“New IRS Partnership Regulations Shut Down Bottom Guarantees and Significantly Limit Use of Leveraged Partnerships”
On October 5th, 2016, the Internal Revenue Service published final, temporary and reproposed regulations under Sections 707 and 752 of the Internal Revenue Code of 1986. These regulations, which substantially modify regulations proposed in 2014 effect significant changes to the partnership disguised sale and debt allocation rules.
Notably, the new regulations restrict the ability to enter into “leveraged” partnership transactions by modifying the disguised sale rules so as to take into account all liabilities for disguised sale purposes as if such liabilities were nonrecourse, thereby preventing partners from guaranteeing debt in order to avoid recognition of gain. The regulations also preclude the use of “bottom-dollar” guarantees to allocate debt for basis purposes, even outside the context of a disguised sale.
This Stroock Special Bulletin examines these changes, which are particularly important for those entering into real estate deals involving partnerships or joint ventures, as real estate often has significant debt and built-in gain, which would be recognized on a deemed sale.