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Under IRC Section 752, a partnership liability is classified as either recourse or nonrecourse. A liability is considered recourse to the extent that any partner or related person bears the economic risk of loss (EROL) for that liability. A partner bears the EROL for a partnership liability if the partner or related person has an obligation to make a payment to any person. Conversely, a liability is considered nonrecourse if no partner or related person bears the EROL for that liability.
The classification of a liability as recourse or nonrecourse has implications for a partner's basis in the partnership. An increase in a partner's share of the liabilities of a partnership, or any increase in a partner's individual liabilities by reason of the assumption by such partner of partnership liabilities, is considered as a contribution of money by such partner to the partnership.
When a partner guarantees a partnership's nonrecourse obligation, the guarantee does not cause the obligation to fail to qualify as a nonrecourse liability of the partnership under section 752 until such time as one of those events actually occurs and causes the guarantor to become personally liable for the partnership debt under local law. This is because a partner's guarantee of a partnership's nonrecourse obligation is conditioned on the occurrence of certain "nonrecourse carve-out" events.
However, irrespective of the form of a contractual obligation, a partner is considered to bear the economic risk of loss with respect to a partnership liability, or a portion thereof, to the extent that the partner or related person undertakes one or more contractual obligations so that the partnership may obtain or retain a loan. The contractual obligations of the partner or related person significantly reduce the risk to the lender that the partnership will not satisfy its obligations under the loan, or a portion thereof.
In conclusion, if a partner guarantees his own portion of qualified non-recourse debt, it does not automatically convert the liability into a recourse debt. The liability will remain nonrecourse until such time as a "nonrecourse carve-out" event occurs and causes the guarantor to become personally liable for the partnership debt under local law. However, the partner's guarantee could be seen as bearing the economic risk of loss for the partnership liability, which could potentially affect the partner's basis in the partnership.
Sources:
T.D. 8274
PLR 9815001
§ 1.752-2. Partner's share of recourse liabilities.
T.D. 9876
TAM 2016-001
T.D. 8385
§ 1.704-2. Allocations attributable to nonrecourse liabilities.
CCA 201525010
T.D. 9877
