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With respect to particular debt obligations, investors will
be regarded as personally liable for such obligations within the
meaning of section 465(b)(2)(A) if they are ultimately
economically liable to repay the obligations in the event funds
from the investment activities are not available to repay the
obligations. The fact that other investors or participants
remain in the “chain of liability” does not preclude investors
who have the ultimate economic liability from being treated as at
risk. In determining which investors or participants in a
transaction are ultimately financially responsible for the debt
obligations, the substance of the transaction controls.
Pritchett v. Commissioner, 827 F.2d 644, 647 (9th Cir. 1987),
revg. and remanding 85 T.C. 580 (1985); Follender v.
Commissioner, 89 T.C. 943, 949-950 (1987); Melvin v.
Commissioner, 88 T.C. 63, 75 (1987), affd. per curiam 894 F.2d
1072 (9th Cir. 1990); see also Raphan v. United States, 759 F.2d
879, 885 (Fed. Cir. 1985).
The above limitation on debt obligations with respect to
which investors will be considered at risk is expressly reflected
in the statutory scheme. Section 465(b)(4)4 provides that even
4 Sec. 465(b)(4) provides as follows:
(4) Exception.--Notwithstanding any other
provision of this section, a taxpayer shall not be
considered at risk with respect to amounts protected
against loss through nonrecourse financing, guarantees,
stop loss agreements, or other similar arrangements.
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