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Ebook Passive Activity Loss Audit Technique Guide

Submitted by wulan on Tue, 10/06/2009 - 07:37

The Audit Technique Guide (ATG) on Passive Activity Losses (PAL) has been significantly revised to reflect an issue-based format. Additionally, it has been updated to encompass current emerging issues, changes to Form 8582, Passive Activity Loss Limitation, and recent case law. The guide was developed to provide Revenue Agents and Tax Compliance Officers with technical information and tools to examine issues relating to both income and losses from passive activities.

This text provides specific guidance on potential audit issues along with summaries of the applicable Internal Revenue Code (IRC) and Federal Tax Regulations (Regulations) and highlights of common errors. We have attempted to write this ATG in plain layman’s language, addressing issues which may be encountered on an audit. The text is not all encompassing and does not cover every exception. The IRC ž 469, the related Regulations, and case law may have to be researched.

Included in the ATG are many job aids, designed to be used by examiners: a summary of court cases, checksheets for common issues, and decision trees. Examiners are reminded that the checksheets have been provided to assist the examiner, but are not all encompassing. The IRC ž 469 and the related Regulations may have to be researched. In some instances, line numbers on various forms have been referenced. The examiner is reminded that line numbers may change from year to year. The job aids can be located at the end of each chapter. A summary of court cases and rulings can be located in the first exhibit in Chapter 1.

While certain provisions of the IRC ž 469 are explained, the primary focus of this text is not an in-depth explanation of the law or Form 8582, but rather a guide to current and emerging audit issues. Regulations for activities (grouping rules for related entities), real estate professionals and self-charged interest have been finalized. However, the majority of the IRC ž 469 regulations remain in temporary format. Temporary Regulations carry the same weight of authority as final regulations. Regulations have not yet been issued on dispositions and on trusts.

This material can be used in a classroom setting or as a self-study guide. Each lesson is designed to be self-contained. However, in most instances, Chapter 1, Overview, should be reviewed, as the concepts are intrinsic to an understanding of later lessons. Additional information on passive activities can be found at the PAL Intranet site or you can call the Passive Loss Technical Advisor.

CONTENTS

Introduction
A Quick Look Inside!
Chapter 1: Overview

    Introduction
    Types of Passive Activities
    What is Passive
    Activity Rules
    Participation Rules
    Form 8582
    Summary
    Exhibit 1-1: Case Law and Ruling
    Exhibit 1-2: Form 8582- Line by Line Comment
    Exhibit 1-3: Common Issues

Chapter 2: Rental Losses

    In a Nutshell
    The $25,000 Allowance In a Nutshell
    Active Participation Sub-Issue
    Modified Adjusted Gross Income Sub-Issue
    $25,000 Allowance Supporting Law
    Exceptions to Rental Definition
    Real Estate Professional In A Nutshell
    Real Estate Professional
    Material Participation for Real Estate Pros
    Election to Group Rental Real Estate
    Real Estate Pro: Law
    Equipment Leasing Supporting Law
    Vacation Rentals In a Nutshell
    Material Participation Sub-Issue
    Summary
    Exhibit 2.1: Rental Decision Tree
    Exhibit 2.2: Modified Adjusted Gross Income Computation
    Exhibit 2.3: Rental Real Estate Losses: Active Participation
    Exhibit 2.4: Real Estate Professionals
    Exhibit 2.5: Real Estate Professional: Interview Half Personal
    Services Test
    Exhibit 2.6: Equipment Rentals IRC ž 469(c)(2) and Reg. ž 1.469-
    1T(e)(3)
    Exhibit 2.7: Vacation Rentals/Condos/B&Bs/ Hotels Reg. ž 1.469-
    1T(e)(3)(ii) and Reg. ž 1.469-5T(a)

Chapter 3: Passive Income

    In a Nutshell
    Passive Income
    Supporting Law
    Self-Rental Income
    Leased Land
    Land held for Investment
    Supporting Law
    Summary
    Exhibit 3.1: Passive Income
    Exhibit 3.2: Self-Rented Property - Income Recharaterization
    Exhibit 3.3: Passive Income Decision Tree

Chapter 4: Material Participation

    In a Nutshell
    Activity Defined
    Grouping of Activities
    Significant Participation Activities (SPA)
    Indicators
    What are My Issues
    Treatment of Former Passive Activities
    Methods of Proof
    Qualifying Participation
    General Rule
    Non-Qualifying Time
    Supporting Law
    Summary
    Exhibit 4.1: Material Participation
    Exhibit 4.2: Material Participation Decision Tree
    Reg. 1.469-5T(a)
    Exhibit 4.3: Material Participation Activity (SPA)
    Reg. 1.469-5T(a)(4)
    Exhibit 4.4: Activity Log

Chapter 5: Dispositions

    In a Nutshell
    Entire Interest
    Partial Interest
    Fully Taxable Transaction
    FORM 8582: Dispositions with Net Losses
    Dispositions with Overall net Gain
    FORM 8582: Dispositions with Net Gain
    Summary
    Supporting Law
    Exhibit 5.1: Dispositions IRC 469(g)
    Exhibit 5.2: Dispositions Triggering Losses
    Exhibit 5.3: Income Issues On Disposition Of
    A Passive Activit

Chapter 6, Entity Issues

    Overview
    Material Participation for Corporations
    Personal Service Corporation
    Audit Considerations PSCs
    Audit Considerations on Closely held C Corporations
    Supporting Law
    Trusts In a Nutshell
    Trusts Rental Issues
    Supporting Law
    Trusts Material Participation
    Supporting Law
    Trusts Dispositions, Distributions and Gift
    Supporting Law
    Limited Liability Companies (LLCs) Nutshell
    Material Participation for LLCs
    Self-Charged Interest In a Nutshell
    Summary
    Exhibit 6.1: C Corporations: Passive Activity Issues
    Exhibit 6.2: Trusts: Passive Loss Issues
    Exhibit 6.3: LLCs: Passive Activity Issues
    Exhibit 6-4: Self-Charged Interest

Chapter 7: Interaction With Other IRC Sections

    Introduction
    Investment Interest Expense
    Investment Income
    Investment Interest Expense
    Investment Interest Examination Techniques
    Investment Interest Supporting Law
    Rental of Personal Residence In a Nutshell
    Supporting Law
    Interest Issues
    Supporting Law
    Net Operating Losses
    Working Interests in Oil And Gas Property
    Trading Personal Property for an Owner’s Account
    Casualty Losses
    Low Income Housing Losses
    Summary
    Exhibit 7.1: Investment Income And Investment Interest
    Expense
    Exhibit 7.2: IRC ž 469(j)(7) - Interest On Rental Residence

Chapter 8: Activities (Grouping Rules)

    In a Nutshell
    Five Factors
    Rentals
    Limited Partner
    C Corporations
    Partnerships and S Corporations
    Consistency Requirement
    Anti-Abuse Provision
    Supporting Law
    Summary
    Exhibit 8.1: Activities (Grouping Entities

Chapter 9: Credits

    In a Nutshell
    Types of Credits
    Application of Credit
    Special Rental Real Estate Allowance
    Disposition
    Supporting Law
    Summary
    Exhibit 9.1: Low Income Housing And
    Passive Loss Limitations
    Exhibit 9.2: Passive Loss Credit Decision Tree

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