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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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