113 T.C. No. 29
UNITED STATES TAX COURT
LARRY W. AND CYNTHIA J. VAN WYK, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15467-97. Filed December 21, 1999.
P and L each own 50 percent of the stock in W, an
S corporation engaged in the business of farming. P
and his wife borrowed funds from L and his wife. On
the same day, P transferred to W funds equal in amount
to the loan from L and his wife. Part of the funds P
transferred to W paid off preexisting debts P owed to
W, and the remainder represents a new debt from W to P
(the loan). R determined that P is not at risk with
respect to the loan to W and disallowed P’s share of
W’s losses.
1. Held: Pursuant to sec. 465(a), I.R.C., P is
not at risk with respect to the loan. The at-risk
treatment of amounts borrowed by a taxpayer and
contributed to an activity is governed by sec.
465(b)(1)(B), I.R.C. P is not considered to be at risk
with respect to the loan because sec. 465(b)(3)(A),
I.R.C., bars at-risk treatment with respect to amounts
that are borrowed from a person with a prohibited
interest in the activity, and L’s equity interest is
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