Tax News & Views Personally Guaranteed Roundup

February 21, 2020

Does a personal guarantee create at-risk basis?

Basis tracking and liability allocation in a partnership have always been important for determining the taxability of distributions and timing of loss deductions.  For the latter, there are several hurdles to clear before a passthrough loss will be allowed on a partner’s personal tax return, starting with sufficient basis and amounts “at-risk” in the activity.

A unique feature of partnership basis is the ability to increase for a partner’s share of the partnership’s liabilities, with all giving basis to take tax-free distributions but only certain types creating amounts “at-risk” to take losses.  A partner’s amount “at-risk” in an activity generally includes cash and property contributed plus amounts borrowed with respect to the activity where the partner is personally liable for repayment or has pledged personal property as collateral and is not protected against loss.  A question often arises whether “at-risk” basis is created when a partner personally guarantees a debt of the partnership, with the answer being the old tax depends.

In the case of a taxpayer taking $1.5M losses using his personal guarantees of partnership loans as amounts at-risk in 2008 and 2011, the IRS argued the personal guarantees did not actually put the taxpayer at risk and disallowed the losses. 

But the Tax Court disagreed:

“Applying the “constructive liquidation” test to these facts, we do not perceive any scenario in which [taxpayer] could not be considered economically at risk for the debt to the full extent of his guarantee. There were no other partnership assets securing any of the debt; no other partner was liable for any portion of the debt; and if the debt were due in full, [the bank] would certainly have sought payment directly from [taxpayer].”

The Court looks at the worst-case scenario when determining who has the ultimate liability, as referenced above as the constructive liquidation test.  It also helped the taxpayer’s case that he was the sole owner of one activity, as the Court explains:

“Even if we looked to [taxpayer’s 100% passthroughs] (whether or not deemed defunct or insolvent) as the obligors responsible in form for any such reimbursement, we cannot ignore the fact that [taxpayer], as the sole owner of [passthrough entities], would still bear the economic responsibility for such reimbursement in substance.”

A good outcome for taxpayers and a reminder to walk through transactions with your tax pro to ensure the best outcome if the IRS comes knocking, especially with new regulations in play!

Cite: T.C. Memo. 2020-26

No need to report some transactions in video game currency, IRS says – Dave Strausfeld, The Tax Adviser. “The IRS recently revised Form 1040, Schedule 1, which now asks taxpayers “did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” As noted above, the IRS’s Feb. 14 statement clarifies that transacting in virtual currencies as part of a game that do not leave the game environment “would not require a taxpayer to indicate this on their tax return.”

Recent Study on Financial Transaction Taxes Understates their Economic Harm – Colin Miller, Tax Foundation

Several ideas on how to raise taxes are floating around the campaign trail including taxes on wealth, book income, and financial transactions.  Revenues raised by such taxes are in debate as much as their overall economic impact.

“In addition to increasing transaction costs, an FTT would decrease asset prices. This effect would predominantly impact the wealthy who disproportionately hold financial assets, but all investors’ portfolios would be negatively affected, including middle-class taxpayers.”

The capital gains tax threat – Chris Edwards, The Hill. “Congress has kept capital gains tax rates below ordinary rates for most of the past century, and nearly all other advanced economies provide favorable rules for gains.”

Don’t forget the March 2 tax deadline for farmers and fishermen! The IRS reminds us of ways to pay them faster.

Related: Check out our Ag Producer Resource Center  

Friday Fun for Fellow Tax Nerds: 50 Interesting and Fun Facts to Lighten Up Tax Time

Hang in there tax friends!



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