Grouping of Activities for Determination of Material Participation Under Passive Loss Rules
Posted 8/29/08
Losses from trades or businesses in which a taxpayer does not materially participate are classified as passive activities and can not be deducted currently except against taxable income from other passive activities of the taxpayer. This restriction does not apply to activities reported as an investment, i.e. expenses taken as itemized deductions, or as adjustments to gross income in the case of qualified reforestation expenses. The regulations allow a taxpayer to group multiple trades or business in which they are engaged as a single activity for purposes of determining their material participation. Activities grouped must be (1) of similar as to the type of trades or businesses, (2) be under common control and ownership, (3) located proximately, and (4) be interdependent to a degree. The IRS does not currently require taxpayers to report their groupings.
In Notice 2008-64 the IRS requests comments on a change in the regulations under IRC 469 that would require taxpayers to report on the tax return for the year it is made, any change in the grouping of trades or businesses for the purpose of determining material participation.