Tax Court Provides Path for Expanding Amounts Treated “At Risk”

Trade or business losses incurred by non-corporate taxpayers and certain closely-held corporations are notoriously difficult to access for federal income tax purposes. One of the major limitations on the ability to claim such losses are the “at risk” rules. These rules limit certain taxpayers’ ability to claim business losses to their cash investment and debt for which they are ultimately liable. In the recently-released Bordelon case, the Tax Court allowed a business owner to increase his amount “at risk” by certain debt that he had guaranteed, even though the court itself acknowledged that “it was not likely that [the Taxpayer] would ever be called on to make payments pursuant to his guarantee, and that he did not in fact ever do so.” Mark Leeds and Christian Choi, of the New York office of Mayer Brown, examine the Bordelon case, and its implications for tax planning, in this Legal Update.