Also, under these rules, a taxpayer's capital is not "at risk" in the business, even as to the equity capital which he has contributed to the extent he is protected against economic loss of all or part of such capital by reason of an agreement or arrangement for compensation or reimbursement to him of any loss which he may suffer. Under this concept, an investor is not "at 1987 U.S. Tax Ct. LEXIS 5">*21 risk" if he arranges to receive insurance or other compensation for an economic loss after the loss is sustained, or if he is entitled to reimbursement for part or all of any loss by reason of a binding agreement between himself and another person. [S. Rept. 94-938, at 49 (1976), 1976-3 C.B. (Vol. 3) 87; fn. ref. omitted.]

Where a taxpayer's debt obligation constitutes only a secondary liability under which the taxpayer has a right of reimbursement against the primary obligor, the taxpayer will not be treated as at risk with respect to such an obligation. The taxpayer's right of reimbursement from the primary obligor is regarded as a type of protection against loss within the meaning of section 465(b)(4). Brand v. Commissioner, 81 T.C. 821">81 T.C. 821, 81 T.C. 821">828 (1983).

The parties herein agree that Marcus was at risk within the meaning of section 465 with respect to his portion (namely, $ 25,000) of the $ 35,000 cash downpayment Medici paid to ACG. The parties also agree that Marcus was not at risk under section 465 with respect to the recourse promissory note Medici gave to ACG reflecting Medici's obligation to make additional capital contributions1987 U.S. Tax Ct. LEXIS 5">*22 to ACG because that mere obligation did not result in money being contributed to the activity nor did it constitute the borrowing of money for use in the activity as required by section 465(b)(2)(A) and (B).

The disputed question herein is the extent to which Marcus is to be considered at risk under section 465 with respect to the $ 3,500,000 loan ACG obtained from the First National Bank of Chicago. The resolution of this issue turns on whether Marcus, as a general partner of Medici, was "personally liable" within the meaning of section 88 T.C. 63">*72 465(b)(2)(A) for repayment of the bank loan to ACG and, if so, whether and to what extent Marcus was protected against loss within the meaning of section 465(b)(4) by a right of contribution from the other limited partners of ACG.

Petitioners argue that Marcus was personally liable for repayment of the $ 3,500,000 bank loan because (1) the bank would not have made the loan to ACG if it had not received as collateral therefor the security interest in Medici's recourse promissory note to ACG and in the promissory notes of the other limited partners of ACG; (2) the structure of the financing establishes that, absent1987 U.S. Tax Ct. LEXIS 5">*23 repayment from the proceeds of distributing the film, the bank and ACG would look to the loan collateral (i.e., the recourse promissory notes of ACG's limited partners) for repayment of the bank loan; and (3) the limited partners were not mere guarantors of ACG's obligation to repay the bank loan, and they had no rights of reimbursement from ACG or the general partners of ACG with respect to their recourse promissory notes.

Respondent argues that Marcus (as well as the other limited partners of ACG) were not personally liable on the bank loan within the meaning of section 465(b)(2)(A) because a taxpayer's at-risk amount is determined at the end of each year, and as of the end of 1979 (the year at issue herein), Marcus had not made, and was not obligated to make, any of the payments on Medici's recourse promissory note to ACG. Respondent therefore argues that if in 1979 ACG had failed to repay the bank loan, the bank would not have been able to demand repayment thereof from Marcus (through Medici) because under the terms of Medici's note, no payments were due thereon until 1981. Thus, respondent contends that Marcus was not personally liable for repayment of any amount of the bank1987 U.S. Tax Ct. LEXIS 5">*24 loan during 1979 and that Marcus' obligation with respect to the deferred capital contributions is not includable in Marcus' yearend at-risk amount. Respondent also argues that Marcus was not "economically at risk" with respect to the bank loan. For the reasons explained below, we agree with petitioners and hold that as of December 31, 1979, Marcus is to be 88 T.C. 63">*73 regarded as "personally liable" within the meaning of section 465, on the debt obligation of ACG to the bank.

