Robert L. Whitmire v. Commissioner of Internal Revenue

We are asked to determine the extent of loss protection a taxpayer may build into a business transaction so as to eliminate any realistic possibility of actual loss from an unprofitable deal, yet remain “at risk” and entitled to a deduction for invested amounts under Internal Revenue Code 26 U.S.C. § 465 . This issue arose in 1980, when taxpayer Robert L. Whitmire (“Whitmire”) claimed an “at risk” deduction under section 465 for his investment in a New York limited partnership, Petunia, one of many companies involved in a complex computer “sale-leaseback” transaction. The IRS Commissioner denied Whitmire’s deduction, and Whitmire petitioned the tax court, seeking a reversal of the Commissioner’s decision. Like the Commissioner, the tax court found that the risk in Whitmire’s complex leasing transaction was so layered with protections that the investment crossed the line into the exception to section 465, which excludes deductions where loss protections remove any realistic possibility that the taxpayer will suffer a loss. We agree, and therefore affirm the decision of the tax court.

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An appeal from the tax court may be taken to the United States Court of Appeals for the circuit…