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IRS Treatment Of 'Bad Boy' Guarantees Brings Uncertainty

Law360, New York (March 3, 2016, 5:42 PM EST) -- Gregory M. McKenzie

John A. Garraty

Joseph Philip Forte The IRS Office of Chief Counsel recently released 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...

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