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Peter E. Fisch and Mitchell L. Berg Peter E. Fisch and Mitchell L. Berg

Real estate investors have used bottom-dollar guarantees, also termed “bottom dollar payment obligations” or BDPOs, for many years to increase a partner’s basis in her partnership interest and defer gain recognition, often until the eventual (but inevitable) step-up in basis afforded to taxpayers at death under the Internal Revenue Code of 1986, as amended (the Code). However, the bottom-dollar guarantee technique was undermined by the Department of the Treasury on Oct. 5, 2016 when it issued temporary regulations (the “2016 temporary regulations”) providing that, subject to certain transition rules, bottom-dollar guarantees would no longer be effective to increase the obligated partner’s share of partnership liabilities because such obligations were regarded as lacking a significant non-tax commercial purpose. (2016 Temporary Regulations §1.752-2T; Preamble to 2016 Temporary Regulations §1.752-2T)

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