Respondent correctly states that the determination of a taxpayer's amount at risk is made at the end of each taxable year of the partnership or other activity. Sec. 465(a). ⁶ Respondent argues therefore that a taxpayer's at-risk amount does not include amounts that a taxpayer is "required to contribute to the partnership until such time as the contribution is actually made," citing the proposed regulations under section 465. ⁷ As explained, however, petitioners herein do not contend that Marcus' at-risk amount increased solely by virtue of his obligation, as a general partner of Medici, to contribute additional capital to ACG in years after 1979. Rather, petitioners argue that Marcus' at-risk amount increased1987 U.S. Tax Ct. LEXIS 5">*25 because Medici became personally liable on the recourse obligation of ACG to the bank when its recourse note to ACG was pledged to the bank as collateral for the bank loan.

1987 U.S. Tax Ct. LEXIS 5">*26 It cannot seriously be questioned that debt obligations of a partnership that are payable in later years generally are to be included in the at-risk amounts of the partners that are personally liable therefor. Sec. 465(b)(2)(A). The proposed regulations under section 465 and final regulations under section 752 contemplate that obligations due in later years will be included in the computation of a partner's at-risk amount and in the computation of his basis. See sec. 1.465-24(a)(2), Proposed Income Tax Regs.; sec. 1.752-1(e), Income Tax Regs. Numerous cases have so held. See, e.g., United States v. Raphan, 759 F.2d 879">759 F.2d 879 (Fed. Cir. 1985) (taxpayer's basis increased with respect to debt obligations due 6 years subsequent to the taxable years at issue); 88 T.C. 63">*74 Abramson v. Commissioner, 86 T.C. 360">86 T.C. 360 (1986) (taxpayer's at-risk and basis amounts increased with respect to debt obligations due 10 years subsequent to the taxable years at issue). Furthermore, there is no suggestion in section 465 that debt obligations that do not mature until later years are to be excluded from the taxpayer's at-risk amount.

Our recent opinion1987 U.S. Tax Ct. LEXIS 5">*27 in Pritchett v. Commissioner, 85 T.C. 580">85 T.C. 580 (1985), on appeal (9th Cir., May 2, 1986), does not stand for a contrary result. In Pritchett, limited partners made initial cash contributions to a partnership and agreed to make additional cash contributions in later years if called upon to do so by the general partners in order to repay a recourse loan extended to the partnership. We determined in Pritchett that the limited partners were not at risk with respect to their contingent cash call obligations. The loan did not accrue interest and no payments of principal were due on the loan for 15 years. See sec. 465(b)(3). In sum, the alleged recourse debt obligations of the limited partners to make additional cash contributions were not definite and fixed and were tainted by the non-arm's-length nature of the underlying partnership loan. ⁸ In the instant case, the limited partners' obligations to make additional capital contributions to ACG were definite and fixed, and ACG negotiated the bank loan at arm's length. Although Medici's note to ACG was not payable in 1979, the year in issue, it does not follow that Medici lacked personal liability 1987 U.S. Tax Ct. LEXIS 5">*28 on the bank loan in 1979.

In contending that Marcus was not personally liable on the bank loan, respondent also argues that Marcus and the other limited partners of ACG were not "economically at risk" with respect to the debt obligation of ACG to the bank. Although respondent does not elaborate1987 U.S. Tax Ct. LEXIS 5">*29 upon this argument on brief, he apparently contends that the limited partners' obligations with respect to the bank loan were 88 T.C. 63">*75 secondary to the primary obligations of ACG and the general partners of ACG with respect thereto.

Recent cases establish that with respect to a particular debt obligation, a partner will be regarded as personally liable within the meaning of section 752 (for basis purposes) and section 465(b)(2)(A) (for at-risk purposes) if he has the ultimate liability to repay the debt obligation of the partnership in the event funds from the partnership's business and investments are not available for that purpose. United States v. Raphan, 759 F.2d 879">759 F.2d 879, 759 F.2d 879">886 (Fed. Cir. 1985); Gefen v. Commissioner, 87 T.C. 1471">87 T.C. 1471 (1986); Abramson v. Commissioner, 86 T.C. 360">86 T.C. 360, 86 T.C. 360">375-376 (1986); Smith v. Commissioner, 84 T.C. 889">84 T.C. 889, 84 T.C. 889">907-908 (1985), affd. without published opinion 805 F.2d 1073">805 F.2d 1073 (D.C. Cir. 1986).

