Provides IRS examiners with specific guidance on potential audit issues, issue identification and lead sheets and other job aids. Examples and citation are based on 1994 law.

TABLE OF CONTENTS

• INTRODUCTION v
• WHAT’S NEW vii
• SUMMARY OF EXHIBITS ix
• CHAPTER 1 AN OVERVIEW OF THE LAW AND FORM 8582
  • Introduction 1-1
  • Two Types of Passive Activities 1-2
  • Activity Rules 1-3
  • Exceptions to the Loss Disallowance Rule 1-4
  • Participation Rules 1-5
  • Material Participation 1-6
  • Active Participation 1-6
  • Form 8582 1-7
  • Completion of Form and Worksheets 1-7
  • Audit Issues 1-9
  • Issue Identification 1-9
  • Summary 1-9
• CHAPTER 2 RENTAL ISSUES
  • Introduction 2-1
  • Exceptions to Rental Activities 2-2
  • Equipment Rental Issues 2-3
  • Real Estate Issues 2-5
  • $25,000 Offset Issues 2-8
  • Limited Partner Issues 2-9
  • Vacation Rental Issues 2-10
  • Automatic Adjustments 2-10
  • Real Estate Professionals 2-15
  • Income From Self-Rented Property 2-18
  • Issue Identification 2-19
  • Summary 2-20
• CHAPTER 3 MATERIAL PARTICIPATION
  • Introduction 3-1
  • Rules of Time 3-1
  • General Rule 3-1
  • Quantitative Time Tests 3-2
  • More Than 500 Hours 3-3
  • Substantially All Participation 3-4
  • 100-500 Hours and More Than Anyone Else 3-4
  • Significant Participation Activity (SPA) 3-5
  • Computation of Overall Gain or Loss on SPAs 3-6
  • Any 5 of 10 Past years 3-9
  • Any 3 Years in Personal Service Activity 3-9
  • Facts and Circumstances 3-10
  • Limited Partners 3-10
  • Retired or Disabled Farmer and
  • Surviving Spouse of Farmer 3-12
  • Treatment of Former Passive Activities 3-12
  • Proof of Participation 3-12
  • Qualifying Participation 3-13
  • General Rule 3-13
  • Nonqualifying Time 3-14
  • Participation Issues 3-15
  • Issue Identification 3-15
  • Summary 3-16
• CHAPTER 4 INCOME ISSUES
  • Introduction 4-1
  • General Rules 4-2
  • Nonpassive Income 4-2
  • Material Participation Activities 4-3
  • Portfolio Income 4-3
  • Personal Service Income 4-4
  • Recharacterization Issues 4-6
  • Nondepreciable Rental Property 4-6
  • Rental to Nonpassive Activity 4-7
  • Rental Incidental to Development Activity 4-8
  • Disposition Issues 4-9
  • General Rules 4-9
  • Losses 4-10
  • Nonqualifying Dispositions 4-11
  • Installment Sales 4-13
  • Substantially Appreciated Property 4-15
  • Multiple Activities in Past 12 Months 4-16
  • Dealer Rules 4-17
  • Issue Identification 4-17
  • Summary 4-18
• CHAPTER 5 ENTITY ISSUES
  • Introduction 5-1
  • Partnerships 5-1
  • Limited Partnerships 5-2
  • Limited Liability Companies (LLC) 5-3
  • Publicly Traded Partnerships (PTPs) 5-4
  • Corporations 5-5
  • Material Participation for Corporations 5-5
  • Closely Held C-Corporations 5-6
  • Relief Provisions for Closely Held C-Corporations 5-8
  • Personal Service Corporations 5-8
  • S-Corporations 5-9
  • Consolidated Returns 5-9
  • Change in Corporate Status 5-10
  • Loss Determinations and TEFRA Issues 5-11
  • Taxable Years 5-13
  • Tiered Structures 5-13
  • Self-Charged Interest and Other Items 5-14
  • Effect of Regulations 5-15
  • Flow-Through Entity’s Election 5-15
  • Dispositions of Partnership and S-Corporation Interests 5-16
  • Trusts and Estates 5-18
  • Issue Identification 5-18
  • Summary 5-19
• CHAPTER 6 INTERACTION WITH OTHER CODE SECTIONS
  • Introduction 6-1
  • Basis and At-Risk Provisions 6-1
  • Rental of Personal Residence 6-2
  • Investment Interest 6-4
  • Net Operating Losses 6-6
  • Alternative Minimum Tax 6-7
  • Low Income Housing 6-9
  • Rehabilitation Credit 6-11
  • Oil and Gas 6-11
  • Casualty Loss 6-12
  • Summary 6-13
• CHAPTER 7 ACTIVITY RULES
  • Introduction 7-1
  • Temporary Treasury Regulations 7-1
  • Final Regulations 7-2
  • Trade or Business Activity 7-3
  • Appropriate Economic Unit 7-3
  • Rental Activities 7-5
  • Limited Partners and Limited Entrepreneurs 7-7
  • Flow-Through Entities 7-8
  • Activities Conducted Through a Closely Held
  • C-Corporation or Personal Service Corporation 7-8
  • Consistency Requirement 7-8
  • Anti-Abuse Rule 7-9
  • Effect on Dispositions 7-10
  • Issue Identification 7-11
  • Summary 7-11
• GLOSSARY G-1