HOW A HIGH-INCOME TAXPAYER MAY AVOID THE SUSPENSION OF BUSINESS LOSSES - TREATED AS PASSIVE ACTIVITY LOSSES -

The purpose of this article is to enhance the awareness of the high-income taxpayer as to how to avoid the suspension of business losses – treated as passive activity losses - by satisfying Treas. Reg. §... [ view full abstract ]

The purpose of this article is to enhance the awareness of the high-income taxpayer as to how to avoid the suspension of business losses – treated as passive activity losses - by satisfying Treas. Reg. § 1.469-1t(e)(3)(ii)(c), i.e., the extraordinary personal services exception to the passive activity loss rules under I.R.C. § 469. To qualify for § 469’s extraordinary personal services exception, the high-income taxpayer must be able to offer competent evidence that (1) the high-income taxpayer provided to tenants what the law deems to be extraordinary personal services, (2) tenants rented the properties to receive the services provided by the high-income taxpayer, i.e., that the tenant’s having a place to live was just an “incidental” benefit to the receipt of the services provided to the tenant by the high-income taxpayer, and (3) the high-income taxpayer “materially participated” in her rental business.
In a case study approach, the three primary objectives of this article are:
(1) To establish the factual background surrounding the case study;
(2) To establish the law at issue (i.e., the federal tax law concerning the extraordinary personal services exception to the passive activity loss rules under I.R.C. § 469); and
(3) To apply the law at issue to the factual background for the purpose of identifying implications for the high-income taxpayer in avoiding the suspension of business losses – treated as passive activity losses - under the passive activity loss rules of I.R.C. § 469.
This article argues that if these objectives are met, the high-income taxpayer will have a greater understanding of the intricacies of I.R.C. § 469. In a case study approach, this article accomplishes its purpose and objectives in a stepwise fashion as follows.
• In Part I, the factual background surrounding the case study is established.
• In Part II, the federal tax law concerning the extraordinary personal services exception to the passive activity loss rules under I.R.C. § 469 is identified.
• In Part III, the law at issue is applied to the factual background for the purpose of establishing particular legal conclusions about the federal income tax consequences of the application of I.R.C. § 469.
• In Part IV, implications of the findings in Part III for the avoidance by the high-income taxpayer of the suspension of business losses – treated as passive activity losses - by satisfying Treas. Reg. § 1.469-1t(e)(3)(ii)(c) i.e., the extraordinary personal services exception to the passive activity loss rules under I.R.C. § 469, are presented.

The High-Income Taxpayer Offers Competent Evidence that Shows
(1) She Provided What the Law Deems to be Extraordinary Personal Services
And (2) the Use by Occupants/Residents of the Home is Incidental
to such Occupants’ Receipt of Services Provided by the High-Income Taxpayer

“Extraordinary personal services (within the meaning of paragraph (e)(3)(v) of this section) are provided by or on behalf of the owner of the property in connection with making such property available for use by customers (without regard to the average period of customer use). . .”