^th internal memo written by the Internal Revenue Service's Office of Chief Counsel client brief How It Started A Meeting With the IRS Chief Counsel client advisory

The participants explained to the IRS, among other matters, that the bad boy guaranty is a device to prevent the borrower from taking certain voluntary actions, such as a bankruptcy filing, and the guarantor is very unlikely to ever take any of the prohibited actions or have liability on the guaranty.

The IRS Reverses Itself

The new memorandum acknowledged that a carve-out or bad boy guarantee is a device to prevent the borrower from taking actions which violate the terms of the loan in a manner which might harm the value of the property or interfere with the lender's exercise of remedies. The IRS concluded that the adverse financial impact to the guarantor resulting from the prohibited acts would be contrary to the guarantor's self-interest, making the acts and resulting personal liability very unlikely to occur. The IRS acknowledged that the bad boy acts were all voluntary acts of the guarantor, not matters which a lender could use to enforce personal liability in the absence of specific voluntary actions. Therefore, the New Memorandum concludes that a bad boy guarantee does not cause a non-recourse loan to become recourse unless one of the enumerated bad boy acts actually occurs.

^th internal memo written by the Internal Revenue Service's Office of Chief Counsel client brief Loeb & Loeb LLP. Loeb & Loeb How It Started A Meeting With the IRS Chief Counsel client advisory Kelley Drye & Warren LLP

The participants explained to the IRS, among other matters, that the bad boy guaranty is a device to prevent the borrower from taking certain voluntary actions, such as a bankruptcy filing, and the guarantor is very unlikely to ever take any of the prohibited actions or have liability on the guaranty.