On April 15, 2016, the IRS released a memorandum addressing the impact of so-called “bad boy” guarantees on the characterization of underlying partnership debt as recourse vs. nonrecourse under Section 752 of the Internal Revenue Code. “Bad boy” guarantees are principally used in nonrecourse real estate mortgage financing transactions, especially those utilizing commercial mortgage-backed securities or securitized financing, to protect a lender against certain bad acts that are either in the control of the borrower or are customarily viewed as events where liability should be shifted to the borrower and its principals (such as fraud, material misrepresentation, and environmental issues).

Reversing its position from guidance issued earlier this year, the IRS concluded that the “bad boy” guarantees considered generally do not cause the underlying partnership obligation to fail to qualify as a nonrecourse liability of the partnership until such time as one of the “bad boy” events actually occurs (causing the guaranteeing partner to become liable for the partnership debt).

Importantly, IRS indicated that the applicable tax analysis is ultimately dependent on all the relevant facts and circumstances. Therefore, taxpayers should carefully review their financing arrangements in the context of their overall transaction and applicable circumstances, even if the terms of such financing arrangements appear similar to the terms covered by the said memorandum.

Click here to access the full alert.

TweetLikeLinkedInLinkedInGoogle Plus
Photo of Avi Reshtick Avi Reshtick

Avi Reshtick is a Member of Mintz Levin’s tax group based in the firm’s New York office. Avi represents clients on a wide range of US federal income tax matters, including mergers and acquisitions, divestitures, tax-free spin-offs, leveraged buyouts, joint ventures, fund formations, debt financing, capital markets transactions, and financial restructurings. Avi advises clients on the formation and operation of public and private partnerships, limited liability companies, and S corporations. He has significant experience advising domestic, international, and multinational clients on US federal income tax considerations relating to cross-border investment structures, business formation, and internal restructurings.

Photo of Jeffrey A. Moerdler Jeffrey A. Moerdler

Jeff Moerdler is head of the Real Estate and Communications practices and based in the firm’s New York office. With experience including almost 30 years as a general commercial real estate attorney, he has developed a unique specialty practice in the intersection of real estate with technology, communications, and energy issues. Jeff’s real estate practice is both national and local and includes representation of landlords and tenants in all types of leases; counseling owners and developers in the acquisition, sale, development, and renovation of property; advising lenders and borrowers in commercial loans; and the representation of all parties in real estate litigation.

Photo of Dan Gaquin Dan Gaquin

Dan Gaquin is Co-chair of the Firm’s Real Estate Section and is based in the Boston office. His experience covers all aspects of commercial real estate, including acquisitions and sales, development, permitting, leasing, and financing. He has extensive experience acquiring and selling commercial properties of all types, and has represented developers, owners, and operators of real estate.

Photo of Sohail Itani Sohail Itani

Sohail Itani is an Associate in the firm’s New York office. He provides legal counsel on complex tax issues involving transactions. He advises clients on the tax implications of M&A transactions (such as leveraged buyouts), investment fund formation, financing arrangements, and partnership and LLC operating agreements. Sohail assists clients through the deal negotiation process from a tax perspective, including with respect to purchase agreements for various transaction structures across several different industries. Sohail analyzes and helps clients understand the material U.S. corporate, international, partnership, and personal income tax matters implicated by their transactions.