The following may not be treated as part of basis for at-risk purposes in determining your tax position in a business or investment:
Under the terms of a partnership agreement, limited partners may be required to make additional capital contributions under specified circumstances. Whether such a potential cash call increases the limited partner’s at-risk amount has been a matter of dispute.
In one case, the IRS and Tax Court held that a limited partner was not at risk with respect to a partnership note where, under the terms of the partnership agreement, he could be required to make additional capital contributions if the general partners did not pay off the note at maturity. The possibility of such a potential cash call was too uncertain; the partnership might earn profits to pay off the note and even if there were losses, the general partners might not demand additional contributions from the limited partners.
However, a federal appeals court reversed, holding that the limited partner was at risk because his obligation was mandatory and “economic reality” insured that the general partners would insure their rights by requiring the additional capital contribution.
In another case, limited partners relied upon the earlier favorable federal appeals court decision to argue that they were at risk where they could be required by the general partners to make additional cash contributions, but only in order to cover liabilities or expenses that could not be paid out of partnership assets. So long as the partnership was solvent, the limited partners could “elect out” of the call provision. Because of this election, the Tax Court held that the limited partners’ obligation was contingent, rather than unavoidable as in the earlier federal appeals court case. Thus, the cash call provision did not increase their at-risk amount.
18.224.51.67