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    Passive Activity

    I know this is everyone's favorite subject.

    I have an S Corp client owned by he and his wife, 49% and 51%, respectively.

    She materially participates; she provides services full time to the corporation all year long. This business is her lively-hood/passion. The husband has a full time job and does not materially participate; not even 100 hours.

    In the event of a loss; could the husband use the phraseology in temp reg. 1.469-5T(f)(3) to claim a non-passive loss even though his participation is minimal?

    The reg states: "(3) PARTICIPATION OF SPOUSE. In the case of any person who is a
    married individual (within the meaning of section 7703) for the taxable year, any participation by such person's spouse in the activity during the taxable year (without regard to whether the spouse owns an interest in the activity and without regard to whether
    the spouses file a joint return for the taxable year) shall be treated, for purposes of applying section 469 and the regulations thereunder to such person, as participation by such person in the activity during the taxable year."

    It seems that the reg implies the husband could use his wife's participation to classify his participation as "materially participating" for purposes of classifying his interest in this activity as non-passive.

    Am I correct in assuming this?

    TIA.
    Circular 230 Disclosure:

    Don't even think about using the information in this message!

    #2
    Yes..

    you are reading this correctly. Code section 469(h)(5) "In determining whether a taxpayer materially participates, the participation of the spouse of the taxpayer shall be taken into account."
    emphasis added.

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