Photo of 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.

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.