Due to the current economic downturn, many corporations (Borrowers) may find themselves in financial difficulty and need to refinance their existing debt obligations with creditors (Lenders). Such Borrowers may be able to reduce their financing costs through the issuance of “distress preferred shares” (DPS). This method of refinancing generally does not adversely affect the Lenders, as they can receive equal or better after-tax returns on their investments without jeopardizing their security and priority.

On April 15, 2016, the IRS released a generic legal advice memorandum (GLAM 2016-001) (the “April GLAM”) addressing the impact of so-called “bad boy” guarantees (also known as nonrecourse carve-out guarantees) on the characterization of underlying partnership debt as recourse vs. nonrecourse under Section 752 of the Internal Revenue Code.