Grouping activities under sec. 469.

• Author: Bowman, Misty D.

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...