Question

10.       A taxpayer is considered to be at risk under the at risk rules for which of the following and under what section of the Code?

a.         money borrowed by another for which payment is guaranteed by the taxpayer; Code Section 469(a).

b.         money borrowed by the taxpayer from another who has an equity interest in the taxpayer’s business; Code Section 61.

c.         qualified nonrecourse financing; Code Section 469.

d.         qualified nonrecourse financing; Code Section _____(if you conclude none of a, b, or c is correct, write in the citation for the correct section of the Internal Revenue Code, including the subsection and paragraph, if applicable).

Answer 1

Under Sec. 465, a taxpayer that engages in certain activities may deduct losses from those activities only to the extent the taxpayer is “at risk” for those activities at the end of the tax year. Any loss from one of these activities that is not allowed in that tax year under the at-risk rules is carried over and treated as a deduction allocable to the same activity in the next year. If losses from an at-risk activity are allowed, these losses are subject to recapture in later years if the at-risk amount is reduced below zero

Under Sec. 465(a)(1), the at-risk rules apply to individuals (including partners and S corporation shareholders), estates, trusts, and certain closely held corporations

Under Sec. 465(b)(1), a taxpayer is at risk for money and the adjusted basis of any property contributed to an activity and amounts borrowed for use in the activity, if the taxpayer is personally liable for repayment or the taxpayer pledged property (other than the property used in the activity) as security for the loan.

under Sec. 465(b)(4), a taxpayer is not at risk for amounts protected against loss through nonrecourse financing, guarantees, stop-loss agreements, or other similar arrangements

section 469 defines allowability of Passive activity losses and credits limited

Passive activity defined For purposes of section 469 (1)In generalThe term “passive activity” means any activity

(A) which involves the conduct of any trade or business, and

(B) in which the taxpayer does not materially participate

Therefore

a).money borrowed by another for which payment is guaranteed by the taxpayer is considered at risk if taxpayer is not materially participated in the trade of business of borrower. section 469(a)

b) Amounts borrowed will not be considered at risk with respect to an activity if such amounts are borrowed from any person who has an interest in the activity or from a related person to anyone (other than the taxpayer) having such an interest section 465(b)(3)(A)

C) Amounts borrowed will not be considered at risk with respect to an activitythe borrowed amount is protected against loss through nonrecourse financing, guarantees, stop-loss agreements, or other similar arrangements [IRC section 465(b)(4).