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Passive Activity Loss ATG - Exhibit 1.1: IRC § 469 – CITATIONS Case Law and Rulings

Publication Date - December, 2004

NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.


Table of Contents / Exhibit 1.2
Tax Code, Regulations and Official Guidance Search
 

Exhibit 1.1: IRC § 469 – CITATIONS Case Law and Rulings

Activity (Grouping) Rules – Reg. § 1.469-4

  • Gates, T.C. Memo Summary Opinion 1998-181 à Rentals could not be grouped with a business under Reg. 1.469-4(b)(1). A summary opinion cannot be cited as precedent for any other case (§ 7463(b)).
  • Glick, 96 F Supp2d 850 200-1à Grouping rental real estate with a management arm in another entity was permitted.
  • Gregg, USTC AFTR 2d 2001-503 (Oregon) à No pro-ration for short year; LLC member not a limited partner; grouping of similar businesses. Note: not a precedent setting case.
  • Kahle, T.C. Memo 1997-90 à Taxpayer could not group rental and nonrental operations into a single undertaking.  Note:  issue was based on temporary regulations, now expired.
  • Schumacher, T.C. Summary Opinion 2003-96 A Schedule C airplane leasing activity  was insubstantial under Reg. 1.469-4(d)(1)(A) in relation to an S Corporation business. 
  • Vezey, No. F96-0055-CV, 1988 U.S. District Court of Alaska à Rental could not be grouped with a closely held C Corporation.
    • PLR 199924012
    • TAM 200014010 
    • FSA 199907011

Condo / Hotel / Vacation Rentals – Reg. § 1.469-1T(e)(3)(ii)(A)&(B)

  • Barniskis, T.C. Memo 1999-256 à Jointly held condo was passive activity; losses nondeductible.  Excepted from rental definition.  Taxpayer failed to show material participation.
  • Chapin, T.C. Memo 1996-56 à The taxpayer failed requirement for regular and continuous participation to materially participate in condo.
  • Madler, T.C. Memo 1998-112 à No material or active participation in condo.
  • Mordkin, T.C. Memo 1996-187 à Board chairman did not materially participate in hotel condo.
  • Pohoski, T.C. Memo 1998-17 CA-9 à No material participation in one Hawaii condo, but material participation in another.
  • Rapp, T.C. Memo 1999-249 à No material participation in condo for condo president.
  • Scheiner, T.C. Memo 1996-554 à No material participation in hotel condo.
  • Serenbetz, T.C. Memo 1996-510 à No material participation in condo.
  • Toups, T.C. Memo 1993-359 à Cottage rented on average less than 7 days; no material participation.
    • TAM 9505002
    • TAM 9543003

Credits

  • Sidell, T.C. Memo 1999-301 à Self-rental rules apply to C Corporations; cannot offset rehabilitation credit.
  • Housing Pioneers, Inc., à Did not qualify as a low income housing nonprofit organization.

Equipment Leases

  • Blewett T.C. Summary 2001-174 Equipment leased to a C Corporation was excepted from the passive loss rules as gross receipts were less than 2 percent of basis or Fair Market Value (FMV), i.e. activity was incidental to the business.
  • Frank, T.C. Memo 1996-177 à Losses from airplane lease were passive and not deductible.
  • Goshorn, T.C. Memo 1993-578 à Charter boat – no material participation.
  • Hairston, T.C. Memo 2000-386 à Losses from lease of construction equipment to taxpayer’s corporation were nondeductible. 
  • Kelly, T.C. Memo 2000-32 à Airplane leased to flight school was a rental.  Fact that it was subleased hourly was not relevant.
  • Kenville, 97-2 USTC ¶ 50,936 à Airplane chartered in two ways (a) charter activity #1 met exception to a rental as extraordinary personal services were provided; (b) charter activity #2 did not meet exception to a rental for “ nonexclusive use exception to a rental”.
  • Schetzer, T.C. Memo 1999-252 à No $25,000 offset for an auto rental; definition of a rental activity.
  • Vezey, No. F96-0055-CV, 1988 U.S. District Court of Alaska à Rental could not be grouped with a closely held C Corporation.
  • Welch, T.C. Memo 1998-310 à Taxpayer leased his tools on average for less than 30 days and provided significant services.  Thus, standard was material participation.
    • TAM 9722007
    • TAM 9343010
    • TAM 199949036

