Academic journal article Journal of Accountancy

Defining "Activity" for Passive Losses

Academic journal article Journal of Accountancy

Defining "Activity" for Passive Losses

Article excerpt

In May 1989, the Internal Revenue Service issued a complex set of temporary regulations defining "activity" for passive loss purposes. The temporary regulations used a building-block approach, starting with an "undertaking" and then combining these into "activities" and integrated businesses.

In 1989 tax returns, taxpayers disclosed their treatments of rental real estate undertakings and also generally elected to treat combined nonrental undertakings as separate activities for disposition purposes.

But under the three-year sunset clause for temporary regulations, these rules have now expired, applying only to tax years ending on or before May 10,' 1992.

Proposed regulations have replaced the temporary regulations with a "facts and circumstances" approach, treating one or more businesses or rentals as a single activity if they constitute an appropriate economic unit for the measure of gain or loss (proposed regulations 1.469-4, PS-01-89, May 15, 1992).

The proposals are more flexible than the temporary regulations, allowing taxpayers to use any reasonable method to separate or aggregate their activities into appropriate economic units. …

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