The relevant question is who, if anyone, will ultimately be obligated to pay the partnership's recourse obligations if the partnership1987 U.S. Tax Ct. LEXIS 5">*30 is unable to do so. It is not relevant that the partnership may be able to do so. The scenario that controls is the worst-case scenario, not the best case. Furthermore, the fact that the partnership or other partners remain in the "chain of liability" should not detract from the at-risk amount of the parties who do have the ultimate liability. The critical inquiry should be who is the obligor of last resort, and in determining who has the ultimate economic responsibility for the loan, the substance of the transaction controls. 759 F.2d 879">United States v. Raphan, supra at 885. ⁹

Of interest to our resolution of this question is the direction given to the Treasury by Congress in the Deficit Reduction1987 U.S. Tax Ct. LEXIS 5">*31 Act of 1984, in response to the decision of the Claims Court in Raphan v. United States, 3 Cl. Ct. 457">3 Cl. Ct. 457 (1983). In Raphan, ¹⁰ the Claims Court made a determination 88 T.C. 63">*76 of liability, or lack thereof, based primarily on the form of the transaction and on certain labels used by the parties to the transaction. In response to the Claims Court decision in Raphan, in 1984 Congress specifically directed the Treasury to promulgate regulations under section 752 to consider the substance, and not merely the form, of financing, and particularly to consider current commercial lending practices with respect to guarantees, assumptions, and indemnities. Sec. 79, Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 494, 597; H. Rept. 98-861, at 869 (Conf. 1984), 1984-3 C.B. (Vol. 2) 123. We also believe it appropriate herein to take into account the substance and realities of the financing arrangements presented to us.

1987 U.S. Tax Ct. LEXIS 5">*32 With the above standards in mind, our careful analysis of the financing in question in this case leads us to conclude that Marcus and the other limited partners of ACG were ultimately and personally liable for repayment of the $ 3,500,000 loan ACG obtained from the First National Bank of Chicago. The terms of the loan reflected arm's-length financing. Interest accrued on the unpaid balance of the loan at a market rate. Unpaid principal was due in 2 years. The creditor was an unrelated, third-party financial institution. If proceeds from the distribution of films owned by ACG were not sufficient to repay the bank (which, as explained, is the "worst-case" assumption we must make in our analysis herein), the bank would have direct access to (1) other assets of ACG or its general partners, or (2) the assets of ACG's limited partners up to the amount of the balance due under their respective recourse obligations to contribute additional capital to ACG, as reflected by the promissory notes of the limited partners which had been pledged to the bank.

If ACG's assets were not available to repay the bank and the bank proceeded first against the general partners of ACG (as the nominal1987 U.S. Tax Ct. LEXIS 5">*33 primary obligors on the bank loan), it is clear that under the structure of the financing involved in this case, the general partners would not bear the economic cost thereof because they would look to the deferred capital contributions of the limited partners from which they would be fully reimbursed. Clearly, the deferred capital contributions were to serve as the ultimate source of the proceeds 88 T.C. 63">*77 for repayment of the bank loan if the partnership did not have the funds to do so. To hold otherwise would ignore the substance and reality of the financing structure before us.

Furthermore, and critical to this analysis, if the bank proceeded directly against the limited partners to collect the loan, the limited partners would have no right of reimbursement from ACG or its general partners with respect to amounts the limited partners paid to the bank because any such payments would be based on the independent, fixed, and definite recourse obligations of the limited partners to make the deferred capital contributions to ACG.

For the reasons stated above, we conclude that Marcus was personally liable on the bank loan to ACG up to the amount of his obligation to contribute additional1987 U.S. Tax Ct. LEXIS 5">*34 capital to the partnership.

