantees.”
The Internal Revenue Service Office of Chief Counsel released an advice memorandum (AM 2016-001) April 15 which provided that in most cases a partner's payment obligation under such a guarantee would be ignored until the triggering event actually occurred (74 DTR K-4, 4/18/16).
In issuing the guidance, the IRS backed away from earlier guidance (CCA 201606027), released Feb. 5, that said partnership obligations are recourse liabilities allocable to the partner who guarantees them upon the partnership's insolvency or bankruptcy (25 DTR K-1, 2/8/16).
“The February ruling was quite troubling to the real estate and legal community,” Michelle M. Jewett, a tax partner at Morrison & Foerster LLP in New York, told Bloomberg BNA April 18. “However, everyone viewed it as an incorrect interpretation of the regulations so it didn't really affect behavior.”
Jewett said the February guidance indicated that a partner's guarantee would cause nonrecourse debt to be treated as recourse debt on the part of the guaranteeing partner, affecting the basis and loss deductions taken by the other partners.
“The February memorandum caught the legal community off guard. The IRS received a lot of calls from the real estate industry and practitioners,” she added.
Jewett said the IRS effectively admitted it got the analysis wrong in the February ruling when it said in the April 15 memorandum that the events described in a typical bad boy guarantee are remote because the borrower wouldn't act against its self-interest by voluntarily committing those acts.
The IRS didn't formally withdraw the February guidance, but it may have attempted to distinguish the particular transaction at issue in the February ruling when in the April document it cited D.B. Zwirn Special Opportunities Fund, L.P. v. SCC Acquisitions, Inc., 902 N.Y.S.2d 93, 2010 BL 132440 (N.Y. App. Div. 2010), which held that financial statements showing financial difficulty weren't written admissions of insolvency.
Jewett said the reference to case law “was quite helpful, because in the February ruling the carve-out event relating to admissions of insolvency was the one that seemed to have caused the IRS the most concern. In discussing the case, the IRS indicated an intention to view this carve-out narrowly including by following the court's holding in Zwirn that financial reporting wasn't a formal declaration of insolvency for purposes of the bad boy guarantees.”
To contact the reporter on this story: Erin McManus in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Brett Ferguson at email@example.com
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)