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CASE STUDY

Without application of the at-risk
Amounts borrowed rules, D would have used the $100,000 It is important to
loss in its entirety by first applying
are not considered $60,000 of the loss to reduce stock recognize that the
to be at risk if basis and then applying the remaining amount at risk may
they are from any portion of the loss to reduce the differ from basis
debt basis from $100,000 to $60,000
person who has (Sec. 1367(b)(2)(A)). However, since under the general
an interest in the D is not considered at risk with respect S corporation basis
to her loan to W, she encounters a limit
activity or is related under Sec. 465 at the shareholder level. computations of
to a person having The unused loss carries over to the Sec. 1367.
following year.
such an interest Amounts borrowed from related
in the activity. party with no interest in the activ- rule is to allow an unlimited carryover
ity: The rule disregarding at-risk basis for for losses and deductions that were not
amounts borrowed from a person with an currently used because of the at-risk
During the year, W allocated a loss of interest in the activity does not apply to limits. The carryforward of suspended
$100,000 to D. Her use of the $100,000 amounts borrowed from a member of the at-risk losses is indefinite.
loss ordinarily would result in the basis shareholder’s family who holds no stock
adjustments shown in the chart, “Basis in the S corporation (Sec. 465(b)(3)). Comparing at-risk amounts
with stock and debt basis
Basis adjustments for loss It is important to recognize that the
amount at risk may differ from basis
under the general S corporation basis
Stock basis Debt basis Total basis
computations of Sec. 1367. Examples
of such differences include loans from
Initial investment $ 60,000 $100,000 $160,000
other investors in the activity, loans
Less passthrough loss (60,000) (40,000) (100,000) from a person related to a person (other
Remaining basis $ 0 $ 60,000 $ 60,000 than the taxpayer) having an interest
in the activity, loans secured by prop-
erty transferred to the S corporation,
Adjustments for Loss” (D’s share of the Example 4: Claiming at-risk basis and nonrecourse loans secured by the
annual loss first reduces stock basis and for certain loans from a related party: corporate stock. When an at-risk limi-
then reduces debt basis). Assume the same facts as in Ex- tation is encountered, the practitioner
Thus, D has basis under the normal ample 3. D’s loans to W with funds will need to monitor any carryover loss-
S corporation rules for both her stock borrowed from her father would be es subject to the at-risk rules, as well as
investment and her loan to W. However, considered to be at risk if her father the normal stock basis rules. ■
for at-risk purposes, she is not considered were not a shareholder. Accordingly,
to be at risk in the amount she loaned to a redemption of her father’s shares
the corporation because the funds she in- might be an appropriate remedy if D
vested were borrowed from a person who is faced with continuing restrictions
has an interest in the activity. on the deductibility of future losses.
Her father’s stock ownership in the S
corporation is considered to make D not Carrying over losses limited by Contributor
at risk with respect to the funds she bor- at-risk rules
rowed from him. This same result would Any loss not allowed under the at-risk Shaun M. Hunley, J.D., LL.M., is an exec-
occur if D had borrowed from any other limits for a particular tax year is treated utive editor with Thomson Reuters Check-
shareholder in the corporation or from a as a deduction allocable to the activity point. For more information about this
person related to someone (other than D) in the first succeeding tax year (Sec. column, contact thetaxadviser@aicpa.org.
who has an interest in the activity. 465(a)(2)). The practical effect of this

48 April 2023 The Tax Adviser