Larry W. and Cynthia J/ Van Wyk - Page 7

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          465(b)(1)(A).  Petitioners contend that section 1.465-10(d),                
          Example, Proposed Income Tax Regs., 44 Fed. Reg. 32240 (June 5,             
          1979) "clearly illustrates this principle."  The example provides           
          as follows:                                                                 
               A is the single shareholder in X, an electing small                    
               business corporation engaged in an activity described                  
               in � 465(c)(1).  A contributed $50,000 to X in exchange                
               for its stock under � 351.  In addition, A borrowed                    
               $40,000 for which A assumed personal liability.  A then                
               loaned the entire amount to X for use in the activity.                 
               * * *  At the close of the taxable year (without                       
               reduction for any loss of X) A's amount at risk is                     
               $90,000 ($50,000 plus $40,000). * * *                                  
          As we read the foregoing example, it does not contemplate a                 
          situation where the amounts A contributed to X are borrowed by A            
          from a person who has an interest in X.  The source of the                  
          contributed amounts is critical because it is section                       
          465(b)(1)(B) and its related provisions, discussed below, rather            
          than section 465(b)(1)(A), that govern at-risk treatment for                
          amounts that are borrowed with respect to the activity.                     
               Petitioners additionally argue that section 1.465-10(c),               
          Proposed Income Tax Regs., 44 Fed. Reg. 32240 (June 5, 1979),               
          supports their argument that petitioner should be considered at             
          risk with respect to the loan.  The proposed regulation provides            
          that "The amount at risk of a shareholder of an electing small              
          business corporation * * * shall be adjusted to reflect any                 
          increase or decrease in the adjusted basis of any indebtedness of           
          the corporation to the shareholder".  Id.  Petitioners' reliance            

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