Disallowed loss from depreciation on self-rental

To my points: The formal written disclosures as to groupings is relatively new. Hence our need to get a timeline here. Prior to formal, written grouping disclosures were required, there wasn't any mechanism to disclose one's grouped activities. See Rev Proc 2010-13 as to this point. Formal groupings were required for new groups for tax years beginning on or after 1/25/10. So, you might be in a situation where a formal grouping disclosure was not required. In which case, based on how the taxpayer reported things on his 1040 over the years, it might be that we can legitimately argue that a grouping election has already been made. In which case, we put the late election relief in our back pocket, since it wouldn't be needed at this point.

And do note: There is a very good reason why the Rev Proc was issued: Because the IRS had no real way of knowing what the taxpayer grouped and didn't group. So, if our activities took place before formal groups were required to be disclosed, we have a very good case here, assuming we netting things on Schedule E, Page 2 in some fashion over the years. The fact that the IRS issued the Rev Proc is in our favor in my view. It evidences the fact that the IRS couldn't totally tell what was and wasn't grouped. Therefore, the taxpayer's own stipulations here, and how he reported things, carry some weight.

We discussed this issue extensively on TA one time. I think it was JAD or Wiles that started the thread...

My next point was about the appropriateness of the grouping. That is, even if we successfully assert that we have properly grouped the two activities, the question remains: Was it appropriate and were we allowed to do it? This gets to Dave's points. Hold off on the proportionate ownership test. What we need to look at here, in detail, is the Substantiality issue. There is some case law on this and the fact that we have a big loss may or may not fit into the mix here. There are quantitative and qualitative factors that need to be examined.

I agree with what Ckenefick said, but would like to add a couple of points.

As he said, business activities may be grouped if they constitute an “appropriate economic unit.” See Treas. Reg. §1.469-4(c)(1). Whether the activities constitute an “appropriate economic unit” depends on the facts and circumstances. Treas. Reg. §1.469-4(c)(2) lists a variety of factors to be considered, such as similarities and differences in the types of businesses, the extent of common control, the extent of common ownership, geographical location, and interdependence between the activities. There are several examples there.

Also as he said, under Rev. Proc. 2010-13, 2010-4 I.R.B. 329, for tax years beginning on or after 1/25/2010, new groupings had to be disclosed. Also, the addition of new activities to existing groupings and regroupings must also be disclosed. However, with respect to groupings that existed prior to the effective date of the Rev. Proc., taxpayers are only required to report changes to such groupings. See section 4.06. And if the rental arrangement began in 2010 (as you say), the it didn’t require a grouping disclosure because the first return on which groupings had to be disclosed was 2011. And the disclosure wasn't required to be made on the 2011 or later returns because there weren't any changes to the original grouping.

Also as he said, there is case law regarding the "insubstantial" requirement. As far as I know, the court cases that have dealt with this issue are Glick v. United States, 96 F.Supp. 2d 850 (S.D. Ind. 2000); Candelaria v. United States, 518 F.Supp. 2d 852 (W.D. Tex. 2007); and Schumacher v. Commissioner, T.C. Sum. Op. 2003-96. TAM 200747018 dealt with this issue in connection with a car dealership. Reading these may help you craft an argument for your client’s case.

I need to revisit this topic for another question related to a grouping election between another operating dealership and a self-rental.

Facts:

-Dealership (LLC partnership acquired in 2012) is owned 51% by Bob, 49% by Joe (unrelated).
-Self-rental activity (started in 2012) is 100% owned by Bob and is a single-member LLC reported on Bob's Schedule E.
-The self-rental activity owns the property, had a cost segregation study performed, and will have a related $1 million loss for the year.

I know that the two entities do not have proportionate ownership, which could be a big problem for making a grouping election. However, could I consider the rental activity "insubstantial" in relation to the dealership business income?

I am also not clear on where to report the Rev. Proc. 2010-13 election statement. Do I attach the election statement on Bob's personal return, the partnership return, or both?

I just wanted to refresh this topic as I have the same situation going on. I wanted to see what GreenCPA ended up finding out and if anyone else has any insights on the subject. I was in a seminar today and brought this up and was told that the re-characterization rules would still be in play even with the grouping. Any help would be appreciated.

Did either of you come to a resolution on this? I have a Dental practice (s-Corporation) renting (self-rental) from an LLC that owns the building in the S-Corporation. They did a Cost segregation on the building and want to depreciate it as non-passive against the S-Corp Income.