§ 465. Deductions limited to amount at risk
(a)
Limitation to amount at risk
(1)
In general
In the case of—
(B)
a C corporation with respect to which the stock ownership requirement of paragraph (2) of section
542
(a) is met,
engaged in an activity to which this section applies, any loss from such activity for the taxable year shall be allowed only to the extent of the aggregate amount with respect to which the taxpayer is at risk (within the meaning of subsection (b)) for such activity at the close of the taxable year.
(2)
Deduction in succeeding year
Any loss from an activity to which this section applies not allowed under this section for the taxable year shall be treated as a deduction allocable to such activity in the first succeeding taxable year.
(b)
Amounts considered at risk
(1)
In general
For purposes of this section, a taxpayer shall be considered at risk for an activity with respect to amounts including—
(2)
Borrowed amounts
For purposes of this section, a taxpayer shall be considered at risk with respect to amounts borrowed for use in an activity to the extent that he—
(B)
has pledged property, other than property used in such activity, as security for such borrowed amount (to the extent of the net fair market value of the taxpayer’s interest in such property).
No property shall be taken into account as security if such property is directly or indirectly financed by indebtedness which is secured by property described in paragraph (1).
(3)
Certain borrowed amounts excluded
(A)
In general
Except to the extent provided in regulations, for purposes of paragraph (1)(B), amounts borrowed shall not be considered to be at risk with respect to an activity if such amounts are borrowed from any person who has an interest in such activity or from a related person to a person (other than the taxpayer) having such an interest.
(B)
Exceptions
(C)
Related person
For purposes of this subsection, a person (hereinafter in this paragraph referred to as the “related person”) is related to any person if—
(i)
the related person bears a relationship to such person specified in section
267
(b) or section
707
(b)(1), or
(ii)
the related person and such person are engaged in trades or business under common control (within the meaning of subsections (a) and (b) of section
52).
(4)
Exception
Notwithstanding any other provision of this section, a taxpayer shall not be considered at risk with respect to amounts protected against loss through nonrecourse financing, guarantees, stop loss agreements, or other similar arrangements.
(5)
Amounts at risk in subsequent years
If in any taxable year the taxpayer has a loss from an activity to which subsection (a) applies, the amount with respect to which a taxpayer is considered to be at risk (within the meaning of subsection (b)) in subsequent taxable years with respect to that activity shall be reduced by that portion of the loss which (after the application of subsection (a)) is allowable as a deduction.
(6)
Qualified nonrecourse financing treated as amount at risk
For purposes of this section—
(A)
In general
Notwithstanding any other provision of this subsection, in the case of an activity of holding real property, a taxpayer shall be considered at risk with respect to the taxpayer’s share of any qualified nonrecourse financing which is secured by real property used in such activity.
(B)
Qualified nonrecourse financing
For purposes of this paragraph, the term “qualified nonrecourse financing” means any financing—
(ii)
which is borrowed by the taxpayer from a qualified person or represents a loan from any Federal, State, or local government or instrumentality thereof, or is guaranteed by any Federal, State, or local government,
(C)
Special rule for partnerships
In the case of a partnership, a partner’s share of any qualified nonrecourse financing of such partnership shall be determined on the basis of the partner’s share of liabilities of such partnership incurred in connection with such financing (within the meaning of section
752).
(D)
Qualified person defined
For purposes of this paragraph—
(i)
In general
The term “qualified person” has the meaning given such term by section
49
(a)(1)(D)(iv).
(ii)
Certain commercially reasonable financing from related persons
For purposes of clause (i), section
49
(a)(1)(D)(iv) shall be applied without regard to subclause (I) thereof (relating to financing from related persons) if the financing from the related person is commercially reasonable and on substantially the same terms as loans involving unrelated persons.
(E)
Activity of holding real property
For purposes of this paragraph—
(c)
Activities to which section applies
(1)
Types of activities
This section applies to any taxpayer engaged in the activity of—
(2)
Separate activities
For purposes of this section—
(A)
In general
Except as provided in subparagraph (B), a taxpayer’s activity with respect to each—
shall be treated as a separate activity.
(3)
Extension to other activities
(A)
In general
In the case of taxable years beginning after December 31, 1978, this section also applies to each activity—
(B)
Aggregation of activities where taxpayer actively participates in management of trade or business
Except as provided in subparagraph (C), for purposes of this section, activities described in subparagraph (A) which constitute a trade or business shall be treated as one activity if—
(4)
Exclusion for certain equipment leasing by closely-held corporations
(A)
In general
In the case of a corporation described in subsection (a)(1)(B) actively engaged in equipment leasing—
(B)
50-percent gross receipts test
For purposes of subparagraph (A), a corporation shall not be considered to be actively engaged in equipment leasing unless 50 percent or more of the gross receipts of the corporation for the taxable year is attributable, under regulations prescribed by the Secretary, to equipment leasing.
(5)
Waiver of controlled group rule where there is substantial leasing activity
(A)
In general
In the case of the component members of a qualified leasing group, paragraph (4) shall be applied—
(B)
Qualified leasing group
For purposes of this paragraph, the term “qualified leasing group” means a controlled group of corporations which, for the taxable year and each of the 2 immediately preceding taxable years, satisfied each of the following 3 requirements:
(i)
At least 3 employees
During the entire year, the group had at least 3 full-time employees substantially all of the services of whom were services directly related to the equipment leasing activity of the qualified leasing members.
(ii)
At least 5 separate leasing transactions
During the year, the qualified leasing members in the aggregate entered into at least 5 separate equipment leasing transactions.
