Passive Losses - 16 CPE
This course addresses the practical aspects of §469 and the needed skill to handle pragmatic issues. Fundamentals are reviewed, planning opportunities identified, creative strategies discussed and evaluated along with remaining traditional approaches. The goal of this instructive program is to understand and solve problems under §469, with emphasis on tax savings ideas. Readers will overview the proper administration of this complex and often cumbersome provision.
Completion Deadline & Exam: This course, including the examination, must be completed within one year of the date of purchase. In addition, unless otherwise indicated, no correct or incorrect feedback for any exam question will be provided.
Course Level: Overview: This program is appropriate for professionals at all organizational levels.
Field of Study: Taxes
Prerequisite: General understanding of Federal income taxation.
Advanced Preparation: None
Learning Assignments & Objectives
As a result of studying each assignment, you should be able to meet the objectives listed below each assignment.
Chapter 1 Overview
At the start of Chapter 1, participants should identify the following topics for study:
* Reasons for change from prior law
* Categories of income & loss
* Fully taxable disposition
* Entire interest
* Other transfers
* Ordering of losses
* Regular & personal service corporations
* Real estate professionals
* Definition of pre-enactment interest
* Increase or decrease in pre-enactment interests
After reading Chapter 1, participants will be able to:
1. Recognize the broad impact of the §469 limitation provision by:
a. Showing the differences between prior law loss treatment and the former and current treatment of losses;
b. Stating the prior tax shelter problem and naming at least two of Congress’s motives and rationales in passing §469;
c. Listing several economic decision-making changes caused by the limitation;
d. Identifying income and loss into two categories; and
e. Illustrating the central concept of investor activity participation as the basis for determining the allowance of a passive loss.
2. State the mechanics of the passive loss rules, show the impact of §469 to appropriate deductions, identify what type of income may be offset by passive losses and then, define a passive loss using four calculation steps.
3. Identify passive losses under §469 by:
a. Using the three “bucket” analogy of §469 to:
(i) list the categories of a client's annual income showing the limitation’s impact, and
(ii) define “passive items” and “material participation” under §469;
b. Locating portfolio income based on items deemed nonpassive under the Code; and
c. Listing five circumstances that allow for special treatment of income and loss.
4. Recognize the suspension of disallowed losses, identify two ways to ultimately "free up" passive losses, state the treatment of passive credits including potential basis adjustment, and define a fully taxable disposition indicating the impact of related party transactions.
5. Outline the impact and tax consequences of a fully taxable disposition (FTD) by:
a. Defining an entire interest disposition, particularly for a partnership or grantor trust;
b. Stating the allowance of suspended losses upon installment sale, exchange, gift or death;
c. Identifying the ordering of recognized tax attributes upon a FTD; and
d. Recognizing ways to escape the application of the FTD and other passive loss rules particularly for closely held corporations and personal service corporations that change their operations and nature.
6. Identifying which clients are or are not subject to the passive loss rules by:
a. Naming two types of corporations to which §469 applies and listing the elements of their Code definitions;
b. Stating the general rental activity rule exception listing two eligibility requirements
c. Defining “pre-enactment interest,” “qualified interest” and “pre-enactment activity” identifying their §469 “phase in” treatment; and
d. Stating §469’s effective date and recognizing the IRS’s application authority under 469(l).
After studying the materials in Chapter 1, answer the exam questions 1 to 18.
Chapter 2 Material Participation
At the start of Chapter 2, participants should identify the following topics for study:
* General rule
* Definition of “trade or business”
* TRA ’86 committee report guidelines
* General rule for individuals
* Record keeping regulations
* Meaning of participation
* Limited partnership interests presumption
* Special rules for trusts & estates
* Special rules for retired & disabled farmers
* Special rules for corporations
After reading Chapter 2, participants will be able to:
1. Identifying how to avoid the application of the passive loss rules through material participation, and name six factors under the TRA ’86 that were considered in determining whether the taxpayer’s involvement in the operation of the activity is regular, continuous, and substantial.
2. List the seven tests provided by the initial February 19, 1988 regulations on material participation, outline the seven tests into three useful categories, show how to keep appropriate records of a client’s participation in an activity, define participation, list two exceptions to the definition of what counts toward material participation, state the husband and wife rule associated with the passive loss rules, annually determine material participation and define pre-1987 participation.
3. Identify special applications of the material participation rule by:
a. Stating the general rule for limited partnership interests and listing four exceptions;
b. Recognizing its current application to trusts, estates and certain corporations including members of an affiliated group listing at least four application rules for such entities; and
c. Defining the application of the material participation rule to retired or disabled farmers under the regulations.
After studying the materials in Chapter 2, answer the exam questions 19 to 28.
Chapter 3 Activity Definition
At the start of Chapter 3, participants should identify the following topics for study:
* Tax Reform Act of 1986
* Undertakings of old temporary activity regulations
* Aggregation of trade or business undertakings
* Integrated businesses
* Aggregation of professional service undertakings
* Control by the same interests
* Rental real property undertakings
* Participation unaffected
* Final simplified activity regulations
* Passive activity audit guide
After reading Chapter 3, participants will be able to:
1. Recognize the history and rationale of the definition of “activity” by:
a. Stating the impact of TRA ‘86, §183, and the at-risk rules noting differences between the former complex definition and the final simplified regulations;
b. Identifying why it is operationally important to separate activities and how activities were originally separated under the Committee Reports; and
c. Define Notice 88-94’s role in determining separate activities.
2. Identify the importance of the original undertaking rule used to determine an activity by:
a. Outlining its legislative history including the early concepts of “undertakings,” “separate source of income production” and “support operations;”
b. Stating the primary undertaking rule, defining its key variants such as aggregate, intergrated and professional service undertakings and naming two exceptions to the primary rule;
c. Recognizing its provisions for controlled undertakings noting permitted elective treatments and their effect on participat