Non-Recourse Finance

(redirected from Nonrecourse Debts)

Non-Recourse Finance

A loan secured by the revenue of the project the loan intends to fund, and nothing else. That is, non-recourse finance does not allow the bank or other lending institution access to the borrower's other assets in the event of default. This is a relatively high-risk form of financing; projects that utilize non-recourse finance generally have uncertain revenue streams and long loan periods.
References in periodicals archive ?
This is largely the result of the at-risk provision that denies members in LLCs taxed as partnerships at-risk basis for their share of LLC nonrecourse debts. Since all LLC debt is generally nonrecourse (either true nonrecourse or exculpatory), most LLC members can deduct only cash out-of-pocket LLC losses under the at-risk provisions.
Any reduction that occurs is a result of the rules providing that members get at-risk basis for recourse debts, but not for nonrecourse debts (except for qualified nonrecourse financing).
The Service has also indicated a willingness in its public comments to apply the same treatment to forgiveness transactions involving partnership nonrecourse debts.(27) It would be difficult to conceive of a defensible rationale for treating nonrecourse debtors otherwise so long as the Service continues to follow Rev.
The difference in the tax consequences of foreclosure on recourse and nonrecourse loans is significant because it establishes the principle that forgiveness of a nonrecourse debt does not trigger forgiveness of indebtedness income.
The Services has taken inconsistent positions on the appropriate tax treatment of discharged nonrecourse debt. As noted, the regulations under Sec.
91-31 explicitly rejected this position for nonrecourse debt reductions, in essence providing that all debt reductions should be treated the same, whether involving recourse or nonrecourse debt.
In fact, the exception for reduction of third-party nonrecourse loans in these narrow circumstances flatly contradicts the explanation provided by the Services for its refusal to allow purchase price adjustment treatment (i.e., basis reduction) for negotiated reduction in nonrecourse debt balances in other situations.(17)
Before reviewing the rules for nonrecourse debt, it is helpful to view the relevant history of the court cases that led to the development of the rules.
vs Commissioner was one of the first cases to rule on the effect that discharging nonrecourse debt has on cancellation of indebtedness income.
Revenue Ruling 92-53 issued in June, 1992 clarifies the issue of nonrecourse debt. The IRS ruled that the excess nonrecourse debt should be included in liabilities in the calculation of insolvency to the extent that the excess nonrecourse debt is discharged.
John had no personal liability with respect to the note, which was secured by an apartment building valued at $700,000 that John acquired from a third party (not the Creditor), with the proceeds of the nonrecourse debt. In 1992, when the value of the apartment building was $500,000 and the outstanding principal on the note was still $700,000, Creditor agreed to modify the terms of the note by reducing the note to $500,000.
Discharge of $200,000 nonrecourse debt will result in the taxpayer's recognizing $50,000 of debt discharge income.