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services in the management of the activity,

Four separate activities.

figure the corporation’s overall gain or

overall loss from all passive activities or any

Once the corporation chooses a grouping

b. Any person in the activity spent more

passive activity. In figuring the PAL, a

under these rules, it must continue using

hours during the tax year than that individual

closely held corporation subtracts both

that grouping in later tax years unless a

spent performing services in the

passive activity income and net active

material change in the facts and

management of the activity (regardless of

income from its passive activity deductions.

circumstances makes that grouping clearly

whether the individual was compensated for

See the instructions for line 2 on page 7 for

inappropriate.

the management services).

the definition of net active income.

The IRS may regroup the activities if the

grouping fails to reflect one or more

Self-Charged Interest

Special rules for limited partners.

appropriate economic units and one of the

Generally, a limited partner cannot

Certain “self-charged” interest income or

primary purposes of the grouping is to avoid

materially participate in an activity. However,

expense can be treated as passive activity

the passive activity limitations.

the corporation is considered to materially

gross income or passive activity deductions

participate in an activity in which it holds a

Limitation on grouping certain activities.

if the loan proceeds are used in a passive

The following activities cannot be grouped

limited partner interest if one or more

activity. Generally, self-charged interest

individuals (each of whom would materially

together.

income and expense result from loans

participate in the activity under test 1, 5, or

1. A rental activity with a trade or

between the corporation and a partnership

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

business activity unless the activities being

in which the corporation had a direct or

corporation’s activity were the individual’s

grouped together make up an appropriate

indirect ownership interest. It also may result

activity) directly or indirectly own more than

economic unit and:

from loans between one partnership and

50% (by value) of the corporation’s

another if each owner in the borrowing entity

a. The rental activity is insubstantial

outstanding stock.

has the same proportional ownership

relative to the trade or business activity or

interest in the lending entity. The

The corporation is not treated as a

vice versa, or

self-charged interest rules do not apply to

limited partner, however, if the corporation

b. Each owner of the trade or business

the corporation’s partnership interest if the

was a general partner in the partnership at

activity has the same proportionate

partnership made an election under

all times during the partnership’s tax year

ownership interest in the rental activity. If so,

Regulations section 1.469-7(g) to avoid the

ending with or within the corporation’s tax

the rental activity portion involving the rental

application of these rules. See Regulations

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

of property used in the trade or business

section 1.469-7 for details.

partnership’s tax year in which the

activity can be grouped with the trade or

corporation directly or indirectly owned a

business activity.

Passive Activity Income

limited partner interest).

2. An activity involving the rental of real

Passive activity income includes all income

property with an activity involving the rental

A limited partner’s share of an electing

from passive activities, including (with

of personal property (except personal

large partnership’s taxable income or loss

certain exceptions described in Temporary

property provided in connection with the real

and credits (including general business

Regulations section 1.469-2T(c)(2) and

property or vice versa).

credits) from all trade or business and rental

Regulations section 1.469-2(c)(2)) gain from

3. Any activity with another activity in a

activities is treated as income or loss from

the disposition of an interest in a passive

different type of business and in which the

the conduct of a single passive trade or

activity or property used in a passive activity

corporation holds an interest as a limited

business activity.

at the time of the disposition.

partner or as a limited entrepreneur (as

Consolidated groups. See Regulations

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

Passive activity income does not include

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

activity engages in holding, producing, or

the following.

determining whether a consolidated group

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distributing motion picture films or

Income from an activity that is not a

materially or significantly participates.

videotapes; farming; leasing section 1245

passive activity.

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property; or exploring for or exploiting oil

Portfolio income, including interest,

Grouping of Activities

and gas resources or geothermal deposits.

dividends, annuities, and royalties not

Generally, one or more trade or business

derived in the ordinary course of a trade or

Activities conducted through

activities or rental activities may be treated

business, and gain or loss from the

partnerships and other C corporations

as a single activity if the activities make up

disposition of property that produces

subject to section 469. Once a partnership

an appropriate economic unit for the

portfolio income or is held for investment

or corporation determines its activities under

measurement of gain or loss under the

(see section 163(d)(5)). See Temporary

these rules, a partner or shareholder can

passive activity rules. Whether activities

Regulations section 1.469-2T(c)(3). See

use these rules to group those activities

make up an appropriate economic unit

Self-Charged Interest above for an

with:

depends on all the relevant facts and

exception.

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Each other,

circumstances. The factors given the

Personal service income, including

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Activities conducted directly by the

greatest weight in determining whether

commissions and income from trade or

partner or shareholder, or

activities make up an appropriate economic

business activities in which the corporation

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Activities conducted through other

unit are:

materially participated for the tax year. See

partnerships and corporations.

Temporary Regulations section

1. Similarities and differences in types of

A partner or shareholder cannot treat as

1.469-2T(c)(4).

trades or businesses,

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separate activities those activities grouped

Income from positive section 481

2. The extent of common control,

together by the partnership or corporation.

adjustments allocated to activities other than

3. The extent of common ownership,

passive activities. See Temporary

4. Geographical location, and

Partial disposition of an activity. The

Regulations section 1.469-2T(c)(5).

5. Reliance between or among the

corporation can treat the disposition of

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Income or gain from investments of

activities.

substantially all of an activity as a separate

working capital.

activity if it can prove with reasonable

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Example. A corporation has a significant

Income from an oil or gas property if the

certainty:

ownership interest in a bakery and a movie

corporation treated any loss from a working

1. The prior year unallowed losses and

theater in Baltimore and in a bakery and a

interest in the property for any tax year

credits, if any, allocable to the part of the

movie theater in Philadelphia. Depending on

beginning after 1986 as a nonpassive loss

activity disposed of, and

all the relevant facts and circumstances,

under the rule excluding working interests in

2. The net income or loss and any

there may be more than one reasonable

oil and gas wells from passive activities. See

credits for the year of disposition allocable to

method for grouping the activities. For

Regulations section 1.469-2(c)(6).

the disposed part of the activity.

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instance, the following groupings may or

Any income treated as income not from a

may not be permissible.

passive activity under Temporary

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Passive Activity Income

A single activity.

Regulations section 1.469-2T(f) and

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A movie theater activity and a bakery

Regulations section 1.469-2(f). See

and Deductions

activity.

Recharacterization of Passive Income

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A Baltimore activity and a Philadelphia

Take into account only passive activity

below.

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activity.

income and passive activity deductions to

Overall gain from any interest in a PTP.

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Instructions For Form 8810 - Corporate Passive Activity Loss And Credit Limitations - 2006 Page 4

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