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.