It is not unusual for the owners of a closely held business to also own a number of real properties. For example, they may own real property that:
The Code provides various rules that may limit the ability of an individual taxpayer, who owns an interest in a closely held business, to deduct losses that are attributable to such business.
Under the passive activity loss (“PAL”) rules, for example, the losses realized by a taxpayer from passive activities that exceed the
Be sure to start with Part I, here!
Real Estate as an Active Business
The active conduct of a trade or business does not include the holding for investment purposes of land, or other property, or the ownership and operation (including the leasing) of real property used in a trade or business, unless the
The Passive Loss Rules
In general, if a taxpayer’s aggregate losses from passive activities exceed the taxpayer’s aggregate income from passive activities for the taxable year, the excess losses may not be deducted against other income for that taxable year. Such excess losses are suspended and are carried forward, to be treated as deductions from
During the course of the year, we encounter a number of shareholder disputes. Sometimes we represent a minority shareholder; sometimes we represent the corporation or the majority shareholders. 
Regardless of who the players are, the resolution of the dispute will involve some economic deal. The economic deal, in turn, will depend in no small part
Passive Activity Losses
The “passive loss rules” are aimed at preventing individual taxpayers from using their losses from passive activities to offset their income from active businesses. The rules operate by “disallowing” the current deduction of passive losses – the excess of an individual taxpayer’s losses from passive activities for the year over his or
In several previous posts, we have emphasized the importance of educating oneself about the tax consequences of any given business transaction well before that transaction comes to life. In many situations, such forethought gives a taxpayer the opportunity to weigh the costs and benefits of different courses of action and, as a result, to
In several previous posts, we noted the importance of determining, in the case of a family or other closely-held business, where the goodwill for the business resides: in the business, in the shareholder-employees, or in another employee. In the absence of an employment agreement or non-compete, we noted that it may be possible to
Planning for the Surtax
The best time to plan for any tax event is well before it occurs, and this also applies to the surtax. The trustee of a trust will almost always want the business income of the trust to be characterized as active income. The surtax may be addressed, at least partially, in
The IRS’s Position on Material Participation by Trusts
According to the IRS, material participation for a non‑grantor trust should be determined solely by reference to the activities of the trustee acting as such; it should not include the trustee’s participation in any other capacity (e.g., as an employee of the corporation), nor should it consider