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limited partner interest if one or more

to regroup as required under Regulations

the names, addresses, and employer

individuals (each of whom would materially

section 1.469-4(e)) is to avoid the underlying

identification numbers (EIN), if applicable,

participate in the activity under test 1, 5, or

purposes of the passive activity rules.

for the activities being grouped as a single

6, on page 3, for the tax year if the

activity. In addition, the statement must

Limitation on grouping certain activities.

corporation’s activity were the individual’s

contain a declaration that the grouped

The following activities cannot be grouped

activity) directly or indirectly own more than

activities make up an appropriate economic

together.

50% (by value) of the corporation’s

unit for the measurement of gain or loss

1. A rental activity with a trade or

outstanding stock.

under the passive activity rules.

business activity unless the activities being

The corporation is not treated as a

Addition to an existing grouping. The

grouped together make up an appropriate

limited partner, however, if the corporation

economic unit and:

corporation must file a written statement

was a general partner in the partnership at

a. The rental activity is insubstantial

with its original income tax return for the tax

all times during the partnership’s tax year

year in which the corporation adds a new

relative to the trade or business activity or

ending with or within the corporation’s tax

activity to an existing grouping. The

vice versa, or

year (or, if shorter, during the portion of the

statement must provide the name, address,

b. Each owner of the trade or business

partnership’s tax year in which the

and EIN, if applicable, for the activity that is

activity has the same proportionate

corporation directly or indirectly owned a

ownership interest in the rental activity. If so,

being added and for the activities in the

limited partner interest).

the rental activity portion involving the rental

existing grouping. In addition, the statement

of property used in the trade or business

must contain a declaration that the activities

A limited partner’s share of an electing

make up an appropriate economic unit for

activity can be grouped with the trade or

large partnership’s taxable income or loss

the measurement of gain or loss under the

business activity.

and credits (including general business

passive activity rules.

credits) from all trade or business and rental

2. An activity involving the rental of real

activities is treated as income or loss from

property with an activity involving the rental

Regrouping. The corporation must file a

the conduct of a single passive trade or

of personal property (except personal

written statement with its original income tax

business activity.

property provided in connection with the real

return for the tax year in which the

property or vice versa).

corporation regroups activities under

Consolidated groups. See Regulations

3. Any activity with another activity in a

Regulations section 1.469-4(e)(2). The

section 1.469-1(h)(4) for rules for

different type of business and in which the

statement must provide the names,

determining whether a consolidated group

corporation holds an interest as a limited

addresses, and EINs, if applicable, for the

materially or significantly participates.

partner or as a limited entrepreneur (as

activities that are being regrouped. If the

Grouping of Activities

defined in section 464(e)(2)) if that other

corporation regroups two or more activities

activity is holding, producing, or distributing

into a single activity, the statement must

Generally, one or more trade or business

motion picture films or videotapes; farming;

contain a declaration that the regrouped

activities or rental activities may be treated

leasing section 1245 property; or exploring

activities make up an appropriate economic

as a single activity if the activities make up

for or exploiting oil and gas resources or

unit for the measurement of gain or loss

an appropriate economic unit for the

geothermal deposits.

under the passive activity rules. In addition,

measurement of gain or loss under the

the statement must contain an explanation

passive activity rules. Whether activities

Activities conducted through

of why the original grouping was clearly

make up an appropriate economic unit

partnerships and other C corporations

inappropriate or the nature of the material

depends on all the relevant facts and

subject to section 469. Once a

change in the facts and circumstances that

circumstances. The factors given the

partnership or corporation determines its

made the original grouping clearly

greatest weight in determining whether

activities under these rules, a partner or

inappropriate.

activities make up an appropriate economic

shareholder can use these rules to group

Reporting of pre-existing groupings

unit are:

those activities with:

•

required only upon change. The

Each other,

1. Similarities and differences in types of

•

corporation is not required to file a written

Activities conducted directly by the

trades or businesses,

statement reporting the grouping of the

partner or shareholder, or

2. The extent of common control,

•

trade or business activities and rental

Activities conducted through other

3. The extent of common ownership,

activities that have been made for tax years

partnerships and corporations.

4. Geographical location, and

beginning before January 25, 2010,

5. Reliance between or among the

A partner or shareholder cannot treat as

(pre-existing groupings) until the corporation

activities.

separate activities those activities grouped

makes a change to the grouping.

together by the partnership or corporation.

Example. A corporation has a

Effect of failure to report. If the

Partial disposition of an activity. The

significant ownership interest in a bakery

corporation fails to report these changes,

corporation can, for the tax year in which

and a movie theater in Baltimore and in a

each trade or business activity or rental

there is a disposition of substantially all of

bakery and a movie theater in Philadelphia.

activity will be treated as a separate activity.

an activity, treat the part disposed of as a

Depending on all the relevant facts and

The corporation will be considered to have

separate activity if it can prove with

circumstances, there may be more than one

made a timely disclosure if it has filed all

reasonable certainty:

reasonable method for grouping the

affected income tax returns consistent with

1. The prior year unallowed losses and

activities. For instance, the following

the claimed grouping and makes the

credits, if any, allocable to the part of the

groupings may or may not be permissible.

required disclosure on the income tax return

•

activity disposed of, and

A single activity.

for the year in which the corporation first

•

2. The net income or loss and any

A movie theater activity and a bakery

discovered the failure to disclose. If the IRS

credits for the year of disposition allocable to

activity.

first discovers the failure to disclose,

•

the disposed part of the activity.

A Baltimore activity and a Philadelphia

however, the corporation must have

activity.

reasonable cause for not making the

•

Disclosure Requirement

Four separate activities.

required disclosure.

Once the corporation chooses a grouping

The following disclosure requirements for

Passive Activity Income

under these rules, it must continue using

groupings apply for tax years beginning after

that grouping in later tax years unless either:

January 24, 2010. The corporation is

and Deductions

•

The corporation determines that the

required to report to the IRS certain changes

original grouping was clearly inappropriate;

to the corporation’s groupings that occur

Take into account only passive activity

during the tax year. For more information on

income and passive activity deductions to

•

A material change in the facts and

these disclosure requirements, see

figure the corporation’s overall gain or

circumstances makes that grouping clearly

Revenue Procedure 2010-13, available at

overall loss from all passive activities or any

inappropriate.

passive activity. In figuring the PAL, a

New grouping. The corporation must file a

The IRS may regroup the corporation’s

closely held corporation subtracts both

activities if any of the activities resulting from

written statement with its original income tax

passive activity income and net active

the corporation’s groupings is not an

return for the first tax year in which two or

income from its passive activity deductions.

appropriate economic unit and one of the

more activities are originally grouped as a

See the instructions for line 2 on page 8 for

primary purposes of the grouping (or failure

single activity. The statement must provide

the definition of net active income.

-4-

Instructions for Form 8810 (2010)

Instructions For Form 8810 - Corporate Passive Activity Loss And Credit Limitations - 2010 Page 4

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