The provisions of § 7.465-1 and § 7.465-2 may be illustrated by
the following examples:
Example (1).J and K, as equal partners, form partnership JK on
January 1, 1975. Partnership JK is engaged solely in an activity
described in section 465(c)(1). On January 1, 1975, each partner
contributes $10,000 in cash from personal assets to JK. On July 1,
1975, JK borrows $40,000 (of which J's share is $20,000) from a
bank under a nonrecourse financing arrangement secured only by the
new equipment (for use in the activity) purchased with the $40,000.
On September 1, 1975, JK reduces the amount due on the loan to
$36,000 (of which J's share is $18,000). On October 1, 1975, JK
distributes $3,000 to each partner. For taxable year 1975, JK has
no income or loss. Although J's basis in the activity is $25,000
($10,000 + $18,000 - $3,000) J's amount at risk on the effective
date is $7,000 determined as follows:
Initial amount at
risk
$10,000
Plus: Items which
increased basis other than amounts described in sec. 465(b) (3) or
(4)
0
Total
10,000
Less:
Distribution
3,000
J's amount at risk
on effective date
7,000
Example (2).Assume the same facts as in Example (1) except that JK
has a loss (as described in section 465(d) for 1975 of which J's
share is $12,000. Although J's basis in the activity is $13,000
($10,000 + $18,000 - ($3,000 + $12,000)) J's amount at risk on the
effective date is $7,000 determined as follows:
Initial amount at
risk
$10,000
Plus: Items which
increased basis other than amounts described in sec. 465(b) (3) or
(4)
0
Total
10,000
Less:
Distribution
3,000
Portion of loss
($12,000) in excess of portion of basis not at risk ($18,000)
0
Total
3,000
J's amount at risk
on effective date
7,000
Example (3).Assume the same facts as in Example (1) except that JK
has a loss (as described in section 465(d) for 1975, and J's share
is $23,000. J's basis in the activity is $2,000 ($10,000 + $18,000
- ($3,000 + $23,000)). The amount at risk on the effective date is
determined as follows:
Initial amount at
risk
$10,000
Plus: Items which
increased basis other than amounts described in sec. 465(b) (3) or
(4)
0
Total
10,000
Less:
Distribution
3,000
Portion of loss
($23,000) in excess of portion of basis not at risk ($18,000)