Stephen and Ann Schwalbach - Page 14

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          Temporary Income Tax Regs., 54 Fed. Reg. 20543 (serves as text of           
          proposed regulations).  As applicable herein, section                       
          1.469-4T(b)(2)(ii)(B), Temporary Income Tax Regs., 54 Fed. Reg.             
          20543, provided:                                                            
                         (B) Operations conducted through                             
                    nonpassthrough entities.  For purposes of                         
                    applying section 469 and the regulations                          
                    thereunder, a taxpayer's activities do not                        
                    include operations that the taxpayer conducts                     
                    through one or more entities (other than                          
                    passthrough entities). The following example                      
                    illustrates the operation of this paragraph                       
                    (b)(2)(ii)(B):                                                    
                         Example. (i) A, an individual, owns                          
                    stock of X, a closely held corporation * * *                      
                    that is directly engaged in the conduct of a                      
                    real estate development business.  A                              
                    participates in X's real estate development                       
                    business, but does not own any interest in                        
                    the business other than through ownership of                      
                    the stock of X.                                                   
                         (ii) X is subject to section 469 * * *                       
                    and does not hold the real estate development                     
                    business through another entity.                                  
                    Accordingly, for purposes of section 469 and                      
                    the regulations thereunder, the operations of                     
                    X's real estate development business are                          
                    treated as part of X's activities.                                
                         (iii) A is also subject to section 469 *                     
                    * *, but A's only interest in the real estate                     
                    development business is held through X.  X is                     
                    a C corporation and therefore is not a                            
                    passthrough entity.  Thus, for purposes of                        
                    section 469 and the regulations thereunder,                       
                    A's activities do not include the operations                      
                    of X's real estate development business.                          
                    Accordingly, A's participation in X's                             
                    business is not participation in an activity                      
                    of A, and is not taken into account in                            
                    determining whether A materially participates                     
                    * * * or significantly participates * * * in                      
                    any activity. * * *                                               



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