September 2013
IRS Chief Counsel Describes
When Guarantors Are At Risk
for Tax Purposes
By Thomas R. Vance and Robert E. Dallman
Thomas R. Vance and Robert E. Dallman discuss the impact
of an important and new IRS announcement relating to the
“at-risk rules.”
T
he at-risk rules are an additional hurdle that
certain taxpayers must overcome before
deducting otherwise valid losses for tax
purposes. By way of background, Congress enacted
the “at-risk
rules” in Code Sec. 465 to limit certain
at-risk ru
taxpayers’
xp
payeers’’ losses
l es from activities to the amount of
losse
the
taxpayer’s
he taxp
payeer
er’ss iinvestment
nv ment in those activities.
e 1 If the
at-risk
t-risk rules
r s apply,
rule
ap
ppl a taxpayer
axpayer may
may deduct
deduct a loss
lo
oss
from
om
m an
n activity
acctivitty only
on to
o the extent
ex ent to which
wh ch the
he
taxpayer
economically
xp
payeer is considered
con
ns der
de
econom ally “at
“ t risk”
r k” for
or
the activity.
tivity 2
IRS Chief Counsel’s Offi
fice
ce recently
recently advised
a
that a
member of an LLC (who guarantees
guarantees the
th debt of the
LLC) may be “at risk” with respect to the guaranteed
debt at the time the guarantee is executed (as opposed
to when the member makes a payment on the guarantee).3 The Chief Counsel Advice (CCA) applies to
LLCs treated as partnerships or as disregarded entities
and also provides insight on the treatment of general
and limited partnerships.
The CCA resolves an issue that has arisen in many
audits of LLC members; namely that two Proposed
Treasury Regulations provide conflicting rules for
when similar guarantees increase the amount at risk
for owners of entities treated as in partnerships for
tax purposes. This update addresses the significance
Thomas R. Vance and Robert E. Dallman are attorneys in
the Milwaukee office of Whyte Hirschboeck Dudek S.C.
of the CCA to LLC members and the implications it
may have for owners of general partnerships, limited
partnerships, and S corporations.4
Rules That Limit
the Use of L
Losses
o
Taxpayer have
Taxpayers
ve to consider
on id th
three
ree sets of rules in
n de
determining
te
ning whether
ether a loss
l ss will
il be allowed:
allow d:
1. Basis Limitations.
The
owners
1
itations T
he ow
ers of eentities
ities treated
t ea
as partnerships for tax purposes and shareholders
of an S corporation may claim losses from their
entities only to the extent they have basis in their
ownership interests.5
2. At-Risk Limitations. Taxpayers can claim losses
only to the extent that they are at risk within the
meaning of Code Sec. 465.
3. Passive Losses. Losses from passive activities are
used only to the extent allowed by the Code Sec.
469 passive activity loss rules.
Each set of rules must be applied in the order listed
above.6 For example, if a partner in a partnership has a
loss that exceeds the partner’s basis in her partnership
interest, that loss is disallowed regardless of whether
the partner has a sufficient amount at risk to justify
the loss. If the partner has sufficient basis, she must
also have sufficient economic risk for purposes of
Code Sec. 465 or the loss will be suspended. Once
the loss is supported by sufficient basis and amount
©
2013 T.R. Vance and R.E. Dallman
TAXES—THE TAX MAGAZINE®
31
When Guarantors Are at Risk for Tax Purposes
at risk, it is then analyzed under the passive activity
rules of Code Sec. 469.7
As a practical matter, taxpayers encounter the
limitations imposed by basis and passive losses more
often than the at-risk rules. This may be because a
taxpayer’s amount at risk in an entity is often the
same as or close to her amount of basis in that entity.
However, certain debts (which increase basis) do not
always increase the amount at risk, and these rules
remain a trap for those who are caught unaware.8
Taxpayers Subject
to the At-Risk Rules
The at-risk rules only apply to certain taxpayers. These
are individuals and any C corporation for which (at
any time during the last half of the year) 50 percent
of the value of its outstanding stock is owned by five
or fewer individuals.9
While the at-risk rules do not apply to general partnerships, limited partnerships, LLCs or S corporations
as entities, they do apply to the owners of those entities. The owners must have sufficient amounts at risk in
their entities to deduct any losses flowing from them.
