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)

On April 5, 2019, the Treasury Priority Guidance Plan for 2019 announced that Treasury would prioritize the issuance of final regulations concerning partnership recourse liabilities, including bottom dollar payment obligations. (2016 Temporary Regulations §1.752-2T; Preamble to 2016 Temporary Regulations §1.752-2T). In the unlikely case that final regulations are not issued, the 2016 temporary regulations would lapse on Oct. 4, 2019 and bottom-dollar guarantees would once again enable partners to increase their share of partnership liabilities and defer gain.

What is a Bottom Dollar Guarantee?