¶2980. Passive Loss Rules - William Bryant

2980. Passive loss RulesbyKevin R. Conzelmann, S. Ocko, , Day & Lord, Barrett SmithNew York, New York OVERVIEW The Passive loss Rules apply to individuals, including partners and S corporation shareholders,estates, closely held C corporations, and personal service corporations. Special Rules apply topublicly traded partnerships. Taxpayers subject to the Rules must determine which of theirundertakings constitute separate activities and whether any of these activities are Passive . Apassive activity is an activity which involves a trade or business in which the taxpayer does notmaterially participate. Beginning in 1994, rental activities are treated as Passive activities, exceptto the extent that the taxpayer is engaged in rental real estate activities as a real participation requires a taxpayer to be involved in the operations of the activity on aregular, continuous and substantial basis. Under the regulations, a taxpayer will be treated asmaterially participating in an activity if he satisfies one of several quantitative "safe-harbor" partners are not generally treated as materially participating in an taxpayer subject to the Passive loss Rules who owns an interest in a Passive activity duringthe taxable year must calculate whether he has a Passive activity loss or credit for the taxable Passive activity loss is the amount by which Passive activity

¶2980.01 Introduction The passive loss rules were enacted as part of the Tax Reform Act of 1986. 1 The rules were intended to prevent taxpayers from using losses and credits from tax shelters to offset income

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