Academic journal article Journal of Accountancy

Proof of Material Participation Must Be Credible

Academic journal article Journal of Accountancy

Proof of Material Participation Must Be Credible

Article excerpt

A taxpayer must prove material participation in an activity to deduct losses from that activity against nonpassive income. The Ninth Circuit reaffirmed that credible evidence must be presented to prove that one of the material participation tests of IRC [section] 469 has been met.

In 2007, the U.S. District Court for the Western District of Washington granted the IRS summary judgment disallowing a taxpayer's attempt to carry back losses without sufficient evidence of material participation m the family company However, the IRS'S alternate argument that the taxpayer's claim should also be disallowed pursuant to capital loss rules/limitations was rejected because it wasn't clear whether the activities in question were conducted in a dealer or trader capacity In September 2008, the Ninth Circuit Court of Appeals upheld the decision without oral argument.

Started in the 1970s, family-run partnership Dean Securities brokered stocks and bonds. In 1998, sharp declines in securities values caused large losses for the company.

Loren Dean, a 20% panner, claimed a refund for carryback losses for 1996 based on his 1998 partnership losses. …

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