Passive Activity Losses

IRS may require reporting of PAL activity groupings

Mike Habib, EA

Notice 2008-64, 2008-31 IRB 268

A new notice requests comments regarding a proposal to require taxpayers to report to IRS their groupings and regroupings of activities and the addition and disposition of specific activities within their existing groupings of activities for purposes of the Code Sec. 469 passive activity loss () rules and PAL Reg. § 1.469-4.

Background. Code Sec. 469 generally provides that deductions from passive trade or business activities, to the extent they exceed income from all such passive activities (exclusive of portfolio income), may not be deducted against other income.

Under Code Sec. 469(b), disallowed losses and credits are treated as deductions and credits allocable to the activity in the next tax year.

Code Sec. 469(g)(1)(A) generally provides that if during the tax year a taxpayer disposes of his entire interest in any passive activity (or former passive activity), and all gain or loss realized on the disposition is recognized, the excess of (i) any loss from the activity for the tax year (determined after the application of Code Sec. 469(b), over (ii) any net income or gain for the tax year from all other passive activities (determined after the application of Code Sec. 469(b)), is treated as a loss which is not from a passive activity.

Reg. § 1.469-4 sets forth the rules for grouping a taxpayer’s trade or business activities and rental activities for purposes of applying the passive activity loss and credit limitation rules.

Proposed reporting. IRS is considering whether to change the reporting requirements for taxpayer groupings under Code Sec. 469. Although IRS has considered a number of approaches, the proposal described in Notice 2008-64 would generally require taxpayers to report to IRS, as part of their regular annual return, changes to their groupings. The proposal would apply to all persons or entities to whom the rules in Reg. § 1.469-4 apply. It would not apply to persons or entities who have made the election in Reg. § 1.469-9(g), relating to real estate professionals.

Specifically, the proposal would require a statement with specified information as detailed in Notice 2008-64 to be filed with respect to these events:

  • New groupings. A taxpayer would have to file a written statement with his original return for the first tax year in which one or more trade or business activities or rental activities are originally grouped as a single activity or as separate activities.
  • Addition of new activities to existing groupings. Whenever a taxpayer adds a new trade or business activity or a rental activity to an existing grouping within a tax year, he would have to file a written statement with his original return for the tax year in which the new trade or business activity or rental activity is added to the existing grouping.
  • Disposition of activities from existing groupings. Whenever a taxpayer disposes of a specific activity from an existing grouping within a tax year, he would have to file a written statement with his original return for the tax year in which the disposition of the specific trade or business activity or rental activity within the existing grouping occurs.
  • Regroupings. Under Reg. § 1.469 -4(e)(2), if it is determined that the taxpayer’s original grouping was clearly inappropriate or a material change in the facts and circumstances has occurred that makes the original grouping clearly inappropriate, the taxpayer would have to regroup the activities and file a written statement with his original return for the tax year in which the regrouping occurs.

Failure to report. In general, if a taxpayer failed to report, then each trade or business activity or rental activity would be treated as having been grouped as a separate activity for purposes of applying the passive activity loss and credit limitation rules.

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