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financially at risk with respect to the leasing activity at the
close of the taxable year. Sec. 465(a)(1), (c)(1)(C).2
Investors generally are considered to be financially at risk
with respect to investments in leasing activities to the extent
they contribute money to the activities. Sec. 465(b)(1)(A).
Investors also are considered to be financially at risk with
respect to debt obligations of leasing activities to the extent
they are personally liable for repayment of the debt obligations
or to the extent they have pledged property, other than the
property used in the activities, as security for the borrowed
amounts. Sec. 465(b)(2).3
2 Sec. 465 was added to the Internal Revenue Code by the Tax
Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1520, 1531, and
applies to tax years beginning after Dec. 31, 1975.
3 Sec. 465(b)(2) provides as follows:
(2) Borrowed Amounts.n-For purposes of this
section, a taxpayer shall be considered at risk with
respect to amounts borrowed for use in an activity to
the extent that he--
(A) is personally liable for the
repayment of such amounts, or
(B) has pledged property, other than
property used in such activity, as security
for such borrowed amount (to the extent of
the net fair market value of the taxpayer’s
interest in such property).
No property shall be taken into account as security if
such property is directly or indirectly financed by
indebtedness which is secured by property described in
paragraph (1).
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