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In American Principals Leasing Corp. v. United States, 904
F.2d 477 (9th Cir. 1990), it was stated with regard to section
465(b)(4), as follows:
the purpose of subsection 465(b)(4) is to suspend at
risk treatment where a transaction is structured--by
whatever method--to remove any realistic possibility
that the taxpayer will suffer an economic loss if the
transaction turns out to be unprofitable. A
theoretical possibility that the taxpayer will suffer
economic loss is insufficient to avoid the
applicability of this subsection. We must be guided by
economic reality. If at some future date the
unexpected occurs and the taxpayer does suffer a loss,
or a realistic possibility develops that the taxpayer
will suffer a loss, the taxpayer will at that time
become at risk and be able to take the deductions for
previous years that were suspended under this
subsection. [Id. at 483; citations omitted.]
The potential bankruptcy or insolvency of entities providing
guaranties or loss protection to investors is not considered in
applying section 465(b)(4) unless it creates a realistic
possibility of economic loss. Thornock v. Commissioner, 94 T.C.
439, 454 (1990); Capek v. Commissioner, 86 T.C. 14, 52 (1986).
In this regard, the report from the Senate Finance Committee with
respect to section 465 states as follows:
For purposes of this rule [i.e. section
465(b)(4)], it will be assumed that a loss-protection
guarantee, repurchase agreement or insurance policy
will be fully honored and that the amounts due
thereunder will be fully paid to the taxpayer. The
possibility that the party making the guarantee to the
taxpayer, or that a partnership which agrees to
repurchase a partner’s interest at an agreed price,
will fail to carry out the agreement (because of
factors such as insolvency or other financial
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