Activities
ctiv
vitiies Subject to
the
he
e At-R
A
At-Risk
Rissk Rules
ules
The at-risk
at-rrisk rules
r s aapply to any activity
activity engaged
engaged in as
a tra
trade
business
or forr the prod
production
ade or
o b
usin
ness o
uction off income,
c me,
including
off hold
holding real pro
property.
clludin
ng the
ng
t
aactivity
tivi
iv
perty 10
There are
from this broad rule for certain
re exceptions
ex
equipment leasing engaged
ed in by cclosely
osel held corporations and active businesses
ses carri
ccarried
ed on by qualified
C corporations.11
Generally, each activity engaged in by a taxpayer
is treated as a separate activity for purposes of the
at-risk rules. While some activities may be grouped
together, losses generated by one activity or group
may not be deducted against income generated by
a different activity or group.12
Amounts Considered At Risk
A taxpayer’s amount at risk includes cash contributions and certain amounts borrowed with respect to
the activity.13 The amount at risk in any activity is also
increased by the net income from that activity and
decreased by any loss allowed under Code Sec. 465.14
Debts of the entity increase a taxpayer’s amount at
risk only if (1) the taxpayer is personally liable for
32
repayment or has pledged property (other than property used in the activity) as security for the borrowed
amounts, and (2) the taxpayer is not protected against
loss by nonrecourse financing, guarantees, stop loss
agreements or other similar arrangements.15
Certain debt satisfies the two-prong test and increases
an owner’s amount at risk. An owner may borrow
money directly and contribute it to an entity, and that
contribution will increase the amount at risk in the
entity.16 A similar increase in the amount at risk may
be achieved if an owner lends money to an entity.17
However, such structures may not be desirable because
the owner would be primarily liable for the debt.
As discussed in the CCA, for other borrowed
amounts, the first prong (i.e., personally liable standard) is generally determined by analyzing whether
the taxpayer is ultimately liable for repayment as the
“payor of last resort.”18 For the second prong (i.e., the
protected against loss standard), three circuit courts
(Second, Eighth and Eleventh) consider whether
(based on the “economic realities” as of the end of the
tax year) the taxpayer is protected from loss by any arrangement. The Sixth Circuit applies the same “payor
of last resort” analysis as is used for the first prong.
The CCA addressed a taxpayer within the jurisdiction of the Seventh Circuit (taxpayers in Wisconsin,
Indiana and Illinois),
), which has not ruled on the
proper test for
prong. However, Chief
or the second
se
Counsel
Counsel expressed
esse the
he belief
be f that
hat the Seventh
Sevventh Circuit
Circu
would
the “economic
w d view
vi
“ o om realities”
r alities” standard
s andar with
w
more
m e approval
app al and applied
applied it to
o the facts
fa s at issue.
is u
Conflict in Proposed
Regulations
Though seemingly mentioned as an aside, the CCA
resolves what has been a major concern for taxpayers. The Proposed Regulations provide conflicting
instructions for how to treat the guarantee of partnership debt by a partner for purposes of Code Sec. 465.
The resolution of the conflict by the CCA is important
to the many entities treated as partnerships for tax
purposes, including general partnerships, limited
partnerships and LLCs.
There are two relevant Regulations—both issued
in 1979 and both still proposed.19 The first is Proposed Reg. §1.465-6(d), which states that:
If a taxpayer guarantees repayment of an amount
borrowed by another person (primary obligor) for
use in an activity, the guarantee shall not increase
September 2013
the taxpayer’s amount at risk. If the taxpayer repays to the creditor the amount borrowed by the
primary obligor, the taxpayer’s amount at risk shall
be increased at such time as the taxpayer has no
remaining legal rights against the primary obligor.
