Rock Bordelon and Torie Bordelon, 2020 T. C. Memo. 26, filed 2/20/20, are engaged in risky business, enough to convince Judge David Gustafson to allow Rock to take passthrough losses from his wholly-owned LLC, and carry over a disallowed loss for want of basis to a year when his risky business gave him basis in his Sub S.

It’s all about personal guarantees. Rock borrowed from the Dep’t of Agriculture and from a bank to fund his business. In both cases, Rock gave personal guarantees. Though Judge Gustafson doesn’t quote the exact language, both guarantees provide that the lenders may proceed against Rock directly for payment, without the need to attempt to collect from any other person. Rock had no right to contribution from anyone, except his wholly-owned entities, and Judge Gustafson says that means Rock has the economic burden in reality.

Section 465, the at-risk rules, goes off on facts and circumstances (surprise, surprise). You can’t take losses or grow basis unless you have skin in the game. The main question is whether the guarantor of a debt is ultimately liable, with no right to recover by way of contribution, stop-loss or side agreement, from anyone else if s/he has to pay up. The test is the so-called “worst case scenario,” where obligor defaults and has nothing, and the obligee goes hunting for dollars.

But that’s different from the “realistic probability” test, that there is a realistic probability that the guarantor would suffer economic loss. Rock would win in either case.

But in a more complex case, it would get hairy.

“Among the U.S. Courts of Appeals there has been a perceived split on the appropriate framework for analyzing section 465(b)(4)–i.e., whether analyzing ‘realistic possibility’, see, e.g., Waters v. Commissioner, 978 F.2d 1310, 1316 (2d Cir. 1992), aff’g T.C. Memo. 1991-462; Young v. Commissioner, 926 F.2d 1083, 1089 (11th Cir. 1991), aff’g T.C. Memo. 1988-440 and T.C. Memo. 1988-525; Moser v. Commissioner, 914 F.2d 1040, 1048-1049 (8th Cir. 1990), aff’g T.C. Memo. 1989-142; Am. Principals Leasing Corp. v. United States, 904 F.2d 477, 483 (9th Cir. 1990), or else analyzing ‘obligor of last resort’ under a ‘worst-case scenario’, see, e.g., Emershaw v. Commissioner, 949 F.2d 841, 845 (6th Cir. 1991), aff’g T.C. Memo. 1990-246.  These cases would presumably be appealable to the Court of Appeals for the Fifth Circuit (absent a stipulation to the contrary, see sec. 7482(b)(1)(A), (2)), and we know of no opinion of that court addressing this issue.  However, the split may not really be implicated in a situation like the one in these cases.  Although we acknowledge that in factually complex cases, such as those involving multi-party sale-leaseback transactions or stop-loss agreements, choosing between the tests might lead to different results, see, e.g., Thornock v. Commissioner, 94 T.C. 439, 450 (1990), we found little distinction between the two frameworks in Wag-A-Bag, Inc. v. Commissioner, T.C. Memo. 1992-581, 64 T.C.M. (CCH) 948, 952 (1992), and held that either would lead to the same result in that case.  In these cases we follow Wag-A-Bag and find that in the circumstances before us, both approaches would lead to the same result.” 2020 T. C. Memo. 26, at pp. 23-24, footnote 10.

Taishoff says that the question is, can one devise a reasonably probable scenario wherein the guarantor would have to pony up, with no one to turn to for help? Now with enough players on the field, one might slip in a stop-loss or indemnity agreement from a minor player to bail out the guarantor. But the wise institutional lender will have none of it (not wanting the multi-bankruptcy game), and the wise guarantor will not prefer a lawsuit for contribution or indemnification from a minor player to the $1.4 million write off Rock gets from Judge David Gustafson.