Proving Material Participation for the Passive Loss Rules

Author: James R. Hamill

Passive loss restrictions represent the most challenging hurdle to deducting losses. Avoiding these limits requires demonstrating material participation for the year in issue. The definition of a passive activity has become an integral part of the definition of net investment income under Section 1411. The 3.8% net investment income tax (NIIT) on high-income taxpayers requires tax professionals to gain a complete understanding of the Section 469 passive loss rules enacted in 1986 to shut down tax shelters.

An increasing number of taxpayers are seeking help avoiding passive status and, thus, the 3.8% NIIT. Successfully achieving that goal requires a taxpayer satisfy one of seven material participation tests found in the regulations. These tests require careful assessment of the taxpayer’s activities by hour, but do not require a daily log book of hours spent on the activity. Nonetheless, IRS has been strict in requiring contemporaneous records, and there has been significant litigation on the material participation issue. Qualifying for material participation will become increasingly important as a means to avoid the 3.8% NIIT.

The two-hour CPE course presented by James Hamill, CPA, Ph.D., explains the seven tests with a particular focus on the case law that has defined how to prove that one or more of the tests has been satisfied. This program is particularly important in helping clients prepare for IRS audits as well as in handling ongoing audits involving material participation challenges.

Publication Date: August 2022

Designed For
CPAs, EAs, return preparers, tax attorneys and other tax professionals who advise clients who may be subject to the passive loss rules or the NIIT will benefit from this insightful webinar.

Topics Covered

• Background — Why it Matters
• Regulatory Tests of MP
• IRS Audit Guidance
• Judicial Decisions
• How to Plan to Prove Participation

Learning Objectives

• Describe the seven tests for material participation
• Recognize how to determine how to best defend your clients against a material participation challenge
• Describe the court cases and how it they apply to client scenarios
• Describe when IRC Section 469 does not apply
• Identify which material participation test is based on the statute and is very difficult to satisfy
• Differentiate IRS court cases and who the winner was

Level
Intermediate

Instructional Method
Self-Study

NASBA Field of Study
Taxes (2 hours)

Program Prerequisites
Basic understanding of federal income taxation.

Advance Preparation
None