Under this Proposed Regulation, taxpayers are not
considered at risk based on the mere execution of a
guarantee of a second taxpayer’s debt. The guarantor’s amount at risk only increases upon payment of
the guarantee.
The second relevant Regulation is Proposed Reg.
§1.465-24(a)(2)(i), which states that:
(“T”) guaranteed the debt of an LLC (“S”) that was
wholly owned by an LLC (“P”) that was, in turn,
wholly owned by T. Initially, T, P and two brother/
sister S corporations (also wholly owned by T) were
co-guarantors. Then, the debt was modified so that
T became a co-borrower with S, but under state
law, T was only an “accommodation party.”20 So, S
remained primarily liable for the debt and had no
right to contributions from T.
Two-Prong Test for Debt
As discussed above and noted in the CCA, the debt
of an entity generally only increases its owners’
amount at risk in the entity if (1) the owner is per[w]hen a partnership incurs a liability in the consonally liable for repayment, and (2) the owner is
duct of an activity and under state law members
not protected against loss. To satisfy the first prong,
of the partnership may be held personally liable
T had to be the payor of last resort in the worstfor repayment of the liability, each partner’s
case scenario. After the debt was modified, T met
amount at risk is increased to the extent the
that prong because, in the worst-case scenario, the
partner is not protected against loss.
promissory note would be payable in full and the
lender would be unable collect from the primary
This Proposed Reguborrower, S. The lender
lation would increase
would then seek payment
The IRS announcement is
a partner’s amount at
in full from T, as co-borrisk upon execution of
rower, before looking to
important even though the ata personal
of
other guarantors.
erso
onal guarantee
gu
risk
rules
are
often
eclipsed
by
partnership
debt
To satisfy the second
ar tner
t rship
hi p de
d
eb to the
basis limitations
and the passive
ba
m ta
assive
extent
not
prong, the economic
xteent tthe
he guara
gguarantor
ant is no
protected
realities
protecteed against
a nst loss.. It
again
I
e alities at the end
e nd of
o
activity rules.
does
the year would
oees not
no
ot require
req
quiree ((as
as a preeth
w uld have
h v to
requisite
indicate
that T w
wass not
qu
uisitte to increasing
incrreasin
si thee
in
cate th
amountt at risk)
that the guarantor actually pay any
protected from loss. The CCA held that the indemri
amount on the guarantee or ssatisfy
nification of T by S (as principal borrower) did not
atisfy all iits legal rights
against the primary borrower.
protect T from loss because under the worst case
wer.
It is very common for owners of entities (which are
scenario S is assumed unable and unwilling to pay.
treated as partnerships for tax purposes) to provide
After the debt was modified, T (as co-borrower) was
guarantees of their partnerships’ debt. The inconsisat risk for full payment.
tent treatment of such guarantees by the Proposed
Comparison to General Partners
Regulations has made it difficult for many taxpayers
to determine the proper tax treatment and is often a
The CCA reasoned that an LLC member who guarsource of consternation if the treatment is audited.
antees the debt of the LLC is placed in a similar
The CCA is one step forward in providing taxpayeconomic position as a general partner with respect
ers (and IRS Agents, etc.) with clarity on this issue.
to the guaranteed debt. A general partner is at risk
However, (as discussed below) it is unclear to what
for the full amount of claims against the partnership
extent IRS personnel will heed the advice.
unless the general partner has a right to contribution
or reimbursement against any other partner. A general
partner’s amount at risk is therefore increased for any
The CCA
debt of the partnership.
Facts
A member of an LLC (who guarantees a debt of the
LLC) is (in the worst-case scenario) directly liable for
The CCA addressed the question of whether a taxthat debt and cannot seek reimbursement from the
payer’s amount at risk increased when the taxpayer
TAXES—THE TAX MAGAZINE®
33
When Guarantors Are at Risk for Tax Purposes
other LLC members (unless they are also guarantors). The Chief Counsel determined that it would
be “incongruent” for an LLC member in a similar
economic position as a general partner to have a
different amount at risk.