Income

  • Carlstedt, T.C. Memo 1997-331 à Income determined to be non-passive as Taxpayer materially participated in business.
  • Cox, T.C. Memo 1993-326 à In community property State, husband could take half deduction for rent expense from wife, and half was reportable as rental income.
  • Edelberg, T.C. Memo 1995-386 à Fees from previously owned medical billing company not passive income.
  • Mayer, T.C. Memo 1994-209 à Gain from sale of securities business was not passive.
  • Sandy Lake Road LP, T.C. Memo 1997-295 à Rollback taxes and attorney's fees related to the determination of such taxes are incurred "in connection with" property from which portfolio income is derived, and are therefore expenses allocable to portfolio income.
  • Seits, T.C. Memo 1994-522 à Sale of coop apartment - not passive income.
  • Schaefer, 105 TC No. 16 à Income from a covenant not to compete is not passive.
  • Shannon, T.C. Memo 1993-554 à Discharge of indebtedness not passive income as debt originated in farm where taxpayer materially participated.
  • Wiseman, T.C. Memo 1995-203 à Activity issue, recharacterization income-land non-passive.
    • PLR 200010004
    • PLR 199924020
    • FSA 200002015
    • FSA 1999-1202

Investment Interest Expense

  • Malone, T.C. Memo 1996-408 à Interest on a loan to by C Corporation stock was investment interest expense.
    • PLR 200010004

Marinas & Charter Boats

  • Dougherty, T.C. Memo 1994-597 à No material participation in marina.
  • Goshorn, T.C. Memo 1993-578 à Charter boat – no material participation.
  • Oberle, T.C. Memo 1998-156 à No material participation in a charter boat activity.
  • Speer, T.C. Memo 1996-323 à No material participation in two S Corporations.

Material Participation  Also see Condo above.

  • Dougherty, T.C. Memo 1994-597 à No material participation in marina.
  • Goshorn, T.C. Memo 1993-578 à Charter boat – no material participation.
  • Gregg, USTC AFTR 2d 2001-503 (Oregon) à No proration for short year; LLC member not a limited partner: grouping similar businesses.
  • Hasan, T.C. Memo 1997-439 à No credible argument that losses from a limited partnership were anything but passive.
  • Machado, 97-2 USTC ¶ 50,593 CA-9; T.C. Memo 1995-526 à Taxpayer did not materially participate in horse racing partnership.
  • Oberle, T.C. Memo 1998-156 à No material participation in a charter boat activity.
  • Speer, T.C. Memo 1996-323 à No material participation in two S Corporations.
    • FSA 200102018

Mini Storage Units

  • Harris, T.C. Memo 1998-332 à Mini-storage units are rentals; thus losses are limited under IRC § 469.

Real Estate Professional

  • Bailey T.C. Memo 2001-296 Attorney not a real estate professional.  Taxpayer did not rise to 750 hour test.
  • DeGuzman 2001-2 USTC para 50,560, US District Court, NJ  Taxpayer did not rise to 750 hour test.  Time must be in a business or rental in which you own an interest.
  • Fowler  TC Memo 2002-223 Heating and air condition business owner did not rise to 750 hour test.
  • Galagar T.C. Summary Opinion 2004-39:  Taxpayer did not meet the 750-hour test in order to be a real estate professional.
  • Jahina T.C. Summary Opinion 2002  $150,000 Taxpayer failed half personal services test in order to be a real estate professional.
  • Kosonen, T.C. Memo 2000-107 à Taxpayer did not file a proper election to group his rentals as a real estate professional.
  • Mowafi, T.C. Memo 2001-111 à The taxpayer, a full-time manager of research for a large corporation, did not meet either half-personal services test or 750 hour test.
  • Paleveda, T.C. Memo 1997-416 à Relief provisions for real estate professionals cannot be applied to years prior to 1994.
  • Pungot, T.C. Memo 2000-60 à Taxpayer was not a real estate professional as he did not own more than 5 percent of a construction firm.
  • Shaw TC Memo 2002-35, the Government argued that Taxpayer did not established he was a real estate professional.  Documentation provided not reasonable.

