May 11, 1989
The Second Installment of
Passive Loss Regulations Issued
The Internal Revenue Service today issued the second
installment of passive loss regulations. These rules offer guidance
on how taxpayers should identify activities under the passive loss
The passive loss rules, enacted as part of the Tax Reform Act
of 1986, limit taxpayers' activities. Taxpayers must carry these
unused losses and credits forward until they have income from
passive activities or completely dispose of the activity that
generated the losses. "Passive activities" are trade or business
activities in which the taxpayer does not materially participate.
They also include rental activities.
Taxpayers must identify their activities to determine whether
an activity is passive or non-passive, to determine when they have
completely disposed of an activity, and in order to make certain
other determinations. The regulations help taxpayers determine how
many "activities" they have and which business operations must be
aggregated and treated as one activity.
Generally, the regulations treat each undertaking of a taxpayer
as a separate activity. An undertaking generally consists of all
the business operations the taxpayer owns and conducts at the same
location. Because many taxpayers conduct all of their business
operations at a single location, either directly or through a single
passthrough entity, their operations generally will constitute one
undertaking and one activity. Therefore, these taxpayers need not
analyze their business operations any further under the regulations.
Special rules apply, however, if an undertaking includes both
rental and nonrental operations. In such a case, the undertaking
generally must be treated as two separate undertakings unless one
type of operation predominates over the other type.
Under certain circumstances, the regulations require taxpayers
to aggregate similar, commonly controlled trade or business
undertakings into larger activities. Generally, undertakings are
similar if they are vertically integrated or have predominant
operations in the same "line of business." The IRS is issuing
Revenue Procedure 89-38, which sets out "lines of business."
The temporary and proposed regulations will appear in the
Federal Register on May 12, 1989. Written comments and requests for
a public hearing should be sent to the Commissioner of Internal
Revenue, Attn: CC:CORP:T:R (PS-001-89), Washington, D.C. 20224, by
August 31, 1989. Revenue Procedure 89-38 is attached and will also
appear in Internal Revenue Bulletin 1989- 24, dated June 12, 1989.
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