Tax Memo

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Tax Memo

Tax Memo

To:Tax Manager


From:John T. Alfonsi


Re:Passive Loss Application

In relation to the issues mentioned in the case, the tax manager is hereby directed to take appropriate actions against the parties involved if they are deemed to have failed to comply with the provisions of of IRC §469 and Internal Revenue Service. Under IRC § 469(j)(7).

Sam's entities aresubject to the itemized passive loss limitations on Schedule A, including the 3 percent phaseout for high income taxpayers. The IRC § 469 does not override other IRC sections. It is only one of some IRC sections, which limit losses on a levy return. While § 469(j)(7) excepts qualified entity interest from the passive loss limitations, nowhere does the IRC, Regulations. or legislative history state or imply that home mortgage interest is not subject to the itemized passive loss limitations. To the contrary, Reg. §1.469-1T(d) specifically presents that the submission of IRC § 469 does not sway the remedy of pieces under any provision of the IRC other than IRC § 469. In other phrases, the mere detail that IRC § 469 permits deductibility does not signify that other IRC parts may not limit the interest expense. Qualified residential interest is claimed as an itemized passive loss from adjusted gross income. The IRC §161 provides that deductions allowed by subtitle A, Ch. 1, Subchapter B, Part VI (itemized deductions), encompassing interest deductions under 163, are taken in computing taxable earnings under 63. Therefore, it is improper for qualified entity interest to be claimed on Schedule E as a passive loss from AGI. .

In deciding whether Sam's loss was passive, the court recited the seven tests for material participation and noted that if Sam were subject to I.R.C. § 469(h)(2) he would be limited to only three of those tests for meeting the material participation standard. Sam argued successfully that he should not be treated as a limited partner for this purpose because Oregon state law distinguishes limited partner status from general partner status based on a taxpayer's “control” over a business entity rather than liability for that business' debts. Under Oregon law, a general partnership interest is defined as one that is not a limited interest, i.e., one where the partner is not subject to restrictions upon participation in the control of the business.

If any taxpayer has any decrease for any taxable year from a working interest in any oil or gas property which is treated as a decrease which is not from a passive undertaking, then any net income from such property (or any property the cornerstone of which is very resolute in entire or in part by quotation to the cornerstone of such house) for any succeeding taxable year shall be treated as earnings of the taxpayer which is not from a passive activity. If the preceding sentence concerns to the net earnings from any house for any taxable year, any credits allowable under subpart B (other than section 27 (a)) or D of part IV of subchapter A for such taxable year ...
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