Blog · 14 October 2026

Partnership Basis and At-Risk Rules After West: §704(d), §465 and What US CPA Firms Should Tell Clients

By Keshav Bansal, CA

Partnership basis and the at-risk rules decide whether a partner’s distributive share of losses can hit the Form 1040 at all. In West v. Commissioner, T.C. Memo. 2026-105 (filed October 7, 2026; Judge David Gustafson; docket 17890-19 per Leagle), the Tax Court denied a Texas entrepreneur’s claimed roughly $6.8 million 2016 partnership loss—and the related carryback to 2015—from a commodities trading venture in which his co-venturer supplied all the capital and he contributed labor plus a $5 million promissory note to that partner. For US CPA firms, West is a clean teaching case on IRC §§704(d) and 465: labor and your own note to a co-partner add zero outside basis, and amounts borrowed from someone with an interest in the activity are not at risk.

What happened in West

Per Ed Zollars’s October 7, 2026 analysis in Current Federal Tax Developments (summarizing the opinion), petitioner Andrew B. West and co-venturer Oscar Leo Quintanilla formed a Commodities Trading Partnership through a CTA and a Secured Promissory Note (the CTA Note) capped at $5 million, backed by an All-Assets Security Agreement. The partnership began January 1, 2014 and terminated February 26, 2016. Quintanilla contributed 100% of the capital; West contributed labor only; profits and losses were split 50/50; and West’s share of losses was treated as borrowed from Quintanilla under the CTA Note.

Zollars reports the partnership’s results as a 2014 net loss of $13,729,319 (which Quintanilla claimed in full on his 2014 return), 2015 net gains of $2,563,150, an early-2016 net loss of $148,902, aggregate net losses of $11,315,071, and a 50% distributive share of loss to West of $5,657,536. West claimed an ordinary partnership loss of about $6.8 million for 2016 (Zollars/opinion reporting cites $6,894,774) with a carryback to 2015.

Separately, a March 2015 Asset Purchase Agreement transferred about $4.5 million of West’s assets to Quintanilla to satisfy other liabilities (including a $2.2 million post-nuptial note to a former spouse)—not the CTA Note. A Texas Bexar County court in December 2021 held West still liable for $5,878,127 under the CTA Note. The IRS notice of deficiency was issued July 10, 2019. Per Zollars, the court sustained deficiencies of $463,827 for 2015 and $5,831 for 2016, plus §6662(a) accuracy-related penalties totaling $93,881 ($92,765 for 2015 and $1,116 for 2016), after also sustaining $162,091 of unreported 2015 income from a bank deposits analysis and most Schedule C disallowances (including travel where Cohan cannot rescue §274(d)).

How §704(d) partnership basis and §465 at-risk work

Under §704(d), a partner’s distributive share of partnership loss is allowed only to the extent of the partner’s adjusted basis in the partnership interest at year-end (before the loss). Outside basis under §722 generally starts with money and the adjusted basis of property contributed to the partnership, then adjusts for income, distributions and the partner’s share of partnership liabilities. Disallowed loss carries forward until the partner has basis.

Section 465 then layers a second screen: even if basis exists, the partner may deduct losses from an activity only to the amount the partner is “at risk.” Under §465(b)(3)(A), amounts borrowed from a person who has an interest in the activity (other than as a creditor) generally do not count as at risk. Passive activity limits under §469 can block what remains after both screens.

In West, the court held West had zero outside basis under §§704(d) and 722. Labor contributed to the partnership, and West’s own promissory note running to Quintanilla individually—not to the partnership—were not cash or property contributions that create basis. The opinion cited VisionMonitor Software, LLC v. Commissioner, T.C. Memo. 2014-182. Separately, §465(b)(3)(A) excluded borrowing from a 50% co-partner who had an interest in the activity. The 2015 Asset Purchase Agreement did not repay the CTA Note in a way that created §704(d) basis. Reasonable cause under §6664(c) failed, so the 20% §6662 penalties stood; decision under Rule 155.

What US CPA firms should tell clients

• Map the three screens before claiming partnership losses. K-1 Box 1 (or ordinary business loss) is only the starting point. Confirm outside basis under §704(d), amount at risk under §465, and passive activity treatment under §469—in that order—before the loss hits the 1040 or a carryback.
• Labor and partner-to-partner notes are not capital. Sweat equity and a note payable to a co-partner personally do not create outside basis the way cash or property contributed to the partnership does. Ask who holds the note and whether the partnership itself is the obligee.
• Co-partner financing often fails at-risk. When the lender is a partner with an interest in the activity, §465(b)(3)(A) can zero out at-risk even if state-law liability on the note remains real—as the Bexar County judgment against West illustrates.
• Document repayment and contribution events carefully. Asset sales or settlements that pay other debts do not automatically repay a partnership-related note or create basis. Tie each transfer to the specific instrument.
• Substantiation still matters on the rest of the return. West also sustained a bank deposits analysis adjustment and Schedule C disallowances; Cohan estimation does not overcome §274(d) for travel. Accuracy-related exposure under §6662 remains live when basis arguments fail—see our guide to accuracy-related penalties after Clear Sky.

A short firm checklist

• For any large K-1 loss, prepare a year-end outside-basis rollforward (§722/§705) before filing, and keep contribution documents that name the partnership as recipient.
• Identify every loan that funds the partner’s share: creditor vs co-partner, recourse vs nonrecourse, and whether §465(b)(3) applies.
• Separate partner-to-partner notes from partnership liabilities that can increase basis under §752.
• If the client claims a loss carryback, confirm the original-year basis and at-risk amounts—not just the carryback-year return.
• Review related partnership structures for SE-tax and limited-partner issues as well; our post on limited partner self-employment tax after Soroban covers a different but adjacent K-1 risk.
• When a client already owes after exam, plan collection early; see IRS collection alternatives.

Where this fits for Tax Brew readers

Partnership basis and at-risk worksheets need clean contribution ledgers, loan files and K-1 tie-outs, while your signing professionals own the technical calls. If your firm needs extra capacity on that preparation work, outsourced tax prep and bookkeeping support for US CPA firms can help. Email info@taxbrewglobal.com.

Check current guidance: this article summarizes West v. Commissioner, T.C. Memo. 2026-105 (filed October 7, 2026; Judge Gustafson; docket 17890-19, via Leagle), Ed Zollars’s Current Federal Tax Developments analysis (October 7, 2026), VisionMonitor Software, LLC v. Commissioner, T.C. Memo. 2014-182, and IRC §§704(d), 722, 465(b)(3)(A), 6662(a), 6664(c) and 274(d). Confirm the full opinion and current Code before advising. This is general information, not tax or legal advice. Sources as of 14 October 2026.