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stock is owned, directly or indirectly, by or

Gain or loss on dispositions;

limitations other than the passive loss and

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for not more than five individuals, and the

credit rules.

Net active income (for a consolidated

corporation is not a personal service

group treated as a closely held

corporation.

corporation); and

Rental Activities

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Credits from passive activities.

Certain organizations are treated as

A rental activity is a passive activity even

individuals for this test (see section

if the corporation materially participated in

542(a)). For rules of determining stock

Activities That Are Not

the activity unless it meets the

ownership, see section 544 (as modified

requirements described in item 2 in

Passive Activities

by section 465(a)(3)).

Activities That Are Not Passive

The following are not passive activities.

Other Passive Activity Terms

Activities above. In addition, if the

1. Trade or business activities in

corporation meets any of the five

Net income means the excess of current

which the corporation materially

exceptions listed below, the rental of the

year income over current year deductions

participated for the tax year.

property is not treated as a rental activity.

from the activity. This includes any

See Reporting Income, Deductions,

2. Any rental real estate activity in

current year gains or losses from the

Losses, and Credits From the

which the corporation materially

disposition of assets or an interest in the

Activities on page 3 if the corporation

participated if the corporation was a

activity.

meets any of the exceptions.

closely held corporation that derived more

Net loss means the excess of current

than 50% of its gross receipts from real

An activity is a rental activity if tangible

year deductions over current year income

property trades or businesses in which it

property (real or personal) is used by

from the activity. This includes any

materially participated.

customers or held for use by customers

current year gains or losses from the

and the gross income (or expected gross

For purposes of this rule, each interest

disposition of assets or an interest in the

income) from the activity represents

in rental real estate is a separate activity,

activity.

amounts paid (or to be paid) mainly for

unless the corporation elects to treat all

Overall gain means the excess of the

the use of the property. It does not matter

interests in rental real estate as one

“net income” from the activity over the

whether the use of the property is under a

activity. The corporation makes the

prior year unallowed losses from the

lease, a service contract, or some other

election by attaching a statement to its

activity.

arrangement.

original income tax return for the tax year.

Overall loss means the excess of the

See Regulations section 1.469-9(g) for

Exceptions

prior year unallowed losses from the

details on how to make or revoke this

An activity is not a rental activity if:

activity over the “net income” from the

election.

activity or the prior year unallowed losses

1. The average period of customer

A real property trade or business is

from the activity plus the “net loss” from

use (see 1b below) of the rental property

any real property development,

the activity.

is:

redevelopment, construction,

Prior year unallowed losses means the

a. 7 days or less or

reconstruction, acquisition, conversion,

deductions and losses from an activity

b. 30 days or less and significant

rental, operation, management, leasing,

that were disallowed under the passive

personal services (see below) were

or brokerage trade or business.

activity loss (PAL) limitations in a prior

provided in making the rental property

Note: If an activity qualifies for the

year and carried forward to the tax year

available for customer use.

exception described above in 2002, but

under section 469(b). See Regulations

Figure the average period of customer

has a prior year unallowed passive loss,

section 1.469-1(f)(4).

use for a class of property by dividing the

the prior year unallowed loss is treated as

total number of days in all rental periods

Coordination With Other

a loss from a former passive activity. See

by the number of rentals during the tax

Former Passive Activities on page 6.

year. If the activity involves renting more

Limitations

3. A working interest in an oil or gas

than one class of property, multiply the

Generally, PALs are subject to other

well. The working interest in an oil or gas

average period of customer use of each

limitations (for example, basis, section

well must be held directly or through an

class by the ratio of the gross rental

163(j) interest deduction limitations, and

entity that does not limit the corporation’s

income from that class to the activity’s

at-risk limitations) before they are subject

liability (such as a general partner interest

total gross rental income. The activity’s

to the passive loss limitations. Once a

in a partnership). In this case, it does not

average period of customer use equals

loss becomes allowable under these

matter whether the corporation materially

the sum of these class-by-class average

other limitations, the corporation must

participated in the activity for the tax year.

periods weighted by gross income. See

determine whether the loss is limited

Regulations section 1.469-1(e)(3)(iii).

If, however, the corporation’s liability

under the passive loss rules. See Form

was limited for part of the year (for

Significant personal services include

6198, At-Risk Limitations, for details on

only services performed by individuals. To

example, the corporation converted its

the at-risk rules. Also, capital losses that

general partner interest to a limited

determine if personal services are

are allowable under the passive loss rules

significant, all the relevant facts and

partner interest during the year), some of

may be limited under the capital loss

circumstances are taken into

the corporation’s income and losses from

limitations of section 1211(a). Percentage

consideration, including the frequency of

the working interest may be treated as

depletion deductions that are allowable

the services, the type and amount of labor

passive activity gross income and passive

under the passive loss rules may also be

required to perform the services, and the

activity deductions. See Temporary

limited under section 613A(d).

value of the services relative to the

Regulations section 1.469-1T(e)(4)(ii).

amount charged for the use of the

4. An activity of trading personal

Special Rules for

property.

property for the account of owners of

Consolidated Group

interests in the activity. For purposes of

Significant personal services do not

this rule, personal property means

include excluded services. See

The passive activity loss and passive

property that is actively traded, such as

Temporary Regulations section

activity credit of an affiliated group of

stocks, bonds, and other securities. See

1.469-1T(e)(3)(iv)(B).

corporations filing a consolidated return

Temporary Regulations section

2. Extraordinary personal services

for the tax year (a consolidated group) are

1.469-1T(e)(6) for more details.

were provided in making the rental

determined by taking into account the

property available for customer use.

Generally, income, losses, and credits

following items of each member of the

from these activities are not entered on

group:

Extraordinary personal services are

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Form 8810. However, losses and credits

Passive activity gross income and

services provided in making rental

deductions;

from these activities may be subject to

property available for customer use only if

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Instructions For Form 8810 - Corporate Passive Activity Loss And Credit Limitations - 2002 Page 2

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