Passive Losses 2019 - 16 CPE Credit Hours
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. Recalling the differences between prior law loss treatment and the former and current treatment of losses;
b. Citing the prior tax shelter problem and Congress’s motives and rationales in passing §469;
c. Specifying economic decision-making changes caused by the limitation;
d. Identifying income and loss into categories; and
e. Recognizing the concept of investor participation as central in determining the allowance of a passive loss.
2. Specify the mechanics of the passive loss rules, recognize the impact of §469 to appropriate deductions, identify what type of income may be offset by passive losses and then, determine a passive loss.
3. Identify passive losses under §469 by:
a. Citing the “bucket” analogy of §469 to:
(i) specify the categories of a client's annual income and the §469 limitation’s impact, and
(ii) determine “passive items” and “material participation” under §469;
b. Locating portfolio income based on items deemed nonpassive under the Code; and
c. Identifying circumstances that allow for special treatment of income and loss.
4. Recognize the suspension of disallowed losses, identify ways to ultimately "free up" passive losses, specify the treatment of passive credits including potential basis adjustment, and determine a fully taxable disposition indicating the impact of related party transactions.
5. Identify the impact and tax consequences of a fully taxable disposition (FTD) by:
a. Determining an entire interest disposition, particularly for a partnership or grantor trust;
b. Specifying the allowance of suspended losses upon installment sale, exchange, gift or death;
c. Selecting the order of recognized tax attributes upon an 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. Identify which clients are or are not subject to the passive loss rules by:
a. Specifying types of corporations to which §469 applies and citing the elements of their Code definitions;
b. Recognizing the general rental activity rule exception and eligibility requirements
c. Determining “pre-enactment interest,” “qualified interest” and “pre-enactment activity” identifying their §469 “phase in” treatment; and
d. Citing §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. Identify how to avoid the application of the passive loss rules through material participation, and 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. Specify tests provided by the initial February 19, 1988 regulations on material participation and how these tests provide useful §469 categories, determine participation and how to keep appropriate records of participation in an activity, identify exceptions to the definition of what counts toward material participation, specify the husband and wife rule associated with the passive loss rules, determine annual material participation.
3. Recognize special applications of the material participation rule by:
a. Citing the general rule for limited partnership interests and listing four exceptions;
b. Recalling its current application to trusts, estates and certain corporations including members of an affiliated group and the rules for such entities; and
c. Determining 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. Specifying the impact of TRA ‘86, §183, and the at-risk rules specifying 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. Citing 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. Recalling its legislative history including the early concepts of “undertakings,” “separate source of income production” and “support operations;”
b. Specifying the primary undertaking rule, its key variants such as aggregate, integrated and professional service undertakings and exceptions to the primary rule;
c. Recognizing its provisions for controlled undertakings, permitted elective treatments and their effect on participation; and
d. Identifying miscellaneous entity rules used for determining activities and reasonable and unreasonable methods of organizing operations.
3. Determine the differences between the temporary, the final simplified activity regulations and their key elements by:
a. Identifying factors used to determine whether two or more trade or business undertakings could be a single integrated business;
b. Specifying rental activities, limited partnership activities, and partnership and S corporation activities according to their special rules, and citing conditions that permit a taxpayer to later regroup activities.
c. Recognizing the tax consequences of inappropriate activity grouping and conditions permitting part of an activity to be a separate activity.
4. Recognize the importance of the passive activity audit guide as a tool to avoid audit by:
a. Specifying potential audit issues that the passive activity audit guide addresses whether or not a Form 8582 has been filed;
b. Determining why investment interest deductions on Form 8582 and Schedule A are an indicator for an audit issue and the guide’s focus on the material participation standard;
c. Identifying indicators of significant participation activities, misstatements of active management and net lease arrangements;
d. Determining when vacation rentals do not qualify for the $25,000 offset and the material participation test must be met; and
e. Specifying self-charged expenses, rental and nonrental activity grouping, and divorce transaction that can trigger audits.
After studying the materials in Chapter 3, answer the exam questions 29 to 39.
Chapter 4 Passive and Non-Passive Activities
At the start of Chapter 4, participants should identify the following topics for study:
* Trade or business
* Rental activity exemptions
* Rental of a dwelling unit
* Trading personal property
* Working interests in oil & gas exemption
* Entities that limit liability
* Disqualified deductions
* Activities within activities
After reading Chapter 4, participants will be able to:
1. Determine the differences between passive activities and nonpassive activities under §469 by:
a. Recognizing a “trade or business activity” and the effect of participation on that characterization;
b. Specifying a “rental activity” identifying conditions for a rental activity to exist and the resulting passive presumption; and
c. Identifying exceptions to the general rule that rental activities are presumed passive.
2. Recognize the uncertain initial characterization of an activity and its potential recharacterization by:
a. Citing exceptions to passive activity status and their tax effect;
b. Determining a working interest in oil and gas based on financial risk and the special exemption to qualifying working interests;
c. Specifying forms of entities in which a taxpayer can hold an interest that is not deemed to properly limit the taxpayer’s liability when determining whether the activity is passive or nonpassive;
d. Identifying differences between limited liability and loss protection allowing the working interest passive treatment;
e. Specifying special oil and gas rules that can be applied when the taxpayer has disqualified deductions and the well produces a net loss and the rationale behind such rules; and
f. Recognizing the requirement of separate accounting for portfolio income of a passive activity from other items related to such activity and citing the basis for this rule.
After studying the materials in Chapter 4, answer the exam questions 40 to 44.
Chapter 5 Passive Activity Loss
At the start of Chapter 5, participants should identify the following topics for study:
* Working interest exception for husband & wife
* Separate accounting of disallowed items for husband & wife
* Net active income of closely held corporations
* Affiliated groups filing consolidated returns
* Treatment of carryover losses
* Allocation process
* Significant participation activities
* Separate identification of deductions
After reading Chapter 5, participants will be able to:
1. Recognize the tax treatment of a passive loss including its identification, netting, and suspension by:
a. Determining a “passive activity loss” and its tax treatment;