Bad Boy Guarantee Makes Loan Recourse?

By: 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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