Rental v. Business

  • Gates, T.C. Memo Summary Opinion 1998-181 à Taxpayer argued his rental business constitutes a business in which he materially participates.  A summary opinion may not be treated as precedent for any other case.
  • Kenville, 97-2 USTC ¶ 50,936 à Airplane chartered in two ways (a) charter activity #1 met exception to a rental as extraordinary personal services were provided; (b) charter activity #2 did not meet exception to a rental for “ non-exclusive use exception to a rental”.
    • PLR 9251003
    • TAM 9247003

Self-Charged Items

  • Hillman, 114 TC No. 6 19893-97 Feb. 29, 2000, David H. Hillman, et ux. v. IRS; 87 AFTR2d Par. 2001-803; No. 00-1915 (17 Apr 2001) à On appeal, Government sustained.  S Corporation shareholder cannot treat management fees as a self-charged item, i.e. passive income.
    • TAM 96240070

Self-Employment Tax

  • Norwood, T.C. Memo 2000-84 à The fact that the taxpayer’s interest in a partnership was passive did not exempt him from self-employment tax, because he was a general partner in a partnership.
    • TAM 9750001

Self-Rented Property

(Recharacterization of income for property leased to a business where the taxpayer works)

  • Connor, T.C. Memo 1999-185 à Self-rented income not passive, Reg. 1.469-2(f)(6) applies to rentals to C corporations.
  • Fransen, 98-2 USTC ¶ 50,776 à Self-rental recharacterization applies to rentals to C Corporations.
  • Krukowski, 114 TC No. 25 à Options to renew are not pre-88 binding contracts; self-rental recharacterization applies to rentals to C Corporations beginning 5/11/92.
  • Kucera, T.C. Memo Summary 2001-18 à Post-88 lease is a new contract.  Taxpayer materially participated.  Rentals should be grouped with business.
  • Schwalback, 111 TC No. 9 à Self-rental recharacterization applies to C- Corporations.
  • Sidell, T.C. Memo 1999-301 à Self-rental rules apply to C Corporations; cannot offset rehabilitation credit.

Tax Equity and Fiscal Responsibility Act (TEFRA)

  • Estate of Robert Quick, 110 TC 172 à Passive losses are an affected item, governed by the partnership TEFRA statute.

Validity of Section 469 Regulations

  • Adler, U.S. Court of Federal Claims 93-720T; 32 FedCl 736  Validity of temporary regulations.
  • Mordkin, T.C. Memo 1996-187 à Court upheld the validity of the temporary regulations.
  • Schaefer, 105 TC No. 16 à Upheld validity of Reg. § 1.469-2T(c)(7)(iv) of the temporary regulations.
  • Schetzer, T.C. Memo 1999-252 à no $25,000 offset for an auto rental; definition of a rental activity.
  • Schwalback, 111 TC No. 9 à Court held that the plain language of the regulation clearly indicated that it applied to entities in which the taxpayer materially participated.
  • Sidell, T.C. Memo 1999-301 à Court held that the self-rental rule in Reg. § 1.469-2(f)(6) is valid.

Miscellaneous PAL Items

  • Business v. Portfolio Royalty Income - PLR 9225027
  • Cancellation of Debt (COD) Income from passive source is passive - Revenue Ruling 92-92, 1992-45 I.R.B. 21
  • Distributions in excess of Basis - Revenue Ruling 95-5, 1995-2 I.R.B. 5
  • Distributions in excess of Basis - TAM 9501001
  • No Carryback of PALs / Primary Purpose of IRC § 469 - Adler, 32 FedCl 736
  • Carryforward of PAL from C Corporation  to new S Corporation - St. Charles Investment Co., 110 TC 46
  • Personal Services Corporation - Char-Lil Corp, T.C. Memo 1998-457 Rental losses were disallowed as corporation was a personal service corporation.  Interest income is not passive income. 

Legislative History

  • Senate Report 99-313, 1986-3 C.B. (Vol. 3) 1 (passive activity losses addressed in pages 718-746).
  • House Report 99-841, 1986-3 C.B. (Vol. 4) 1 (passive activity losses on pages 137-150.
  • The CCH has reported portions of the Committee Reports on P.L. 99-514 (Tax Reform Act of 1986) at paragraph 21,960.20 (2002) 

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