Respondent argues that even if Marcus may be regarded as personally liable on the bank loan within the meaning of section 465(b)(2), if Marcus were required to pay the bank an amount that exceeded his pro rata share of the total bank loan, Marcus would have a right of reimbursement from the other limited partners of ACG for any such excess payment. Respondent therefore argues that with respect to Marcus' potential liability to pay the bank an amount in excess of his pro rata share of the bank loan, Marcus should be treated as being protected against economic loss under section 465(b)(4). ¹¹

Respondent's argument is based on California partnership law under which limited partners, who are required to pay partnership obligations in amounts exceeding their pro rata share thereof, are entitled to contribution or reimbursement from the other limited partners for the excess payments. See Cal. Corp. 1987 U.S. Tax Ct. LEXIS 5">*35 Code sec. 15040(f) (West 1986); Stodd v. Goldberger, 73 Cal. App. 3d 827">73 Cal. App. 3d 827, 141 Cal. Rptr. 67">141 Cal. Rptr. 67, 141 Cal. Rptr. 67">73 (1977); Burstein v. Zelman, 182 Cal. App. 2d 1">182 Cal. App. 2d 1, 5 Cal. Rptr. 829">5 Cal. Rptr. 829, 5 Cal. Rptr. 829">830 (1960); Caldwell v. Richards, 91 Cal. App. 428">91 Cal. App. 428, 267 P. 127">267 P. 127 (1928).

Petitioners counter that under California partnership law, creditors of an insolvent limited partnership can enforce 88 T.C. 63">*78 payment of a partnership debt obligation against all limited partners to the full extent of their respective deferred capital contributions (see Cal. Corp. Code sec. 15517(l) (West 1986); Donroy Ltd. v. United States, 196 F. Supp. 54">196 F. Supp. 54 (N.D. Cal. 1961), affd. 301 F.2d 200">301 F.2d 200 (9th Cir. 1962); Engleman v. Malchow, 91 Cal. App. 2d 341">91 Cal. App. 2d 341, 205 P.2d 413">205 P.2d 413 (1949)), and petitioners argue that any rights of reimbursement as between limited partners are only prospective or potential in nature and are not reflected in a binding agreement between the limited partners of ACG.

We find petitioners' argument unpersuasive. 1987 U.S. Tax Ct. LEXIS 5">*36 As previously explained, the test of whether a taxpayer is protected against loss with respect to amounts otherwise at risk is whether the protection (such as a right of reimbursement) is definite and fixed, not whether any payment as a result of the protection is immediate versus prospective. The manner by which the protection is established (whether by binding agreement between the parties or by state law) is not controlling. ¹²

1987 U.S. Tax Ct. LEXIS 5">*37 In light of the above analysis, we conclude that Marcus was protected against loss within the meaning of section 465(b)(4) with respect to his personal liability on the bank loan for amounts that exceed his pro rata share of the bank loan (namely, $ 21,812). ¹³ We emphasize that the definite 88 T.C. 63">*79 and fixed recourse obligations of the other limited partners of ACG to contribute additional capital thereto support our conclusion on this issue. Clearly, it was not contemplated that Marcus ever would have to pay an amount with respect to the bank loan in excess of his pro rata share thereof.

In summary, we conclude that Marcus was at risk within the meaning of section 465(b) with respect to $ 21,812 of the $ 3,500,000 loan ACG obtained from the First National Bank of Chicago. He was personally liable therefor and with respect to that amount he was not protected against loss. When added to the $ 25,000 cash downpayment, Marcus' total at-risk amount with respect to1987 U.S. Tax Ct. LEXIS 5">*38 his investment in Medici was $ 46,812.

Numerous court opinions establish that if shareholders of a corporation use corporate-owned property for personal purposes, they will be charged with additional distributions from the corporation, taxable to them as constructive dividend income if the corporation has sufficient earnings and profits. Ireland v. United States, 621 F.2d 731">621 F.2d 731, 621 F.2d 731">735 (5th Cir. 1980); Loftin and Woodard, Inc. v. United States, 577 F.2d 1206">577 F.2d 1206, 577 F.2d 1206">1214 (5th Cir. 1978); Commissioner v. Riss, 374 F.2d 161">374 F.2d 161, 374 F.2d 161">166-167 (8th Cir. 1967); Challenge Mfg. Co. v. Commissioner, 37 T.C. 650">37 T.C. 650, 37 T.C. 650">663 (1962); American Properties, Inc. v. Commissioner, 28 T.C. 1100">28 T.C. 1100, 28 T.C. 1100">1115 (1957), affd. 262 F.2d 150">262 F.2d 150 (9th Cir. 1958). In addition, the corporation will not be allowed to deduct costs of owning property that are attributable to personal use of the property by its shareholders. United Aniline Co. v. Commissioner, 316 F.2d 701">316 F.2d 701, 316 F.2d 701">705 (1st Cir. 1963); 37 T.C. 650">Challenge Mfg. Co. v. Commissioner, supra at 663.1987 U.S. Tax Ct. LEXIS 5">*39

