8600. How does a taxpayer who is subject to the at risk rules determine the amount “at risk” in an investment?cjumprcline202014-07-07T22:05:00Z2014-07-07T22:05:00Z25773295National Underwriter2773865148600. How does a taxpayer subject to the at risk rules determine how much is “at risk” in an investment?In the most general terms, an individual has amounts “at risk” to the extent the individual is not protected against the loss of the money or other property contributed to the activity. If the individual borrows the money contributed to the activity, the individual is “at risk” only to the extent the individual is not protected against the loss of the borrowed amount (i.e., to the extent of the individual’s personal liability for repayment of such amount)..Prop. Treas. Reg. §1.465-6. See Q 8601 for a discussion of when borrowed amounts will be considered “at risk.”A partner’s “amount at risk” is not affected by a loan made to the partnership by any other partner..Prop. Treas. Reg. §1.465-7. Payment by a purchaser to the seller for an interest in an activity is treated by the purchaser as a “contribution” to the activity..Prop. Treas. Reg. §1.465-22(d).More specifically, an individual has an amount “at risk” in an activity equal to the sum of the following: (1)The amount of money and the adjusted basis of any property that the taxpayer contributes to the activity; and (2)Amounts that the taxpayer has borrowed with respect to the activity, to the extent the taxpayer (i) is personally liable for the repayment of the loan proceeds or (ii) has pledged property (other than property otherwise used in the activity) as security on the loan (to the extent of the fair market value of the taxpayer’s interest in that property)..IRC Sec. 465(b). See Q 8601 and Q 8602 for a detailed discussion of the rules applicable when the taxpayer borrows the amounts contributed to the activity.In the case of a partnership, amounts required to be contributed under the partnership agreement are not “at risk” until the partner actually makes the contribution. Similarly, a partner’s amount at risk does not include the amount of a note that is payable to the partnership and on which the partner is personally liable until such time as the proceeds are actually applied to the activity..Prop. Treas. Reg. §1.465-22(a).An individual is not considered “at risk” with respect to any amount that is protected against loss through guarantees, stop loss agreements, nonrecourse financing (other than qualified nonrecourse financing of real estate described in Q 8602), or other similar arrangements..IRC Sec. 465(b)(4). See Rev. Rul. 78-413, 1978-2 CB 167; Rev. Rul. 79-432, 1979-2 CB 289. An investor is not at risk with respect to a note that may be satisfied by transferring to the creditor property that is derived from the activity if there is no obligation on the part of the investor-borrower to pay the difference should the value of the property transferred be less than the amount of the note..Rev. Rul. 85-113, 1985-2 CB 150.In any case, if a taxpayer engages in a pattern of conduct or utilizes a device that is not within normal business practice, or that has the effect of avoiding the “at risk” limitations, the taxpayer’s amount at risk may be adjusted to more accurately reflect the amount that is actually at risk. For example, if considering all the facts and circumstances, it appears that an event that results in an increased amount at risk at the close of one year will be accompanied by an event that will decrease the amount at risk after the year ends, these amounts may be disregarded, unless the taxpayer can establish a valid business purpose for the events and establish that the resulting increases and decreases are not a device for avoiding the at risk limitations in the earlier year..Prop. Treas. Reg. §1.465-4. In effect, the increased amount of risk at the close of the year would be ignored under the proposed regulations except in limited circumstances..Prop. Treas. Reg. §1.465-4(a).A partner’s amount at risk is increased by the amount of the partner’s share of undistributed partnership income and the partner’s share of any tax-exempt proceeds..Prop. Treas. Reg. §1.465-22(c)(1). It is reduced by distributions of taxable income and by losses deducted..Prop. Treas. Regs. §§1.465-22(b), 1.465-22(c)(2). It is also reduced by nondeductible expenses relating to production of tax-exempt income of the activity..Prop. Treas. Reg. §1.465-22(c)(2).