Sec. 7.465-5 Examples.
The provisions of section 7.465-1 and section 7.465-2 may be illustrated by the following examples:
Example (1). J and K, as equal partners, form partnership JK on January 1, 1975. Partnership JK is engaged solely in an activity described in section 465(c)(1) . On January 1, 1975, each partner contributes $10,000 in cash from personal assets to JK. On July 1, 1975, JK borrows $40,000 (of which J's share is $20,000) from a bank under a nonrecourse financing arrangement secured only by the new equipment (for use in the activity) purchased with the $40,000. On September 1, 1975, JK reduces the amount due on the loan to $36,000 (of which J's share is $18,000). On October 1, 1975, JK distributes $3,000 to each partner. For taxable year 1975, JK has no income or loss. Although J's basis in the activity is $25,000 ($10,000 + $18,000 - $3,000) J's amount at risk on the effective date is $7,000 determined as follows:
Initial amount at risk | $10,000 |
Plus: Items which increased basis other than amounts described in sec. 465(b) (3) or (4) | 0 |
Total | 10,000 |
Less: Distribution | 3,000 |
J's amount at risk on effective date | 7,000 |
Example (2). Assume the same facts as in Example (1) except that JK has a loss (as described in section 465(d) for 1975 of which J's share is $12,000. Although J's basis in the activity is $13,000 ($10,000 + $18,000 - ($3,000 + $12,000)) J's amount at risk on the effective date is $7,000 determined as follows:
Initial amount at risk | $10,000 |
Plus: Items which increased basis other than amounts described in sec. 465(b) (3) or (4) | 0 |
Total | 10,000 |
Less: Distribution | 3,000 |
Portion of loss ($12,000) in excess of portion of basis not at risk ($18,000) | 0 |
Total | 3,000 |
J's amount at risk on effective date | 7,000 |
Example (3). Assume the same facts as in Example (1) except that JK has a loss (as described in section 465(d) for 1975, and J's share is $23,000. J's basis in the activity is $2,000 ($10,000 + $18,000 -- ($3,000 + $23,000)). The amount at risk on the effective date is determined as follows:
Initial amount at risk | $10,000 |
Plus: Items which increased basis other than amounts described in sec. 465(b) (3) or (4) | 0 |
Total | 10,000 |
Less: Distribution | 3,000 |
Portion of loss ($23,000) in excess of portion of basis not at risk ($18,000) | 5,000 |
Total | 8,000 |
J's amount at risk on the effective date | 2,000 |
[T.D. 7504, 42 FR 42198, Aug. 22, 1977]
