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IRS Issues Another Trick: Bottom-Dollar Guarantee Applies to Certain Deficit Restoration Obligations

Our October client alert discusses the IRS final regulations preventing bottom-dollar guarantees from increasing the obligated partner’s share of partnership liabilities. T.D. 9877.

In addition to the issues discussed in our October client alert, the final regulations revised the definition of a bottom-dollar payment obligation to specifically address capital contribution obligations and deficit restoration obligations. The bottom-dollar guarantee definition includes any payment obligations from capital contribution obligations and deficit restoration obligations “other than one in which the partner is or would be required to make the full amount of the partner’s capital contribution or to restore the full amount of the partner’s deficit capital account.”

The final regulations include a rule under Treasury Regulation Section 1.704-1 that capital contribution obligations and deficit restoration obligations are not respected if the facts and circumstances otherwise indicate a plan to circumvent or avoid such obligation. The final regulations provide a non-exclusive list of factors that may indicate a plan to circumvent or avoid the obligation, including:

  1. The partner is not subject to commercially reasonable provisions for enforcement and collection of the obligation.

  2. The partner is not required to provide (either at the time the obligation is made or periodically) commercially reasonable documentation regarding the partner’s financial condition to the partnership.

  3. The obligation ends or could, by its terms, be terminated before the liquidation of the partner’s interest in the partnership or when the partner’s capital account is negative (other than when a transferee partner assumes the obligation).

  4. The terms of the obligation are not provided to all the partners in the partnership in a timely manner.

The final regulations added an exception to the third factor for when a transferee partner assumes the obligation. The IRS emphasized in the preamble that the weight to be given to any particular factor depends on the particular facts, and the presence or absence of any particular factor is not, in itself, necessarily indicative of whether the obligation is respected.

The taxpayer must disclose bottom-dollar guarantees by filing IRS Form 8275, Disclosure Statement, with the return of the partnership for the taxable year in which a bottom-dollar payment obligation is undertaken or modified, identifying the payment obligation, including whether the obligation is a guarantee, a reimbursement, an indemnity, or a deficit restoration obligation.

© 2020 Jones Walker LLPNational Law Review, Volume IX, Number 322


About this Author

Jonathan Katz Federal Tax Attorney Jones Walker

Mr. Katz is a partner in the firm's Tax & Estates Practice Group. Mr. Katz' practice focuses predominately on federal taxation, with a particular focus in federal and state new markets tax credit and historic rehabilitation tax credit transactions. In addition to his tax credit practice, his federal tax practice includes estate planning and administration, federal alcohol excise tax compliance, nonprofit formation and compliance, S corporation compliance, and business organizations.  

In his tax credit practice, Mr. Katz represents...

BRANDON D. Hughey Partner Birmingham Tax Practice Group

While he has advised clients in many aspects of federal and state taxation, Brandon’s practice currently focuses on partnership taxation and the representation of lenders and investors in connection with affordable housing transactions using tax credits under Section 42 and 47 of the Internal Revenue Code and housing and historic state tax credits, tax-exempt bonds, tax-exempt loans, MTEBs, Fannie Mae and Freddie Mac debt, HOME loans, HUD, RAD, AHP grants or loans, USDA/RD loans, and other financing sources.

Brandon has also represented clients in matters before the Internal Revenue Service and the Alabama Department of Revenue. He has represented clients in tax and real estate cases in the US District Court, Alabama state courts and the Alabama Supreme Court. He has also advised businesses on tax and corporate business formation, acquisitions, mergers and dispositions.

Prior to joining Jones Walker, Brandon was a partner at the Birmingham, Alabama, law firm Liles & Rushin, a boutique law firm focused on representing lenders and investors in affordable housing transactions around the country. Before joining Liles & Rushin, Brandon practiced at the Mobile, Alabama, firm Armbrecht Jackson focusing on taxation, real estate, oil and gas, business organizations, estate planning, and trust and estate administration. He also served as an adjunct professor at the University of Mobile in 2012, teaching Advanced Federal Taxation

Shawn J. Daray Associate New Orleans Tax Practice Group

Prior to joining Jones Walker, Shawn served as an extern for the Litigation Division of the Louisiana Department of Revenue, where he published articles on effects of the Amazon Tax for online retailers and state retroactive tax laws.

Shawn was previously a summer associate where he researched contract, corporate, and tax law on transactional issues for a tax and maritime firm. Shawn also drafted memorandum on maritime lien priority and limitation of liability.