If employees of a corporation use corporate property in their capacity as such, they will be charged with additional income in the form of constructive wages or salary, and the corporation will be entitled to a deduction with respect thereto. Secs. 61(a)(1), 162(a)(1). ¹⁴ Whether personal use of corporate property constitutes constructive dividends, constructive 88 T.C. 63">*80 wages, or something else (such as a gift, repayment of a loan, or payment for property purchased) is a question of fact. 577 F.2d 1206">Loftin & Woodard, Inc. v. United States, supra at 1242; Goldstein v. Commissioner, 298 F.2d 562">298 F.2d 562, 298 F.2d 562">566 (9th Cir. 1962); Lengsfield v. Commissioner, 241 F.2d 508">241 F.2d 508, 241 F.2d 508">510 (5th Cir. 1957). The corporation has the burden of establishing that the personal use of corporate property constitutes additional wages or compensation. Motel Co. v. Commissioner, 340 F.2d 445">340 F.2d 445, 340 F.2d 445">449 (2d Cir. 1965).

1987 U.S. Tax Ct. LEXIS 5">*40 Perhaps the most difficult question raised by adjustments relating to the personal use of corporate property pertains to the method of valuing the benefit to the shareholders or employees. Section 301(b) expressly provides that the amount of corporate distributions of property should be the "fair market value" of the property. ¹⁵ See also sec. 1.301-1(j), Income Tax Regs. Many courts, however, occasionally at the urging of the Government, adopt a "cost" analysis for determining the value to shareholders or employees of their personal use of corporate property. See Ireland v. United States, 621 F.2d 731">621 F.2d 731, 621 F.2d 731">737 (5th Cir. 1980); 374 F.2d 161">Commissioner v. Riss, supra at 168-169; 316 F.2d 701">United Aniline Co. v. Commissioner, supra at 704-705; Estate of Runnels v. Commissioner, 54 T.C. 762">54 T.C. 762, 54 T.C. 762">767 (1970).

1987 U.S. Tax Ct. LEXIS 5">*41 In discussing a number of the cases which use "cost" as the measure of the benefit conferred upon the shareholders or employees, the Fifth Circuit in 577 F.2d 1206">Loftin & Woodard, Inc. v. United States, supra at 1222-1227, concluded that --

The cases supporting the use of cost stand for the proposition that cost is an acceptable measure of value when there is no credible evidence of fair market value or when evidence of fair market value exists but is cleary rebutted. * * *

In sum, value is the overriding concept in the measurement of a constructive dividend. * * *

[Emphasis in original.]

Other cases illustrating the preference for the use of fair market value, particularly fair "rental" value, in valuing the personal use of corporate property are as follows: 621 F.2d 731">Ireland v. 88 T.C. 63">*81 at 739; Dole v. Commissioner, 43 T.C. 697">43 T.C. 697, 43 T.C. 697">705 (1965) (Court-reviewed), affd. per curiam 351 F.2d 308">351 F.2d 308 (1st Cir. 1965); 37 T.C. 650">Challenge Mfg. Co. v. Commissioner, supra at 663; Dean v. Commissioner, 9 T.C. 256">9 T.C. 256, 9 T.C. 256">267 (1947),1987 U.S. Tax Ct. LEXIS 5">*42 affd. 187 F.2d 1019">187 F.2d 1019 (3d Cir. 1951). ¹⁶

In applying the above principles to the stipulated facts presented in this case, we must agree with respondent's adjustments relating to the personal use by Marcus and Marilyn of the corporate automobiles.

Petitioners argue primarily that the reimbursement procedure they established (utilizing figures reflected in Rev. Rul. 77-410) fully or at least adequately compensated the corporation for the personal use by Marcus and Marilyn of the automobiles. The amounts of the reimbursements were geared to the costs or estimated costs of the corporation in providing the corporate1987 U.S. Tax Ct. LEXIS 5">*43 automobiles to Marcus and Marilyn. As we have stated, where the value of the personal benefit conferred on shareholders or employees is known or is agreed to, such value controls. In light of the stipulation herein that the value of the personal use of the automobiles exceeded the amount of the reimbursements, the difference between the stipulated value of the personal use of the corporate automobiles (namely, $ 4,012) and the total reimbursement paid to the corporation (namely, $ 1,302) constitutes additional income to Marcus and Marilyn.

