Distributions in excess of basis are considered a sale of stock, and gain on sale of stock does increase at-risk basis.
Agreed.
1.465-22(c)(1) states:
Income. A taxpayer's amount at risk in an activity shall be increased by an amount equal to the excess of the taxpayer's share of all items of income received or accrued from the activity during the taxable year over the taxpayer's share of allowable deductions which are allocable to the activity for the taxable year. A taxpayer's amount at risk in an activity shall also be increased by the taxpayer's share of tax-exempt receipts of the activity.
And 1.465-12 states:
In general. Income received or accrued from an activity includes gain recognized upon the disposition of the activity or an interest in the activity in accordance with §1.465-66.
In JAD’s example, if there is nothing funky going on, like NR debt, we shouldn’t have any at-risk issues.
If we pretend the $2k opening basis is a cash capital contribution, for example, basis would be as JAD has it…$2k + $1k - $4k = -$1k…plus $1k gain recognized = $0 ending basis.
His ending at-risk amount would be the same as his ending basis. Note that at this point, we have no lifetime losses hitting the taxpayer’s 1040.
What about the potential recapture of negative at-risk $2,000.
Your negative $2k isn’t right. $1k of income hit the guy’s 1040, which you’re ignoring. $1k of gain for distribution in excess of basis also hit the guy’s 1040. That makes your negative $2k a $0k, same as ending basis.
If the taxpayer claimed losses in the at-risk calculation of at least $2,000 in prior years, then we have recapture income.
Assuming this really was an issue, you’d have to define “losses.” You go to Sec 465(d) for that definition, where you’ll see it says:
(
d)Definition of loss
For purposes of this section, the term “loss” means the excess of the deductions allowable under this chapter for the taxable year (determined without regard to the first sentence of subsection (a)) and allocable to an activity to which this section applies over the income received or accrued by the taxpayerduring the taxable year from such activity (determined without regard to subsection (e)(1)(A)).So…it is a “net” concept. But it does say, “for the taxable” year, implying that we end up with one number for each year…a net positive or a net negative. So, it’s possible we have a lifetime net of $0, for example, comprised of positives for some years and negatives for other years. However, when you go to Sec 465(e), which deals with recapture of “losses,” it says:
(
2)Limitation The excess referred to in paragraph (1) shall not exceed—
(A) the aggregate amount of the reductions required by subsection (b)(5) with respect to the activity by reason of losses for all prior taxable years beginning after December 31, 1978, reduced by
(B) the amounts previously included in gross income with respect to such activity under this subsection.
It says, “for all prior taxable years” and “previously” included. This is saying that we look at things on a lifetime basis. In other words, let’s say your $2k opening basis/at-risk was comprised of the following: A $2k cash capital contribution in Year1, a $2k loss in Year1 and a $2k profit in Year2. Is it possible that any part of this [namely the $2k loss claimed in Year1 – because it fits into the definition of a loss under 465(d)] might be subject to at-risk recapture? I say…no way. On a lifetime net basis, the taxpayer hasn’t deducted any losses. One takeaway here is that you kind of have to track things on a lifetime basis, more so with partnerships. That is, the “tax basis capital account” component of basis really needs to be broken out between P&L items and non-P&L items. I use three columns – (1) capital contributions (2) distributions and (3) P&L. Only by doing so do you really know how much of the “tax basis capital account” portion of basis is comprised of lifetime profits/losses. And you need to know that to apply the at-risk rules.
If the entity is passive, why wouldn't the recapture income also be passive?
There’s no guidance on this issue.