Even Disregarded Entities May Limit
the Amount at Risk
While indemnification by the primary borrower, S,
did not limit T’s amount at risk, indemnification by
any other party could have. The CCA explained that
even entities disregarded as separate from T (i.e., P
and the two S corporations) could provide protection from loss within the meaning of Code Sec.
465(b)(4). Accordingly, whether a guarantor (like
T before the debt was modified) is protected from
loss by a disregarded entity will depend on an
analysis of the “economic realities” as of the end
of the year.
Limiting the Application of
Proposed Reg. §1.465-6(d)
The CCA acknowledges that its conclusion might
appear to conflict with Proposed Reg. §1.465-6(d)
(1979). However, the CCA advised that the application of that
Regulation should be limited to
that Proposed
P
Prop
general
partnerships
ene
erall part
tnersh and limited partnerships
p because
those
the entities
hosse were
w
en
s primarily in existence
nc at
a the
time
promulgated.
mee thee regulation
reggulattio wass promulga
ed.
doing,
limited
partner
In so doing
d
g, thee CCA
C reaffi
affirmed that
that a lim
e pa
ner
of a limi
limited
partnership
ited part
n rsh
sh does
oes not increase
rease her
er amount
mount
at risk by
the debts of the partnership. A
by guaranteeing
gu
limited partner would still have recourse
recourse to the general
partner for reimbursement so th
the
limited
partner would
e lim
ited p
be protected from loss. This was true when the regulations were proposed and is still true today.
However, the CCA is also clear that since an LLC
does not have a general partner to which a guarantor could look for reimbursement, the Proposed
Regulation does not apply to that kind of ownership. As discussed below, the teaching of the CCA
is helpful to taxpayers evaluating their amounts at
risk in many entities.
Allocating At-Risk Amounts
Using Guarantees in an LLC
To illustrate how the reasoning in the CCA could
apply to an LLC, assume the following:
An LLC has executed a promissory note in favor
of a bank with the face amount of the note be-
34
ing $1 million. The LLC has five members, and
each owns 20 percent of the outstanding member
interests of the LLC.
At the request of the bank, each member executed a joint and several personal guarantee in an
amount equal to the then-outstanding principal
balance of the note.
In the first year, there were no principal payments
on the debt by the LLC; in the second year, there
were $100,000 of principal payments by the LLC
on the note.
The at-risk amount for each guarantor at the end
of the first year and at the end of the second year is
$200,000 and $180,000, respectfully.
No member is at risk for 100 percent of the outstanding principal balance, because (pursuant to
the terms of the joint and several guarantee) each
member is indemnified by the other members to
the extent of the other members’ ownership interests. In other words, each member is protected
from loss on the 80 percent of the debt for which
the member could seek reimbursement from the
other members. Conversely, there is no limit to
the risk on the 20 percent of the debt for which
the member cannot seek reimbursement from
other members.
Alloca ng A
Allocating
At-Risk
t Risk Amou
Amounts
nts
Using
U
ing Guar
Guarantees
antees in
General
G
ene l Par
Partnerships
tn
ners ip
The CCA provides some insight into the effect of
debt held by a general partnership on its partners.
Recall that the two-prong test for debt to increase
the amount at risk would require the partner to
(1) be personally liable for repayment, and (2) not
be protected from loss. As discussed in the CCA,
general partners are directly liable for all the debts
of the entity such that those debts could increase
the partners’ amount at risk. However, the amount
at risk for any single partner is limited by the right
that partner has to seek reimbursement from the
other partners.
The Tax Court has agreed that bona fide guarantee
agreements can allocate specific at-risk amounts
to specific partners.21 In Abramson, each partner
guaranteed a particular amount of debt and the
guarantee provided that neither the partnership
nor any other partner would pay that amount. The
guarantee was also clear that the liable partner
September 2013
had no right to seek reimbursement from the other
partners. In light of this case and the CCA, such an
arrangement should satisfy both prongs of the test
to support the amount and allocation of risk. However, Abramson contemplates a situation where the
partner is primarily liable on the debt, which may
not be desirable for that partner.