(iii)
At least $1,000,000 equipment leasing receipts
During the year, the qualified leasing members in the aggregate had at least $1,000,000 in gross receipts from equipment leasing.
The term “qualified leasing group” does not include any controlled group of corporations to which, without regard to this paragraph, paragraph (4) applies.
(6)
Definitions relating to paragraphs (4) and (5)
For purposes of paragraphs (4) and (5)—
(B)
Leasing of master sound recordings, etc., excluded
The term “equipment leasing” does not include the leasing of master sound recordings, and other similar contractual arrangements with respect to tangible or intangible assets associated with literary, artistic, or musical properties.
(C)
Controlled group of corporations; component member
The terms “controlled group of corporations” and “component members” have the same meanings as when used in section
1563. The determination of the taxable years taken into account with respect to any controlled group of corporations shall be made in a manner consistent with the manner set forth in section
1563.
(7)
Exclusion of active businesses of qualified C corporations
(A)
In general
In the case of a taxpayer which is a qualified C corporation—
(B)
Qualified C corporation
For purposes of subparagraph (A), the term “qualified C corporation” means any corporation described in subparagraph (B) of subsection (a)(1) which is not—
(C)
Qualifying business
For purposes of this paragraph, the term “qualifying business” means any active business if—
(i)
during the entire 12-month period ending on the last day of the taxable year, such corporation had at least 1 full-time employee substantially all the services of whom were in the active management of such business,
(ii)
during the entire 12-month period ending on the last day of the taxable year, such corporation had at least 3 full-time, nonowner employees substantially all of the services of whom were services directly related to such business,
(D)
Special rules for application of subparagraph (C)
(i)
Partnerships in which taxpayer is a qualified corporate partner
In the case of an active business of a partnership, if—
(II)
during the entire 12-month period ending on the last day of the partnership’s taxable year, there was at least 1 full-time employee of the partnership (or of a qualified corporate partner) substantially all the services of whom were in the active management of such business,
then the taxpayer’s proportionate share (determined on the basis of its profits interest) of the activities of the partnership in such business shall be treated as activities of the taxpayer (and clause (i) of subparagraph (C) shall not apply in determining whether such business is a qualifying business of the taxpayer).
(ii)
Qualified corporate partner
For purposes of clause (i), the term “qualified corporate partner” means any corporation if—
(II)
such corporation has an interest of 10 percent or more in the profits and losses of the partnership, and
(III)
such corporation has contributed property to the partnership in an amount not less than the lesser of $500,000 or 10 percent of the net worth of the corporation.
For purposes of subclause (III), any contribution of property other than money shall be taken into account at its fair market value.
(iii)
Deduction for owner employee compensation not taken into account
For purposes of clause (iii) of subparagraph (C), there shall not be taken into account any deduction in respect of compensation for personal services rendered by any employee (other than a non-owner employee) of the taxpayer or any member of such employee’s family (within the meaning of section
318
(a)(1)).
(iv)
Special rule for banks
For purposes of clause (iii) of subparagraph (C), in the case of a bank (as defined in section
581) or a financial institution to which section
591 applies—
(I)
gross income shall be determined without regard to the exclusion of interest from gross income under section
103, and
(II)
in addition to the deductions described in such clause, there shall also be taken into account the amount of the deductions which are allowable for amounts paid or credited to the accounts of depositors or holders of accounts as dividends or interest on their deposits or withdrawable accounts under section
163 or
591.
(v)
Special rule for life insurance companies
(I)
In general
Clause (iii) of subparagraph (C) shall not apply to any insurance business of a qualified life insurance company.
(E)
Definitions
For purposes of this paragraph—
(i)
Non-owner employee
The term “non-owner employee” means any employee who does not own, at any time during the taxable year, more than 5 percent in value of the outstanding stock of the taxpayer. For purposes of the preceding sentence, section
318 shall apply, except that “5 percent” shall be substituted for “50 percent” in section
318
(a)(2)(C).
(iii)
Special rules relating to communications industry, etc.
(I)
Business not excluded where taxpayer not completely at risk
A business involving the use, exploitation, sale, lease, or other disposition of property described in subclause (II) of clause (ii) shall not constitute an excluded business by reason of such subclause if the taxpayer is at risk with respect to all amounts paid or incurred (or chargeable to capital account) in such business.
(II)
Certain licensed businesses not excluded
For purposes of subclause (II) of clause (ii), the provision of radio, television, cable television, or similar services pursuant to a license or franchise granted by the Federal Communications Commission or any other Federal, State, or local authority shall not constitute an excluded business by reason of such subclause.
(F)
Affiliated group treated as 1 taxpayer
For purposes of this paragraph—
(i)
In general
Except as provided in subparagraph (G), the component members of an affiliated group of corporations shall be treated as a single taxpayer.
(ii)
Affiliated group of corporations
The term “affiliated group of corporations” means an affiliated group (as defined in section
1504
(a)) which files or is required to file consolidated income tax returns.
(iii)
Component member
The term “component member” means an includible corporation (as defined in section
1504) which is a member of the affiliated group.
(G)
Loss of 1 member of affiliated group may not offset income of personal holding company or personal service corporation
Nothing in this paragraph shall permit any loss of a member of an affiliated group to be used as an offset against the income of any other member of such group which is a personal holding company (as defined in section
542
(a)) or a personal service corporation (as defined in section
269A
(b) but determined by substituting “5 percent” for “10 percent” in section
269A
(b)(2)).
(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 taxpayer during the taxable year from such activity (determined without regard to subsection (e)(1)(A)).
(e)
Recapture of losses where amount at risk is less than zero
(1)
In general
If zero exceeds the amount for which the taxpayer is at risk in any activity at the close of any taxable year—