Courts Refuse to Follow IRS Rules on Passive Losses

Today with many workers involved in multiple, part-time business ventures, the passive activity rules can come into play in unexpected ways. A passive activity is any rental activity and any other business in which the owner/investor does not "materially participate." The tax law sets out...

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Bibliographic Details
Published inExecutive's Tax & Management Report Vol. 72; no. 10; p. 1
Main Author Redemske, Michael R
Format Trade Publication Article
LanguageEnglish
Published Riverwoods CCH INCORPORATED 01.10.2009
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Summary:Today with many workers involved in multiple, part-time business ventures, the passive activity rules can come into play in unexpected ways. A passive activity is any rental activity and any other business in which the owner/investor does not "materially participate." The tax law sets out seven tests for material participation. Satisfying any one of these tests means that the activity is considered active. The seven tests include: 1. participating in the activity for more than 500 hours during the year, 2. participation that constitutes substantially all of the participation in the activity of all individuals, including nonowners, 3. material participation in any five years during the preceding 10 tax years, and 4. participation on a regular, continuous and substantial basis during the year. In the P.D. Garnett and J.R. Thompson cases, both the Tax Court and the Court of Federal Claims have declined to apply the Temporary Regulations to LLCs and LLPs. The Thompson court went so far as to say that the IRS had exceeded its authority when it attempted to apply the limited partner provisions of the passive activity rules to members of LLCs and partners in LLPs.
ISSN:1098-1594