The CCA suggests an alternative arrangement
that would permit a specific partner to assume the
amount at risk for a particular debt while the entity
remains the primary borrower. The CCA determined
that, when T became a co-borrower accommodation party with S, T became the payor of last resort
(i.e., ahead of the other guarantors). Since T was
only an accommodation party, S remained primarily liable for the debt.
While this structure effectively placed T ahead of
other guarantors, more may be required to effectively place one general partner ahead of another.
In an LLC, the members would not be personally
liable for unpaid LLC debt, and the LLC members
(who did not guarantee the debt) would not indemnify the guarantor-member. However, in a general
partnership, if the partnership defaults, the general
partners are all still liable for the partnership’s debt,
and eac
each
general
ch ge
ene partner may seek reimbursement
from
the
others.
om
m th
e ot
tth s.
thers
Since
co-borrowers
and sseverSi
incee co
co-borr
borrrow
are usually jjointly an
may demand
allyy liable,
liable, a lender
len
demand payment
payment from
from
either.
Where
general
co-borrower
ith
her. Whe
W
ere a gen
al partner is a co
-b rr wer
with
partnership
partnership
th
h th
thee pa
artne
e hip
hi and
d the p
nersh p defaults,
defau ts
the lender
der may pursue payment from either the
partner or the partnership.
p. If the llender
ende pursues the
partnership, the other general
partners
nera par
tners may have to
make payments on the debt. Under general partnership law, they would only be entitled to seek
reimbursement from the co-borrower to the extent
of her interest in the partnership. The co-borrower
is thus protected from loss.
In addition, the co-borrower would have a right to
indemnification from the other general partners for
any payments she makes as a co-borrower. Again,
this limits the co-borrower’s potential loss and her
amount at risk.
To effectively allocate an amount at risk to a general
partner, the agreements between the parties should
protect the other general partners from liability (to the
lender and the co-borrower). If properly structured,
such agreements should create the necessary “economic realities” so that the co-borrower is effectively
allocated the amount at risk.
TAXES—THE TAX MAGAZINE®
Allocating At-Risk Amounts
Using Guarantees in
Limited Partnerships
In a limited partnership, there is at least one general partner and at least one limited partner. At-risk
amounts for partnership debt would be allocated
among general partners in a manner similar to the
partners in a general partnership. If there is only
one general partner, that partner is the only one
personally liable for partnership debts and would
be the only partner allocated at-risk amounts from
partnership debt, absent other economic realities
(e.g., a limited partner that is also a co-borrower).
The CCA specifically notes that the mere guarantee of partnership debt by a limited partner will
not alter that partner’s amount at risk because the
limited partner’s loss is limited by the right to seek
reimbursement from a general partner. Still, it may be
possible (as discussed above) to shift some amount
of risk from the general partner(s) to that limited
partner while leaving the partnership as the primary
borrower. In other words, if the agreements create
the right “economic realities,” the limited partner
may be allocated the amount at risk by becoming
a co-borrower.
Allloc ng At
Allocating
A
At-Risk
Risk Amou
Amounts
nts
Using
U
ing Guarantees
uar ntees in
S Cor
Corporations
oratio
ons
The CCA did not address the implications of guarantees of corporate debt by shareholders of an
S corporation. Conceptually, the shareholders of an
S corporation face the same economic risk of loss as
members of an LLC. The shareholders, like members
of an LLC, are generally shielded from the entity’s liabilities and there is no general partner from whom
to seek reimbursement. It should follow that the effect
of guarantees and related agreements should be the
same for S corporation shareholders as it would be for
members of an LLC. As noted in the CCA, taxpayers
with congruent economic risk should receive congruent treatment under the at-risk rules.
Unfortunately for S corporation shareholders, the
Proposed Regulations for the at-risk rules specifically allocate the at-risk amount from S corporation
debt in the same manner as the debt is allocated
for purposes of basis.22 The only loans that provide
an S corporation shareholder with basis are loans
35
When Guarantors Are at Risk for Tax Purposes
from the shareholder to the corporation.23 Given the
specificity of the rules for allocation of S corporation
debt, the principals of the CCA may not apply to these
entities despite any “incongruent” results.
