To ice the cake, we should impose an at-risk rule
, which states that an investor can't write off losses on money for which he is not personally liable, such as the non-recourse loans that multiply McGovern's deductions.
Under paragraph 111(1)(e) limited partnership losses that cannot be deducted against other sources of income because of the at-risk rules
can generally be carried forward indefinitely and claimed against future limited partnership income.
The passive activities and at-risk rules
provide hurdles that taxpayers must overcome in order for certain losses to offset other sources of income in a given year.
A beneficiary of a qualified subchapter S trust may deduct suspended losses under the at-risk rules
and the passive loss rules when the trust disposes of the S corp stock.
The second limitation that may limit the current use of losses is the at-risk rules
of IRC section 465.
Specifically the AMT, passive activity losses, and the at-risk rules
were judged to be the most complex.
NAA/NMHC/ASHA have long urged the repeal of the overly-complicated at-risk rules
arguing they are no longer needed.
In addition, the at-risk rules
were extended to real estate.
The 1976 TRA at-risk rules
applied to non-real estate tax shelters increase the value of both REITs and real estate corporations relative to entities holding non-real estate tax shelter assets.
The second difference between passive losses and credits is that the at-risk rules
apply only to losses but not to credits.
Practitioners tend to focus on the first and last of these three and may overlook special provisions of the at-risk rules
that can allow some taxpayers to recognize more of their losses sooner.
13) The at-risk rules
are covered in detail in Chapter 17, Passive Activity and At-Risk Rules