For over 50 years, Bloomberg BNA’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...
March 30 — IRS guidance that says the agency would treat a nonrecourse real estate loan as recourse if it included a carve-out for a borrower who admitted insolvency would create the “world's greatest tax shelter” if the analysis weren't just plain wrong, a practitioner said.
“If this were correct, become a developer,” Richard Lipton, a partner at Baker & McKenzie LLP, said March 30 at a National Association of Real Estate Investment Trusts conference. “Developers would be allocated all of the losses from every real estate development in the country.”
The Internal Revenue Service said in CCA 201606027, released last month, that “it is reasonable to assume” that either the legal admission of inability to pay one's debt or six other standard carve-outs related to bankruptcy are likely to occur in a constructive liquidation under Treasury Regulations 1.752-2(b)(1) (25 DTR K-1, 2/8/16).
Lipton said this would mean about $600 billion worth of commercial mortgage-backed security loans, all of which include these carve-outs and more, would suddenly become recourse, making the borrower's other assets liable.
Borrowers Say No
Many real estate investment trusts engage in transactions where they are providing financing to the developer, which is usually the party that signs the nonrecourse carve-outs. Under this guidance, which is not precedential, liabilities that have been allocated to the REIT's operating partnership would instead get allotted to the developer.
“Borrowers would never sign if they thought a liability was more likely than not,” Lipton said. “In the real world, borrowers understand they do not have recourse liability on a loan that has recourse carve-outs unless they engage voluntarily in a bad act.”
This creates a problem for practitioners deciding how to report the debt on a tax return and how to properly advise clients.
Meanwhile, “to a large degree we have to stand up when the IRS issues guidance that is just wrong—and this one is just wrong—you ignore it,” Lipton said, noting real estate groups are pushing for the removal of the guidance. “We are facing the usual difficulty that it is hard to get an administrative agency to admit it screwed up.”
To contact the reporter on this story: Laura Davison in Washington at email@example.com
To contact the editor responsible for this story: Brett Ferguson at firstname.lastname@example.org
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 email@example.com.
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 firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)