Even if guarantee of debt could increase a shareholder’s amount at risk, it is likely of little use to the
shareholder. Recall that a taxpayer must have sufficient
basis in her stock (or loans to the corporation) to take
a loss before considering whether there is a sufficient
amount at risk to take the loss. Courts have long held
that guarantees of corporate debt do not increase the
shareholder’s basis in the S corporation.24 In fact, the
Tax Court has held that where a taxpayer-shareholder
is a co-borrower (effectively an accommodation party)
with the S corporation, the S corporation did not owe a
debt to the taxpayer-shareholder and the shareholder,
therefore, was not entitled to any basis from the loan.25
Thus, it may not matter if the amount at risk supports a
loss since it is likely already suspended for lack of basis.
At-Risk Recapture
The concept of “recapture” is usually associated
with depreciation recapture (which is triggered
by property being sold in a taxable transaction).
However, at-risk recapture presents another potential trap for taxpayers.
Losses cannot by themselves reduce the at-risk
amount below zero because losses in excess of the
amount at risk are suspended.26 However, distributions and reductions in entity debt could reduce a
taxpayer’s amount at risk below zero.
If a taxpayer’s amount at risk falls below zero, the
negative at-risk amount must be included in income
for the year.27 Such amount is then treated as a loss
suspended under the at-risk rules and carried forward
until it can be recognized.28 Essentially, a taxpayer is required to recapture deductions previously taken when
the amount at risk no longer supports those deductions.
Conclusion
The IRS announcement is important even though the
at-risk rules are often eclipsed by basis limitations
and the passive activity rules. The CCA brings needed
clarity to the treatment of guarantees of LLC debt by
members. Unfortunately, it does not directly address
guarantees by partners of general partnerships or
limited partnerships although as discussed above, it
provides some guidance for these entities.
ENDNOTES
1
2
3
4
5
6
7
SSee
ee S.
S REP. NO. 938
938,
8 94
8,
94th Cong.,
ng., 2d Sess. 47
(1976).
(19
976).
Code
Co
ode Se
Sec.
ec. 46
465(a)(1).
65(a)(1
1).
CCA
CC
CA 20
201308028
13080
028 (N
(Nov.
Nov. 14
1
14, 2012).
2).
Thiss will not address:
aaddre (1)) whether an obligation to make a capital contribution to the
company (as opposed to a direct obligation
obligation
to the creditor) increases that taxpayer’s
ta
ye
at-risk amount based on Proposed
osed Reg
Reg.
§1.465-22(a), Cf. J.E. Pritchett, 85 TC 580,
Dec. 42,449 (1985), with J.E. Pritchett,
CA-9, 87-2 USTC ¶9517, 827 F2d 644, 647
and Hubert Enterprises, Inc., 95 TCM 1194,
Dec. 57,351(M), TC Memo. 2008-46, on
remand from, CA-6, 2007-1 USTC ¶50,494,
230 FedAppx 526, aff’g in part, vac’g in part,
and rem’g in part, 125 TC 72, Dec. 56,145
(2005); (2) whether the creditor has an interest in the activity other than as a creditor, e.g.,
Pritchett, id., 827 F2d, at 647; or (3) whether
the fact that the obligation may not become
due for many years in the future suggests
that it should not increase the amount at risk
M.W. Melvin, 88 TC 63, 73–74, Dec. 43,632
(1987); Pritchett, id., 827 F2d, at 647.
Code Secs. 704(d) and 1366(d).
Reg. §1.469-2T(d)(6).
A loss disallowed by the at-risk rules is
ignored for purposes of the passive activity
36
8
9
10
11
12
loss ru
ruless aand is carried forward until it is
all
wable under
under Code
Cod Sec. 465 in a later
ter
allowable
yea
T n, it iss subject to
o the
t passive
assive activity
ty
year.. Then,
los
ode Sec
n the la
ar
loss rule
rules of C
Code
Sec. 46
469 in
later year
based the facts as they were in the year the
loss was generated. Reg. §1.469-2T(d)(1), (8).
