What Is A Vertical-Slice Agreement

The new rules maintain the existing rules where “top” or “first dollar” guarantees and “vertical tranche” guarantees (i.e., a guarantee of a portion of each dollar of partnership liability) result in the secured portion of the debt being assigned to the partner`s guarantor. Some substantive guarantees for partnership debts, where the partner guarantor is responsible for at least 90% of the debt, are also still allowed. That being said, under the proposed regulations (which would come into effect upon completion) adopted under the new regulations, the IRS has provided a fairly strong anti-abuse rule that can result in even non-compliance with superior, vertical, or other eligible safeguards. Under these proposed rules, a guarantee or other obligation of a partner will not be met if the facts and circumstances support a plan to circumvent or circumvent the obligation. In addition, the new rules specify that if a partner`s ability to repay is uncertain, the IRS can use that fact as evidence of a plan to circumvent or avoid a payment obligation. The dates of entry into force of the new rules are somewhat confusing. The final provisions of Articles 707 and 752 entered into force on 5 October 2016. The temporary provisions of § 752 will apply from 5 October 2016, while the temporary regulations of § 707 (including the revised rules for “disguised sale”) will apply from 3 January 2017. Various proposed regulations would come into force prospectively from the date they are published as final regulations. Fortunately, the new provisions that ignore guarantees for the lower dollar have a “vested rights” exception that can respect these existing guarantees for up to seven years.

Partnerships have the option to apply some of the new rules before their mandatory validity date. The Treasury Department and the Internal Revenue Service (the “Service”) have recently adopted temporary regulations that significantly reduce the ability of partners to allocate partnership responsibilities among themselves by effectively eliminating a once common technique. This warning does not cover all the nuances of the new long and complex regulations, but rather highlights their impact on some more common partnership transactions. As described above, in the future, some traditionally used guarantee agreements and other potential payment obligations of partners will not be taken into account for tax purposes, despite their economic consequences. Partners and partnerships should review their existing partnership agreements, related funding documents and other arrangements to assess the impact of the new Regulations. Certain transitional facilities may apply for a limited period. Potential transactions, including joint ventures taxed as partnerships, should be carefully structured to deal with the dangers of these rules. Partners with the lowest dollar guarantees should determine the amount of the portfolio and assess the impact of the transitional rules if the debt is changed or refinanced during the seven-year transition period. Partners may consider restructuring their guarantees in the lowest dollars before the end of the transition period.

For those considering an alternative to the lower dollar guarantee, the vertical tranche guarantee can achieve the parties` objectives if it is properly structured. The first step is to determine what the potential impact of this change means for each partner, depending on the amount of the transition and when to withdraw, refinance or change the debt. .