At-risk rules flow through loss limitations.

• Author: Avery, Sarah

Generally, a taxpayer's deductions from an activity are limited to amounts at risk. A taxpayer is considered at risk for an activity for the amount of money and adjusted basis of other property contributed to the activity and for amounts borrowed to use in the activity to the extent that he is personally liable for the repayment of such amounts or has pledged property as security for such borrowed amount (Sec. 465(b)).

Legislative history provides many tax shelter cases in which taxpayers were found not to be "at risk," when involved in circular, computer equipment sale-leaseback schemes. The courts have found that the offsetting payment structure in a true circular transaction has meant that a default by one party would lead each of the others to default in turn, making it unlikely that any of the parties within the circular transaction (even those with recourse rights) would disrupt the payment chain.

In Robert L. Whitmire (5/28/99), the Ninth Circuit affirmed the Tax Court, 109 TC 266 (1997), which found that the risk in a complex computer equipment leasing transaction was so layered with protections that the investment crossed the line into an exception to Sec. 465, which excludes deductions despite the existence of a risk (i.e., when loss protections remove any realistic possibility that a taxpayer will suffer a loss).

Sec. 465(b)(4) Exception

Sec. 465 provides that a taxpayer may take a deduction from leasing depreciable property only to the extent that he is at risk in the leasing activity. A limited partner is not considered to be at risk for partnership debt obligations associated with a computer leasing transaction; however, a taxpayer is personally liable if he would legally be responsible for his debt under a worst-case scenario (American Principals Leasing Corp., 904 F2d 477 (9th Cir. 1990)).

Facts

Petunia, a New York limited partnership, purchased from the Venture Company computer equipment that had been involved in four prior sales transactions, subject to a user lease, a recourse loan and a security agreement. Petunia gave Venture a limited recourse installment promissory note (Petunia-Venture note). The limited partner liability on the Petunia-Venture note was 434.75% of the partner's contributions. Petunia leased the equipment to F/S Computer Corporation; the lease provided that F/S would indemnify Petunia for any losses resulting from F/S's failure to meet the lease's terms. FSC (F/S's and Venture's grandparent company)...