Petitioners have failed to satisfy their burden of proving that the value of the personal use of the automobiles constituted additional wages or compensation, and we therefore conclude that such value, less reimbursements, constituted a constructive dividend that is taxable to Marcus under section 301 as the sole shareholder of the corporation. This result is not altered simply because Marilyn was not a shareholder of the corporation. Marcus had complete control over the corporation, and he is taxable on the constructive dividend because Marilyn (who was not a shareholder) benefited from the personal use of the corporate property. See Green v. United States, 460 F.2d 412">460 F.2d 412, 460 F.2d 412">419 (5th Cir. 1972).1987 U.S. Tax Ct. LEXIS 5">*44

88 T.C. 63">*82 Another reason the reimbursement rate used by Marcus and Marilyn did not adequately reflect the value of their personal use of the Jaguar, the Datsun, and the BMW, is that the total mileage driven on the automobiles was extremely low. Using the reimbursement rate of $ 0.17 for each mile of personal use during the corporation's 1979 taxable year, petitioners should have reimbursed the corporation only $ 115.77 for Marcus ($ 0.17 x 681 personal miles), and $ 761.60 for Marilyn ($ 0.17 x 4,480 personal miles). It is beyond question that access to unlimited personal use of a new or almost new Jaguar, Datsun, and BMW (and actual personal use thereof representing 33 percent of the total use of the Jaguar and 80 percent of the total use of the Datsun and BMW) has a value significantly in excess of the amount of the total reimbursement called for under the reimbursement agreement (namely, $ 877.37 for both cars), and also significantly in excess of the $ 1,302 total actual reimbursement. This conclusion is supported by the stipulation of the parties that the fair rental value of the personal use of the three automobiles during the corporation's 1979 taxable year was $ 4,012.

The1987 U.S. Tax Ct. LEXIS 5">*45 low personal mileage on the automobiles raises a point not argued by petitioners. Some court opinions suggest that mere incidental or insignificant personal use of corporate property will not justify a finding of a constructive dividend. See United Aniline Co. v. Commissioner, 316 F.2d 701">316 F.2d 701, 316 F.2d 701">703 (1st Cir. 1963). ¹⁷ Particularly, with respect to the use of the Jaguar, it could be argued herein that 681 miles of personal use during an entire year was insignificant. In our opinion, however, 681 miles of personal use is not insignificant in light of the total miles the Jaguar was driven. Clearly, the significance of the total personal mileage must be viewed in context with the percentage it represents of the total miles driven. It also is significant that Marcus and Marilyn had access to luxury automobiles for their personal use throughout the year at a negligible charge therefor. ¹⁸

1987 U.S. Tax Ct. LEXIS 5">*46 88 T.C. 63">*83 We hold that Marcus and Marilyn are taxable on $ 2,710, which is the value of their personal use of the corporate automobiles in 1979, less the amount of their reimbursements to the corporation ($ 4,012 less $ 1,302 equals $ 2,710). ¹⁹

As we have stated, a corporation is not entitled to deduct the costs of owning corporate property that are attributable to the personal use of the property by its shareholders. Based on this principle, respondent disallowed to petitioner-corporation herein a deduction of $ 4,012 with respect to personal use of its automobiles by Marcus and Marilyn. Petitioners agree that $ 4,012 is the appropriate measurement of cost for the personal use of the corporate automobiles. Respondent did not reduce its disallowance of the corporation's deduction by the amount of the $ 1,302 reimbursement1987 U.S. Tax Ct. LEXIS 5">*47 from Marcus and Marilyn. Clearly, the disallowance is improper to the extent of such reimbursement. ²⁰ We therefore hold that the costs attributable to the personal use by Marcus and Marilyn of the automobiles is disallowed to the extent the costs exceed the reimbursement paid therefor by Marcus and Marilyn. We so hold.

Decisions will be entered under Rule 155.