Passive Losses 2022 - 10.5 CPE

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Course Description & Study Guide
This course addresses the practical aspects of §469 and the needed skill to han-dle pragmatic issues. Fundamentals are reviewed, planning opportunities identi-fied, 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 provid-ed.
Course Level: Overview: This program is appropriate for professionals at all or-ganizational levels.
Field of Study: Taxes
Prerequisite: General understanding of Federal income taxation.
Advanced Preparation: None
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Learning Assignments & Objectives
As a result of studying each assignment, you should be able to meet the objec-tives listed below each assignment.
ASSIGNMENT SUBJECT
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
Learning Objectives
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 limi-tation;
d. Identifying income and loss into categories; and
e. Recognizing the concept of investor participation as central in de-termining 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
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(ii) determine “passive items” and “material participation” under §469;
b. Locating portfolio income based on items deemed nonpassive un-der the Code; and
c. Identifying circumstances that allow for special treatment of in-come and loss.
4. Recognize the suspension of disallowed losses, identify ways to ulti-mately "free up" passive losses, specify the treatment of passive credits including potential basis adjustment, and determine a fully taxable dis-position indicating the impact of related party transactions.
5. Identify the impact and tax consequences of a fully taxable disposi-tion (FTD) by:
a. Determining an entire interest disposition, particularly for a part-nership 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 per-sonal 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 eligibil-ity 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.
ASSIGNMENT SUBJECT
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
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* 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
Learning Objectives
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 catego-ries, 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 par-ticipation.
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 cor-porations 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.
ASSIGNMENT SUBJECT
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
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* Control by the same interests
* Rental real property undertakings
* Participation unaffected
* Final simplified activity regulations
* Passive activity audit guide
Learning Objectives
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 spec-ifying differences between the former complex definition and the fi-nal 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 de-termine an activity by:
a. Recalling its legislative history including the early concepts of “undertakings,” “separate source of income production” and “sup-port operations;”
b. Specifying the primary undertaking rule, its key variants such as aggregate, integrated, and professional service undertakings and ex-ceptions 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 activi-ties and reasonable and unreasonable methods of organizing opera-tions.
3. Determine the differences between the temporary, the final simpli-fied 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 group-ing and conditions permitting part of an activity to be a separate ac-tivity.
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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, mis-statements 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 transactions that can trigger audits.
After studying the materials in Chapter 3, answer the exam questions 29 to 39.
ASSIGNMENT SUBJECT
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
Learning Objectives
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 partic-ipation on that characterization;
b. Specifying a “rental activity” identifying conditions for a rental ac-tivity 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:
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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 inter-est 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 protec-tion 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.
ASSIGNMENT SUBJECT
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
Learning Objectives
After reading Chapter 5, participants will be able to:
1. Recognize the tax treatment of a passive loss including its identifica-tion, netting, and suspension by:
a. Determining a “passive activity loss” and its tax treatment;
b. Identifying the appropriate passive loss tax treatment of spouses and working interests in oil or gas;
c. Citing the special passive loss rule for closely held corporations; and
d. Determining an affiliated group’s passive activity loss using speci-fied items of each group member.
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2. Specify reasons why disallowed passive activity losses must be allo-cated among all the taxpayer’s activities producing a loss during the tax year, determine how to allocate disallowed passive activity losses and how they may be applied to multiple activities, identify the ratable por-tion of a loss and the ratable portion of a passive activity deduction under §469, and recognize significant participation activities and how to determine loss, if any.
After studying the materials in Chapter 5, answer the exam questions 45 to 49.
ASSIGNMENT SUBJECT
Chapter 6 Passive Activity Gross Income
At the start of Chapter 6, participants should identify the following topics for study:
* Income from dispositions of property used in passive activities
* Disposition of appreciated property formerly used in a nonpassive activity
* Rental activities
* Income from §481 adjustment
* Self-charged interest
* Exclusion of portfolio income
* Exclusion of personal service income
* Exclusion of oil & gas income
* Active business recharacterization
* Portfolio income recharacterization rules
Learning Objectives
After reading Chapter 6, participants will be able to:
1. Identify passive activity gross income by:
a. Determining “passive activity gross income” under §469;
b. Specifying income from the disposition of property used in a pas-sive activity including mixed or alternating use property;
c. Recognizing the general treatment of rental activity income and gain from the disposition of appreciated property formerly used in a nonpassive activity; and
d. Citing conditions that must be met to offset up to $25,000 per year of losses and credits related to a passive activity against nonpassive income.
2. Recognize the income characterization impact of a taxpayer’s rela-tionship to an activity by:
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a. Specifying the differences between active participation and mate-rial participation and the effect of changing participation;
b. Identifying the $25,000 allowance, the aggregation of credits and deductions, allocation order, and generation of a potential net oper-ating loss;
c. Selecting the differences between the activity treatment of a real estate dealer and a lessor of property particularly under a net lease; and
d. Determining the tax result of a positive §481 adjustment for an ac-tivity.
3. Identify specialty items and unique rules that complicate the calcula-tion of gross passive income by:
a. Recognizing the dangers of self-charged interest and what measures can be taken to avoid this item’s passive nature identifying proposed regulations for dealing with such interest;
b. Citing the types of portfolio income that are not included in pas-sive activity gross income;
c. Determining a “publicly traded partnership” for taxation purposes and how net income from such entities is portfolio income;
d. Recognizing safe harbors to be addressed in future regulations, and
e. Specifying types of income that are deemed compensation for per-sonal services and their effect on portfolio income.
4. Determine tax attributes and subsequent events that can cause a re-calculation of gross passive income by:
a. Identifying a loss from an oil and gas interest that is initially treat-ed as nonpassive and income from a property whose basis is deter-mined by reference to such property.
b. Citing additional miscellaneous exclusions from passive activity gross income;
c. Specifying types of income that are considered gross income de-rived in the ordinary course of a trade or business and their effect on portfolio income; and
d. Recognizing types of recharacterization rules, what type of con-version each prevents, and identifying whether certain transactions will be recharacterized based on the tests provided by the regula-tions.
After studying the materials in Chapter 6, answer the exam questions 50 to 61.
ASSIGNMENT SUBJECT
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Chapter 7 Passive Activity Deduction
At the start of Chapter 7, participants should identify the following topics for study:
* Definition of passive activity deduction
* Qualified residence interest deduction exclusion
* Coordination with other deduction limitations
* Effect of coordination
* Losses on disposition
* Negative §481 adjustment
* Exceptions
Learning Objectives
After reading Chapter 7, participants will be able to:
1. Determine a “passive activity deduction,” how it is processed under §469, and aggregate qualified residence interest using §469(j)(7), speci-fy passive activity deductions with other deduction limitations, and identify effects the coordinati