Merely being a guarantor of a rather large outstanding partnership debt was not sufficient to allow a deduction for losses flowing through from a partnership in the case of Hargis v. Commissioner, TC Memo 2016-232.

The case involved a question of proving basis both in S corporations in which the husband was a shareholder and basis in LLCs taxed as partnerships in which the wife was a partner.  The S corporation issue was fairly simple—the debts did not flow directly from the husband to the S corporation, so there was no basis provided by the debt.

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The IRS, deciding that discretion is the better part of valor, has backed off a position staked out related to “Bad Boy” provisions in non-recourse loan documents in a Chief Counsel Advice, effectively reversing its position in Generic Legal Advice AM 2016-001.  Now the IRS believes that, generally, such provisions will not convert the debt from nonrecourse to recourse debt, a result that would torpedo the expected tax effects of many real estate partnerships.

The contracting partnership (which had two construction companies as partners) asking for the ruling in PLR 201608005 was looking to see if certain payments the contractor received prior to actually beginning work on portion of a project could be considered partnership liabilities.

The contract in question referenced two types of payments to be made by the customer.  One type of payment would be made under standard progress payment terms—if the partnership was in compliance with the contract at the time each payment milestone was reached, a payment would be due.  These payments were not the ones the contractor was asking to be ruled as liabilities.

The other type of payment was a “Notice to Proceed” payment that the customer was to make when it gave the partnership notice to proceed to the next phase of construction.  These payments were made before the completion of the work and, in fact, before any expenses were incurred by the partnership on that phase of the project.

The IRS took a look at a number of issues related to liabilities and at-risk rules related to partnership interest in the Chief Counsel Advice 201606027.  The advice relates to a partnership that acquired existing hotels and renovated them, but did not operate the hotels.  One of the partners executed a guarantee on the otherwise nonrecourse debt that could be triggered if certain conditions were met.