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S corporations. Respondent determined that the loans from Mr.
Oren to HL and HS were part of a loss-limiting arrangement under
section 465(b)(4), and, therefore, Mr. Oren was not at risk for
those amounts.21 Respondent argues that where loan transactions
are structured so as to remove “any realistic possibility” of
economic loss, taxpayers are not at risk for those amounts.
Petitioners contend that the existence of circular payments is
not per se a loss-limiting arrangement. They argue that the
notes from Mr. Oren to Dart were fully recourse, and Mr. Oren’s
obligation to repay the loans was absolute even if HL or HS
failed to repay.
Generally, a taxpayer is at risk in an activity to the
extent of money contributed or amounts borrowed for use in the
activity. Sec. 465(b)(1). A taxpayer is at risk with respect to
borrowed amounts if he or she is personally liable for repayment
of the loans or, otherwise, if he or she has pledged property as
security for loan repayment. Sec. 465(b)(2). However, a
taxpayer is not at risk, even for amounts received in a fully
recourse loan, if he or she is protected by a loss limiting
arrangement. Sec. 465(b)(4). Section 465(b)(4) provides:
“Exception.--Notwithstanding any other provision of this section,
21HL and HS were both involved in the leasing of equipment;
HL leased trailers and HS leased tractors. Respondent argues,
and petitioners do not dispute, that equipment leasing is an
activity which is subject to the at risk provisions. See sec.
465(c)(1)(C).
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