For example, nonrecourse debt may increase
basis, but it does not increase the amount at
risk (except in the circumstances specified
in Code Sec. 465(b)(2)(B) and in the case of
qualified nonrecourse financing in Code Sec.
465(b)(6)). Also, basis may arise from debt
owed to persons with an interest in the activity (and related persons), but such debts may
not increase the at-risk amount. Most relevant
to this discussion, a debt that increases basis
does not increase the at-risk amount to the
extent the borrower is protected from loss
within the meaning of Code Sec. 465(b)(4).
Code Secs. 465(a)(1) and 542(a). Stock ownership is determined under the constructive
stock ownership rules of Code Sec. 544, as
modified by Code Sec. 465(a)(3).
Code Sec. 465(c)(3).
Code Sec. 465(c)(4) & (7).
See Code Sec. 465(d). An analysis of the
rules for the identification and grouping of
activities provided in Code Sec. 465(c)(2)
& (3) is beyond the scope of this article.
13
14
15
16
17
18
19
20
C
Code
Sec. 465(b)(1).
)
Proposed
P
po
R
Reg.
g. §1.465-22(c).
.465 22 c).
Code
C
e Sec. 465(b)(2)
65(b)(2) & (4).
). Certa
Certain
n q
qualified nonrecourse
nonrec se financ
nancing is treated
trea d as an
amount at risk. Generally, qualified nonrecourse financing is borrowed with respect
to the activity of holding real property from
a qualified lender. See Code Sec. 465(b)(6).
The amount at risk does not increase if the
lender has an interest in the activity other
than as a creditor. See Code Sec. 465(b)(3);
Proposed Reg. §1.465-8.
Proposed Reg. §1.465-10. The Proposed
Regulations would allocate partnership or
S corporation debt under the at-risk rules in
the same manner as it is allocated to provide
basis in those entities.
Initially, courts were not uniform in this regard.
cf. Pritchett, supra note 4, 827 F2d 644, with,
Pritchett, supra note 4, 85 TC 580 (1985).
It is noted that Proposed Regulations have
“no force or effect” (unlike Temporary or Final
Regulations). F.B. Offerman, 55 TCM 955,
964, Dec. 44,809(M), TC Memo. 1988-236.
In the context of debt, an “accommodation
party” executes a note without receiving a
direct benefit from the agreement. The accommodation party is gratuitously lending
its good name to the co-borrower to induce
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the lender to lend the money. The lender
may enforce agreement against the accommodation party, but the co-borrower does
not have a right to contribution.
See E.D. Abramson , 86 TC 360, Dec. 42,919
(1986) (court reviewed).
Proposed Reg. §1.465-10(c).
Code Sec. 1366(d); T. Gleason, 92 TCM 250,
24
Dec. 56,616(M), TC Memo. 2006-191.
See, e.g., E.T. Sleiman, Jr., CA-11, 99-2 USTC
¶50,828, 187 F3d 1352, aff’g, 74 TCM
1270, Dec. 52,372(M), TC Memo. 1997530; D. Leavitt Est., CA-4, 89-1 USTC ¶9332,
875 F2d 420, aff’g, 90 TC 206, Dec. 44,557
(1988); but cf. E.M. Selfe, CA-11, 86-1 USTC
¶9115, 778 F2d 769 (cited in Sleiman at
25
26
27
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1359 for an “unusual sets of facts” showing
that the true borrower was the shareholder).
In R.J. Reser, 70 TCM 1472, Dec. 51,032(M),
TC Memo. 1995-572, aff’d on this point, CA5, 97-1 USTC ¶50,416, 112 F3d 1258, 1264.
Code Sec. 465(a)(1).
Code Sec. 465(e); Proposed Reg. §1.465-3(c).
Code Sec. 465(e)(1)(B).
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