In a Chief Counsel Advice memorandum (CCA 201805013
), the IRS took a narrow view of the concept of “activity” for purposes of the at-risk rules and concluded that business activities conducted through a partnership and three separate S corporations could not be aggregated and treated as a single activity. As a result, amounts for which the taxpayer was considered at-risk with respect to one entity could not be used to increase the amount deemed at-risk for any other entity.
The facts of the CCA state that the taxpayer purchased a minority interest in three S corporations in exchange for non-recourse promissory notes payable to the majority owner, who continued as a shareholder in each entity. The taxpayer also purchased an interest in a partnership and personally guaranteed a portion of the partnership’s debt. The guaranteed line of credit was used to finance inventory and working capital in the partnership’s business, but was not available for use by any of the S corporations.
The partnership and the S corporations each had a similar line of business and operated in the same industry, but operated their respective businesses at different locations. The four businesses also shared some expenses such as advertising, information technology, and accounting services. However, the operations of each business were otherwise largely independent of the others.
The taxpayer sought to deduct losses flowing from the three S corporations. However, the deductibility of those losses was potentially limited under the at-risk rules under Section 465. Because the shareholder from whom the taxpayer purchased its interests continued to hold interests in the S corporations, the taxpayer was not considered “at-risk” for any of the purchase price promissory notes under Section 465(b)(3). The taxpayer argued that she could combine the S corporations with the partnership in order to determine the amount for which they were at-risk. If such aggregation was permitted, the amount for which the taxpayer was at risk with respect to the personal guaranty on the partnership debt would allow the taxpayer to deduct all the reported losses.
The IRS concluded that the taxpayer was not permitted to aggregate the activities of the separate S corporations and the partnership in determining her at-risk amount. Applying a narrow asset concept, the IRS concluded that an “activity” is the smallest indivisible piece or parcel of property, business asset, or integrated business unit in which the taxpayer possesses an ownership interest. The partnership and S corporations each constituted a separate activity. While the taxpayer grouped those entities into a single activity for purposes of the passive-activity loss rules, the IRS stated that, based upon the distinct and separate legislative goals underlying each provision, the ability to group activities under the passive-activity loss rules had no application for purposes of the at-risk rules.
The IRS indicated that aggregation might be possible in rare, compelling cases where multiple entities are owned by the same persons and the same lenders have legal claims against the assets of all the entities and their owners. Based upon the statutory language and the associated legislative history, however, the IRS concluded that as a general rule, taxpayers are prohibited from aggregating activities conducted through multiple entities for purposes of the at-risk rules.
CCA 201805013 suggests that the activity concept for purposes of the at-risk rules may be a narrow one. The CCA also highlights the distinct statutory framework behind the at-risk rules, and suggests that taxpayers may be limited in their ability to borrow aggregation concepts from the passive-activity loss rules to plug gaps in the statutory and regulatory framework for purposes of the at-risk rules.
Principal, Partnership Tax Technical Leader, Washington National Tax Office
+1 202 521 1590
Senior Manager, National Tax Standards Group, Washington National Tax Office
+1 202 521 1511
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