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IRS Releases New Rules for Bottom-Dollar Guarantee Recognition



The IRS released new proposed regulations that drastically change the treatment of partnership debts subject to “bottom-dollar” guarantees.


The proposed regulations add two new requirements for debts to be treated as recourse. The partner or related person making the guarantee must meet a dollar-for-dollar minimum net value requirement. In other words, the guarantor must have enough assets to fully cover the balance of the liability. This requirement does not apply to partners that are individuals or decedent’s estates, nor does the requirement apply to trade payables.

Also, the document that creates the payment obligation must meet the following six standards:

  • The guarantor must maintain a commercially reasonable net worth for the entire term of the obligation, or must be subject to certain asset transfer restrictions
  • The guarantor must periodically document his or her financial condition to the lender
  • The term of the payment obligation cannot be shorter than the term of the partnership’s liability under the instrument
  • The obligation cannot require that the partnership (or any other obligor) hold liquid assets in excess of that person’s reasonable needs
  • The guarantor must receive arm’s length consideration in exchange for assuming the obligation
  • The guarantee cannot be a “bottom-dollar” guarantee. A partner only bears the economic risk of loss under the new regulations if the partner would be liable for up to the full amount of its payment obligation if any amount of the liability was not satisfied. Thus, if a partner guaranteed 99% of the obligation, but not the first 1%, that partner would not be deemed to bear any of the economic risk of loss.

The regulations are prospective only. Taxpayers cannot rely on the guidance until it is finalized. Comments and requests for hearing will be accepted until April 30, 2014.

What Does CohnReznick Think?
Although the proposed regulations provide for a seven-year transition period for existing “bottom guarantees,” there will need to be some additional relief for the publicly traded real estate industry, where REITS have structured “bottom guarantees” on significant portfolios of contributing investors.  If the rules on recourse debt in the proposed regulations become final, there may be opportunities to plan for debt allocations through use of the six standards listed above.


For more information, please contact Thomas Nice, Partner, at 301-961-5542.

To learn more about CohnReznick’s Federal Tax services, please visit our webpage.

Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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