Grouping Activities Under Sec. 469

By Misty D. Bowman, CPA, Davenport, Marvin, Joyce & Co., LLP, Greensboro, NC

Editor: Michael D. Koppel, CPA, PFS

Generally, a taxpayer may group one or more trade, business, or rental activities as one activity if the activities represent an appropriate economic unit in determining gain or loss for Sec. 469 purposes. Determining whether activities make up an appropriate economic unit depends on all the pertinent facts and circumstances. The taxpayer may use any reasonable method in grouping activities by applying the relevant facts and circumstances. Factors that a taxpayer should consider (although all are not necessary) in determining whether multiple activities comprise an appropriate economic unit for the measurement of gain or loss for purposes of Sec. 469 include:

  • Similarities and differences in types of trades or businesses;
  • The extent of common control;
  • The extent of common ownership;
  • Geographical location; and
  • Interdependence among the activities.

Once a taxpayer has grouped multiple activities into appropriate economic units, Regs. Sec. 1.469-4(e) requires the taxpayer to continue using this grouping in subsequent tax years unless a material change in facts and circumstances makes such a grouping clearly inappropriate. A decision not to group (i.e., to treat each activity separately) is a grouping decision. The grouping decision should generally have been made in 1994 when Regs. Sec. 1.469-4 was finalized or, if after that date, at the time the activity was first reflected on a return. Taxpayers must comply with IRS disclosure requirements regarding both their original groupings and the addition or disposition of specific activities within those groupings in ensuing tax years.

Regs. Sec. 1.469-4(e)(2) speaks to the possibilities of regrouping activities. This is where practitioners may be able to use some thought and ingenuity to create additional planning ideas for their clients. Regs. Sec. 1.469-4(e)(2) states:

If it is later determined that a taxpayer’s original grouping was “clearly inappropriate” or a “material change” in facts and circumstances has occurred that makes the original grouping clearly inappropriate, the taxpayer must regroup the activities and must comply with disclosure requirements prescribed by the Commissioner.

The factors of what circumstances would make the original grouping “clearly inappropriate” or what would constitute a “material change” are beyond the scope of this item but should be afforded some research time by practitioners because they may be able to derive some key planning opportunities for their clients.

To illustrate, two seemingly different types of activities may be treated as one activity.

Example 1: Q, an individual, is a partner in a business (partnership A) that sells merchandise to grocery stores. Q is also a partner in a partnership, B, that owns and operates a trucking business. The two partnerships are under common control (see the factors for consideration above). Most of the operations of B’s trucking business consist of transporting A’s merchandise. B is the only trucking business in which Q is involved. Under Regs. Sec. 1.469-4, Q can properly treat the merchandise wholesale activity and the trucking business as one activity.

This basic illustration highlights planning opportunities that have been available for many years. Considering the current economic climate, now is an appropriate time to revisit Regs. Sec. 1.469- 4(e)(2) for opportunities related to Sec. 469 that may have been overlooked.

Grouping Rental and Other Activities

One specific type of planning opportunity that is seen quite often in practice is the grouping of rental activities with other trade or business activities. Typically, a rental activity cannot be grouped with a trade or business activity. However, taxpayers may group those activities as one activity if they constitute an appropriate economic unit and:

  • The rental activity is insignificant in relation to the trade or business activity;
  • The trade or business activity is insignificant in relation to the rental activity; or
  • Each owner of the trade or business activity has the same proportionate ownership interest in the rental activity.

Quite often in practice taxpayers separate seemingly different aspects of their general business into multiple entities not only for planning purposes but also for liability protection.

Example 2: A physician group (P) is owned equally by five physicians (20% each) and is operated as a C corporation. P is operated out of a building owned by partnership R, which rents the building to P. R’s partners are the same physicians in the physician group that makes up P. The partners’ ownership in the partnership equity is the same (20% each) as that of P. Under Sec. 469, these two activities may be grouped as one activity, but only for purposes of determining whether the taxpayer materially participates in the rental entity.

However, it is important to note that under the self-rental rule of Regs. Sec. 1.469-2(f)(6), property is treated as a nonshelterable passive activity (NOPA) if it is rented to a lessee for use in a trade or business in which the taxpayer materially participates (see Regs. Sec. 1.469-5 for material participation clarification). The result is that the net rental activity income (not the net loss) from the property rented is treated as nonpassive. This rule applies to the rental of property to passthrough entities and C corporations. If a taxpayer owns an interest in a C corporation in which he or she materially participates in the activity conducted by the C corporation, a rental by the taxpayer to the C corporation of property used in the C corporation activity qualifies for NOPA treatment. As a result, where a net loss may be disallowed under the passive loss rules, a net gain cannot be used to shelter losses from other passive activities under the NOPA provisions.

The NOPA rules may always seem to be adverse to taxpayers at first glance. However, there are instances in which NOPA treatment may actually benefit the taxpayer or result in no adverse effect to the taxpayer. Such instances include when:

  • A NOPA is certain to be profitable;
  • The taxpayer has sufficient investment interest deductions to shelter NOPA income recharacterized as nonpassive; or
  • The taxpayer has sufficient passive income to make use of any NOPA losses.

One caveat to keep in mind regarding the grouping of activities is that Sec. 469 specifically prohibits the grouping of real property rentals and personal property rentals as one activity. It is also important to note that under Regs. Sec. 1.469-4(f) (1), the IRS may regroup a taxpayer’s activities if any such activities in the taxpayer’s grouping are not an appropriate economic unit and a principal purpose of the taxpayer’s grouping (or failure to regroup under Regs. Sec. 1.469-4(e)(2)) is to avoid the fundamental purposes of Sec. 469.


Michael Koppel is with Gray, Gray & Gray, LLP, in Westwood, MA.

Unless otherwise noted, contributors are members of or associated with CPAmerica International.

For additional information about these items, contact Mr. Koppel at (781) 407-0300, or

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