Revenue Procedure 2010-13 was released on January 6, 2010 and is effective for all tax years that begin on or after January 25, 2010 (the 2011 tax year for calendar-year taxpayers). This Revenue Procedure will affect individual, partnership, and S Corporation tax returns. However, since disclosure requirements are already in place for partnerships and S Corporations, individuals are most affected by the new rules.
As if the tax laws were not confusing enough, the IRS has issued new disclosure requirements for taxpayers to report, for purposes of the passive activity loss rules under §469 of the Internal Revenue Code and Treasury Regulation §1-469-4, their groupings and regroupings of activities, as well as the addition of specific activities within the current grouping of activities. The failure to report whether activities have been grouped as a single activity will generally result in the unreported activities being treated as separate activities under a default rule.
The single activity default rule is not good news for taxpayers. In most cases it is very difficult to meet the material participation requirements of §469, Treasury Regulation §1.469-5, and Temporary Treasury Regulation §1.469-5T on an individual activity basis, particularly when the taxpayer previously grouped multiple activities as a single appropriate economic unit pursuant to Treasury Regulation §1.469-4.
In general, taxpayers will have to file a written statement with their original return disclosing the names, addresses, employer identification numbers (if applicable), when any of the following applies to the grouping of trade or business or rental activities under Treasury Regulation §1.469-4:
1. New Groupings
2. Addition of New Activities to Existing Groupings
In addition, any statement reporting either a new grouping of two or more trade or business activities or rental activities, or an addition of new activities to existing groupings, must contain a declaration that the grouped activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of §469.
If two or more activities are regrouped into a single activity, the statement reporting a regrouping must also contain a declaration that the regrouped activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of §469. Furthermore, the statement reporting a regrouping must contain an explanation of why the taxpayer's original grouping was determined to be clearly inappropriate or the nature of the material change in the facts and circumstances that makes the original grouping clearly inappropriate.
It should be noted that a taxpayer is not required to file a written statement for preexisting groupings until the taxpayer makes changes to the groupings as described above.
The passive activity loss rules are complicated. If you believe that these rules apply to you, please contact a Schneider Downs tax advisor to assess your situation and develop a plan to substantiate your tax position.
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