Volume 5 Winter 2011 Number 2 - Charleston Law Review

CHARLESTON LAW REVIEW [Volume 5trust if such contribution would be necessary to keep theinstrument current. 28 Likewise, a change from recourse tononrecourse constitutes a significant modification under theregulations. 29The regulations under § 1001 do not set forth definitionalrules for recourse and nonrecourse debt. 30 However, it iscommonly understood that a recourse debt instrument is one inwhich the debtor is personally liable for payment. 31 In anonrecourse setting, the debtor is not personally liable for thepayment, and the creditor’s only remedies are to securepossession of the property or require the property be sold. 32 Inthe case of a debt instrument issued by a LLC in which themembers are special purpose entities, there may be no practicaldifference between recourse and nonrecourse where, for example,the asset held by the LLC is a single asset.The partnership regulations frame the definitions of recourseand nonrecourse obligations in a different manner. A partnershiprecourse liability is one in which the partner or a related partybears the economic risk or loss, and a nonrecourse liability is onein which no partner or related person bears the economic risk ofloss for that liability. 33 The partnership definitions should notcontrol because the partnership area is concerned about policyconsiderations that may be quite different from those under §1001.There are situations in which a partnership forms adisregarded entity in the form of a limited liability company, andsuch entity then borrows money to purchase assets by means ofrecourse debt. The issue here is whether the recourse debt of thedisregarded entity should be classified as nonrecourse debt of thepartnership for tax purposes. In this type of fact pattern, thepartnership that owns the disregarded entity is not liable for the23628. § 1.1001-3(e)(5)(ii).29. Id.30. See § 1.1001.31. See BLACK’S LAW DICTIONARY 1389 (9th ed. 2009).32. See id. at 157.33. Treas. Reg. § 1.752-1(a) (2006); see also Treas. Reg. § 1.752-2(a)(2009).