Better Late than Never: IRS Radically Changes Aggregation Election Procedures in Passive Activity Cases

By Hale Sheppard

The tax code is best known for its strict rules, but it also features hundreds of taxpayer-favorable elections.  The first step to evaluating and possibly taking advantage of these elections is being aware of their existence.  Unfortunately, taxpayers and/or their advisors sometimes overlook an election or fail to follow the related procedures.  A classic example is the so-called “aggregation election,” under which taxpayers who qualify as real estate professionals can choose to combine all their interests in real estate endeavors for purposes of the passive activity rules in Section 469.  If taxpayers make a timely aggregation election, they often meet the “material participation” test and are thus able to claim their real estate losses in the year that they actually occur.  If not, the losses are largely suspended.

Taxpayers who neglect to follow the aggregation-election procedures have historically had two main options:  (i) seek a private letter ruling from the IRS granting permission to file a retroactive election, or (ii) litigate the case on grounds that they made a “deemed election” or “substantially complied” with the election procedures.  Both options have significant downsides for taxpayers.  Times have changed, though.  The IRS recently issued Rev. Proc. 2011-34, which sets forth special procedures allowing certain taxpayers to make an expedited, inexpensive, late aggregation election.  My article, titled “Better Late than Never:  IRS Radically Changes Aggregation Election Procedures in Passive Activity Cases,” analyzes passive loss limitation rules, material participation standards, aggregation elections, and the pros and cons of various methods for rectifying non-election situations, including reliance on Revenue Procedure 2011-34.  The article was published in the most recent issue of Journal of Tax Practice & Procedure.

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