IRS advised on at-risk and outside-basis limits for partnership losses

Plain-English summary

The IRS advised that an at-risk limitation under section 465 is determined at the partner’s return level, after taking partnership items into account unless they are adjusted in a TEFRA partnership proceeding. It also explained that a similar analysis applies to limiting a partner’s losses by the partner’s outside basis under section 704(d).

Ruling snapshot

• Question: How are at-risk and outside-basis limits applied to partnership losses?
• Outcome: Advice given
• Key authorities: IRC §§ 465, 6231, and 704(d).

Full text (IRS public release)

ID: CCA_2010051809370437 Number: 201025074
Release Date: 6/25/2010
Office: --------
UILC: 6231.01-00

From: --------------------
Sent: Tuesday, May 18, 2010 9:37:08 AM
To:
Cc:
Subject: RE: followup on affected item discussion

At risk under section 465 is ultimately determined only at the Form 1040 of 1120 level. Hambrose v.
Commissioner. But in making that determination, we are bound by all the partnership items as reported
at the partnership level unless those partnership items are adjusted in the TEFRA partnership
proceeding. For instance, at the partnership level we would determine a partner's share of partnership
liabilities and whether those liabilities are recourse, non-recourse or shams. Following the partnership
proceeding, we would issue an affected item notice of deficiency to the indirect partner to limit his
partnership losses to the amount of his at risk.

A similar analysis applies to limitations of losses to a partner's outside basis under section 704(d). Except
that this limitation could apply to a partner that is itself a partnership