New IRS regulations spell the immediate end of bottom-dollar guarantees, indemnities and other similar obligations ("BDGs") that are a key tool to protect partners from recapture of vast amounts of historical tax deductions. Although there is a limited grandfather rule for a portion of existing BDGs, all taxpayers using such guarantees should immediately consider the implications of these new
rules on prior and new transactions, particularly in the context of umbrella partnership real estate investment trust ("UPREIT") structures.
A BDG is generally a guaranty of the least risky portion of a liability or debt. BDGs have been commonly used in various partnership transactions for many years. The new temporary regulations aimed at BDGs were issued concurrently with new regulations that change many of the rules for partnership debt allocation under Code Section 752 and the rules concerning disguised sales involving partnerships under Code Section 707. These changes to the rules concerning partnership debt allocation address fundamental aspects of partnership taxation and are worthy of significant attention since their long-term tax ramifications will be profound. For a detailed discussion on these new rules, see Tax News and Developments Client Alert New Regulations Significantly Change Partnership Disguised Sale and Debt Basis Rules distributed on October 20, 2016.
This client alert focuses solely on the new IRS temporary regulations which were intended to eliminate BDGs. Significant attention must be immediately given to any existing BDGs so as not to trip up on the limited and complex transition rules and inadvertently trigger recognition of gain. This client alert summarizes the background law and context of BDGs, the new IRS regulations aimed at BDGs, and a number of advised courses of action, some of which should be taken as soon as possible.