Using “Phantom Guarantees” to Generate Tax Benefits

The window for using “Phantom Guarantees” to generate tax benefits may soon be closing.


For many years, it has been fairly common for partners of partnerships to guarantee partnership debt in an effort to increase the adjusted tax basis of their partnership interests.  Enhancing tax basis has many valuable tax benefits to the guaranteeing partner ranging from avoiding gain recognition on distributions of money from the partnership to increasing the amount of currently recognizable partnership losses, among other tax benefits.  Of course, the key to successfully using a partner guarantee of partnership debt to enhance tax basis is minimization (or even elimination) of the corresponding financial risk to the partner.

Although a partner’s guarantee of partnership debt generally has significant value, most partners are unwilling to personally assume the debt of a partnership.  Recognizing the inherent wisdom of avoiding personal liability for third party obligations, strategies have been designed whereby a partner can personally assume partnership debt, and thereby take advantage of the corresponding tax benefits, while minimally increasing the partner’s exposure to financial risk.  One such strategy uses a so-called “bottom-dollar guarantee.”

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