Partner guarantees may face greater scrutiny.
A partner sometimes guarantees debts at the partnership level in order to have the debt be added to the “outside basis” the partner has in his partnership interest. IRS rules require that each partner track two measures of what he put into the partnership and what he is allowed to take out: capital account and outside basis. A partner’s outside basis is the equity he invested plus his share of debt at the partnership level. Any debt for which the partner is personally liable is added to that partner’s outside basis. Otherwise the debt is allocated among partners according to complicated rules. By guaranteeing repayment of partnership debt, a partner might give himself a higher outside basis and, therefore, ability to absorb tax benefits.
Jennifer Alexander, an attorney in the office of tax policy at the US Treasury, told an American Bar Association tax section audience in late January that the partner must have a net worth at least equal to the guarantee in order for the guarantee to be respected. In addition, there must be a commercial reason for the guarantee. A guarantee will not be respected if put in place solely for tax reasons.