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What does the term: nonrecourse deduction(s) mean?

In legal documents I have seen the term nonrecourse deduction(s) used as it pertains to taxation and other economic factors. It is not clear to me from the context what the term is meant to convey.

For instance, from a Founders Agreement found on docracy:

The Company will allocate any item of nonrecourse deduction to the Founders equally; provided, that any Founder’s partner nonrecourse deductions for any fiscal year or other period will be specially allocated to the Founder who bears the economic risk of loss with respect to the nonrecourse debt to which such partner nonrecourse deductions are attributable. [...]

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    These are legal terms of art (and may be subject to idiosyncratic definitions within the documents). This is not a question about the meanings in general discourse or writing. – bib Jul 9 '14 at 14:06
  • @bib Fair enough, however there is a legal tag which appears to provide an umbrella for questions of this nature. I have added that tag to the question. If this question should be deleted (or rather, deleted again, I already deleted it once and then undeleted it when I saw the legal tag) that is fine. – Sean Quinn Jul 9 '14 at 14:33
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A non-recourse loan is secured by some collateral, but only by that collateral. The borrower carries no other liability. Thus, if the borrower defaults, the lender can seize the collateral, but has no other recourse to satisfy the debt. If the borrower defaults and collateral is worth less than the outstanding debt, the lender is out of luck.

Non-recourse deductions are deductions related to non-recourse debt. For example, if the asset you're using to collateralize the non-recourse loan depreciates over time, that depreciation could be written off as a non-recourse deduction.

Non-recourse deductions are treated differently from other deductions because the borrower's liability is limited.

  • That's a lot more clear and understandable than other sources I've found discussing non-recourse loans etc., thanks! – Sean Quinn Jul 9 '14 at 14:58
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non-recourse adj : of, relating to, or being a debt whose satisfaction may be obtained on default only out of the particular collateral given and not out of the debtor's other assets [a mortgage] [a creditor] compare recourse - See more at: http://dictionary.findlaw.com/definition/non-recourse.html#sthash.Mwv68o6y.dpuf

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While the above answers deal with a general explanation of nonrecourse debt, they do not answer the question asked regarding partnership nonrecourse deductions and are incorrect in that regard. The language quoted above refers to tax rules under the Internal Revenue Code, dealing with the allocation of liabilities in a partnership. A partnership nonrecourse deduction is a liability for which the partnership is not liable. A partner nonrecourse deduction, on the other hand, deals with a liability for which one partner bears the economic risk of loss. The latter must be allocated to the partner liable for the debt, whereas the former can be allocated under rules described in Treas. Reg. 1.752-3(a).
The reason these allocations are important is that these allocations of debt increase a partner's basis in the partnership, so that the partner can take additional deductions on partnership expenses. This is a pretty complicated area of tax law that only people with experience with partnership tax should handle. I would recommend reading a book called "The Logic of Subchapter K" for a better handle on it, but if you are working on an agreement, I highly recommend you seek tax counsel for this.

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