Partners Greg McKenzie
and Jack Garraty
authored the Law360
article “IRS Treatment Of 'Bad Boy' Guarantees Brings Uncertainty.” The article discusses the IRS Office’s legal memorandum 201606027 that calls into question two fundamental and well-established aspects concerning the tax treatment of investors in real estate limited partnerships and limited liability companies that utilize nonrecourse financing. The memorandum concludes that a customary carveout “bad boy” guarantee given by an LLC member in connection with the LLC’s real estate nonrecourse financing was sufficient to cause the financing (a) to constitute a “recourse” liability for purposes of determining the members’ tax basis in the LLC and (b) to fail to be a “qualified nonrecourse financing” under the at-risk investment rules.
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