decedent’s adjusted basis is less than the amount of suspended loss.Passive Losses: Suspended Losses—Transfers by Gift11. Suspended losses from passive activities that are transferred by gift are not deductible. Instead the entiresuspended loss is added to the donee’s basis.Passive Losses: Taxpayers Subject to Rules12. Taxpayers affected by the passive loss rules are individuals, estates, trusts, closely held C corporations, andpersonal service corporations. Closely held corporations are able to offset passive losses with active incomebut not portfolio income.Passive Losses: Material Participation Defi ned13. Material participation is the involvement of a taxpayer in the operations of an activity on a regular,continuous, and substantial basis. The determination of material participation is important because it mayestablish whether an activity will be characterized as a passive activity or a nonpassive activity.
Passive Losses: Material Participation Tests14. The seven tests (abbreviated) to establish material participation are applied during the year and are asfollows:(1) Participating more than 500 hours.(2) Substantially all of the participation in an activity (regardless of hours).(3) Participating more than 100 hours and more than any other individual.(4) Signifi cant participation with more than 500 hours in all signifi cant participating activities.(5) Material participation in any fi ve taxable years during the 10 preceding taxable years.(6) Material participation in any three taxable years preceding the taxable year for a personal serviceactivity.(7) Regular, continuous, and substantial participation based on facts and circumstances.Passive Losses: Signifi cant Participation15. Signifi cant participation requires more than 100 hours of participation, but not to the point of satisfyingthe material participation requirements of the other six tests. If participation in all signifi cant participatingactivities exceeds 500 hours, then all such activities become material participating activities.Passive Losses: Undertakings and Separate Source of Income Production16. An undertaking is the smallest portion of a profi t-seeking endeavor that can constitute an activity. A“separate source of income production” occurs when the operations of a profi t-seeking endeavor areconducted at the same location and are owned by the same person and the “income producing operations”(rather than support operations) are conducted at such location. This is meaningful in determining whetherthere are one or two separate activities being carried on by a taxpayer.Passive Losses: Rental Operations17. Both rental and business operations carried on by a taxpayer at the same location are generally treated astwo separate activities, unless one undertaking generates more than 80 percent of income over the other.Passive Losses: Real Estate Activities18. A taxpayer can combine real estate activities in any manner the taxpayer chooses, so long as the IRS isinformed of the election.Passive Losses: Nonrental Activities19. Generally, nonrental activities can be combined in any manner so long as the IRS is notifi ed.Passive Losses: Nonrental Property Tests