At-risk rules and LLCs.

• Author: Moore, Philip E.
• Position: Limited liability companies

The at-risk rules are designed to prevent a taxpayer from deducting losses in excess of his economic investment in an activity. Under Sec. 465, a taxpayer's deductible loss prior to applying any passive activity loss rules is generally limited to the amount he is considered to be at-risk. A taxpayer is considered to be at-risk for an activity by taking into account his cash contributions, adjusted basis of property contributed to the activity and amounts borrowed with respect to that activity. Under Sec. 465, the amounts borrowed can be used for an activity in calculating the at-risk amount to the extent that the taxpayer is personally liable for the repayment of such amount or has pledged assets not used in the activity as security for the borrowed amount. The taxpayer is not considered to be at-risk if the amount borrowed comes from a person related to a person who has the interest in the activity. If the lender has an interest in the activity other than as a creditor, or the taxpayer is protected against loss by guarantees, stop-loss agreements or similar arrangements, or the taxpayer is not personally liable for debt repayment, he would not be considered to be at-risk under Sec. 465.

Field Service Advice (CCA) 200025018 addresses the liabilities of the members of a limited liability company (LLC) and the applicability of the at-risk rules. This memorandum addressed two issues. The first was whether a member, who (in his individual capacity) had entered into an agreement to pay an LLC liability, would be considered at-risk for that liability. The second issue was whether each member who had guaranteed an LLC liability would be at-risk for such amounts. In each situation, the FSA assumed that the LLC would be considered a partnership for Federal income tax purposes; thus, the members were similar to limited partners. It was also assumed that, to the extent a member incurred a liability, he incurred a...