Illusory DROs: At-Risk Lessons from Hubert
12 Pages Posted: 18 Jan 2008 Last revised: 12 Sep 2015
Date Written: January 17, 2008
The Sixth Circuit recently vacated the Tax Court's decision in Hubert Enterprises, Inc. v. Commissioner that LLC members' deficit restoration obligations (DROs) did not give rise to amounts at risk under section 465. In Hubert, the LLC members did not guarantee or directly assume any portion of the entity's recourse liabilities. Thus, the case raises an issue of first impression concerning whether LLC members should be treated as at risk for a liability that is recourse to the entity under section 1001 but, absent a DRO or similar arrangement, nonrecourse to the members under section 752. Professor Burke argues that the economic-risk-of-loss (EROL) analysis under the section 752 regulations provides the appropriate framework for determining whether the LLC members were "payors of last resort" for purposes of section 465, the standard articulated by the Sixth Circuit. The article also addresses the broader problem of integrating the EROL and at-risk rules in the event the Tax Court determines, on remand, that the DROs imposed an unconditional obligation to repay the LLC's recourse liabilities. As Hubert illustrates, guidance concerning the relationship between the EROL and at-risk rules is long overdue.
Keywords: partnership, tax, LLC, liability, Hubert
JEL Classification: K34
Suggested Citation: Suggested Citation