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 rules.

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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