Instructions For Form 8810 - 2016 (Page 4 of 13) in pdf

Grouping of Activities

consecutive) of the 10 immediately

2. An activity involving the rental of real

preceding tax years.

property with an activity involving the rental

Generally, one or more trade or business

of personal property (except personal

6. The activity is a personal service

activities or rental activities may be treated

property provided in connection with the real

activity in which the individual materially

as a single activity if the activities make up

property or vice versa).

participated for any 3 (whether or not

an appropriate economic unit for the

consecutive) preceding tax years.

3. Any activity with another activity in a

measurement of gain or loss under the

different type of business and in which the

passive activity rules. Whether activities

An activity is a personal service activity if

corporation holds an interest as a limited

make up an appropriate economic unit

it involves the performance of personal

partner or as a limited entrepreneur if that

depends on all the relevant facts and

services in the fields of health, law,

other activity is holding, producing, or

circumstances. The factors given the

engineering, architecture, accounting,

distributing motion picture films or

greatest weight in determining whether

actuarial science, performing arts or

videotapes; farming; leasing section 1245

activities make up an appropriate economic

consulting in any other trade or business in

property; or exploring for or exploiting oil and

unit are:

which capital is not a material

gas resources or geothermal deposits.

income-producing factor.

1. Similarities and differences in types of

trades or businesses,

7. Based on all the facts and

Activities conducted through partner-

circumstances, the individual participated in

2. The extent of common control,

ships and other C corporations subject

the activity on a regular, continuous, and

to section 469. Once a partnership or

3. The extent of common ownership,

substantial basis during the tax year.

corporation determines its activities under

4. Geographical location, and

The individual did not materially

these rules, a partner or shareholder can use

5. Reliance between or among the

participate in the activity under this seventh

these rules to group those activities with:

activities.

test, however, if the individual participated in

Each other,

the activity for 100 hours or less during the

Activities conducted directly by the

Example. A corporation has a significant

tax year. Participation in managing the

partner or shareholder, or

ownership interest in a bakery and a movie

activity does not count in determining

Activities conducted through other

theater in Baltimore and in a bakery and a

whether the individual materially participated

partnerships and corporations.

movie theater in Philadelphia. Depending on

under the test if:

A partner or shareholder cannot treat as

all the relevant facts and circumstances,

a. Any person (except that individual)

separate activities those activities grouped

there may be more than one reasonable

received compensation for performing

together by the partnership or corporation.

method for grouping the activities. For

services in the management of the activity, or

instance, the following groupings may or may

Partial disposition of an activity. The

not be permissible.

b. Any person in the activity spent more

corporation can, for the tax year in which

A single activity.

hours during the tax year than that individual

there is a disposition of substantially all of an

A movie theater activity and a bakery

spent performing services in the

activity, treat the part disposed of as a

activity.

management of the activity (regardless of

separate activity if it can prove with

A Baltimore activity and a Philadelphia

whether the individual was compensated for

reasonable certainty:

activity.

the management services).

1. The prior year unallowed losses and

Four separate activities.

credits, if any, allocable to the part of the

Special rules for limited partners.

Once the corporation chooses a grouping

activity disposed of, and

Generally, a limited partner cannot materially

under these rules, it must continue using that

participate in an activity. However, the

2. The net income or loss and any

grouping in later tax years unless either:

corporation is considered to materially

credits for the year of disposition allocable to

The corporation determines that the

participate in an activity in which it holds a

the disposed part of the activity.

original grouping was clearly inappropriate;

limited partnership interest if one or more

Disclosure Requirement

individuals (each of whom would materially

A material change in the facts and

participate in the activity under test 1, 5, or 6,

A corporation is required to report to the IRS

circumstances makes that grouping clearly

discussed above, for the tax year if the

certain changes to the corporation’s

inappropriate.

corporation's activity were the individual's

groupings that occur during the tax year. For

The IRS may regroup the corporation's

activity) directly or indirectly own more than

more information on these disclosure

activities if any of the activities resulting from

50% (by value) of the corporation's

requirements, see Rev. Proc. 2010-13,

the corporation's groupings is not an

outstanding stock.

2010-4 I.R.B. 329, available at

appropriate economic unit and one of the

irb/2010-04_IRB/ar15.html.

The corporation is not treated as a limited

primary purposes of the grouping (or failure

partner, however, if the corporation was a

to regroup as required under Regulations

New grouping. The corporation must file a

general partner in the partnership at all times

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

written statement with its original income tax

during the partnership's tax year ending with

purposes of the passive activity rules.

return for the first tax year in which two or

or within the corporation's tax year (or, if

more activities are originally grouped as a

Limitation on grouping certain activities.

shorter, during the portion of the

single activity. The statement must provide

The following activities cannot be grouped

partnership's tax year in which the

the names, addresses, and employer

together.

corporation directly or indirectly owned a

identification numbers (EINs), if applicable,

limited partnership interest).

1. A rental activity with a trade or

for the activities being grouped as a single

business activity unless the activities being

A limited partner's share of an electing

activity. In addition, the statement must

grouped together make up an appropriate

large partnership's taxable income or loss

contain a declaration that the grouped

economic unit and:

and credits (including general business

activities make up an appropriate economic

credits) from all trade or business and rental

a. The rental activity is insubstantial

unit for the measurement of gain or loss

activities is treated as income or loss from

relative to the trade or business activity or

under the passive activity rules.

the conduct of a single passive trade or

vice versa, or

Addition to an existing grouping. The

business activity.

b. Each owner of the trade or business

corporation must file a written statement with

activity has the same proportionate

Consolidated groups. See Regulations

its original income tax return for the tax year

ownership interest in the rental activity. If so,

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

in which the corporation adds a new activity

the rental activity portion involving the rental

determining whether a consolidated group

to an existing grouping. The statement must

of property used in the trade or business

materially or significantly participates.

provide the name, address, and EIN, if

activity can be grouped with the trade or

applicable, for the activity that is being added

business activity.

and for the activities in the existing grouping.

Instructions for Form 8810 (2016)

-4-

Instructions For Form 8810 - 2016 Page 4

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