Anthony J.A. Bryan Jr v. Comm., T.C. Memo 2023-74
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IRS Disallows NOLs by Reaching Back to Prior-Year K-1s (Anthony J.A. Bryan Jr v. Comm., T.C. Memo 2023-74)
In 2007, Bryan gave a Watley Group, LLC (taxed as a partnership) a purported promissory note for $2.7 million with a single balloon payment due on or before Dec. 31, 2030 and interest accruing at 4.75%. The note was neither secured nor collateralized to any assets. Watley filed Forms 1065 for years 2008- 2011 without showing the $2.7 million note on the balance sheet. Watley gave Pool Boy the Movie, LLC (another tax partnership) a promissory note in the amount of $2.7 million in exchange for a 20% interest in Pool Boy. The terms of the note were the same as Bryan’s note to Watley. Pool Boy borrowed funds to make a movie, but neither Watley nor Bryan were personally liable for the loan. Pool Boy issued a 2007 K-1 to Watley showing a $3 million loss. The K-1 loss created an NOL that carried forward to years 2010 to 2012.
The court found that Bryan did not have adequate basis and was not at risk for any amounts in either Watley or Pool Boy. With no basis or amount at risk, the loss on the K-1s were not allowed as deductions and the NOL deductions in 2010 to 2012 were not allowed.