Volume 5 Winter 2011 Number 2 - Charleston Law Review

CHARLESTON LAW REVIEW [Volume 5and a situation in which the creditor has rights over a pool ofassets that may change over time. This situation looks a lot like arecourse loan, despite the fact that the partnership is notpersonally liable for the disregarded entity’s debt under statelaw. 39 In this case, the creditor’s rights are far reaching, andthere is obviously a real risk that the disregarded entity’srecourse loan could be treated as recourse to the partnership byviewing the disregarded entity simply as a division of theowner. 40 At the very least, such a fact pattern would raiseconcerns at the Service, despite the fact that the partnership isnot liable for the debts of the disregarded entity. One argumentthat could be raised by the Service would be a substantiveargument in which the mere form of the transaction should notbe respected where the overriding realities of the transactionmirror a recourse loan. Nevertheless, the taxpayer can stillassert that the loan should be treated as a nonrecourse loan onthe theory that the creditor can seek only recovery of its debtagainst the assets of the disregarded entity. It may also make adifference if the value of the assets that exceed the original loanis only slightly in excess of the face amount of the loan, ascontrasted to a situation in which the original assets, coupledwith after-acquired assets, are greatly in excess of the faceamount of the loan.E. Changes in Accounting or Financial CovenantsThe regulations provide that a change or modification to thecustomary accounting or financial covenants is not a significantmodification. 41III. TAX CONSEQUENCES OF MODIFICATIONSIf the modification does not constitute one of the significantmodifications under the rules previously discussed, then suchmodification is tested under the general facts and circumstances39. Under state law limited liability provisions.40. Marc D. Teitelbaum, A Disregarded Entity Must Be Taken intoAccount, 773 PRAC.L.INST./TAX 9, 39 (2007).41. Treas. Reg. § 1.1001-3(e)(6) (2009).238