This is my concern. Without a clear notification (overt disclosure), it'd be easy for the IRS to argue your exact scenario above when it comes to groupings a Taxpayer silently makes -- the argument being that without the overt disclosure, the TP is taking the position that s/he materially participates in any/all activities treated as non-passive on his/her return (on a separate basis).
In Post #7, by the way, those facts were taken straight from the Kosonen case. In that case, the activities were separately reported on the 1040. And then each loss was separately deducted. In your case, the activities have not been separately reported in the past. That might be a distinguishing factor. Maybe. You see, when you present separately, and then deduct separately, a question arises: Why the deduction? Because of Aggregation or because non-passive in each activity presented? I agree. We don’t know, absent a formal Aggregation election.
But in your case, we never engaged in separate 1040 reporting. Thus, the IRS would have to argue that the taxpayer, behind the scenes, on an Excel spreadsheet, added up the numbers for the various K1 activities into a single total and then presented 1 total on Schedule E, Page 2. A clear admission that he’s non-passive in each activity. But we’d say, “No. A review of the tax return reveals one loss number with respect to ABC, LLC. That’s a clear admission that we grouped.”
It just seems to me that the IRS might not have a slam dunk with it’s argument. That’s all I’m saying.
(Also, I wonder…if, in your case, we had one K1 activity with a loss, and one K1 activity with a profit, how was that presented – as 1 net number or 2 separate numbers? If two separate numbers, that would be an indication that the preparer treated the activities as separate).
Don’t get me wrong. I understand your point. And it’s a fair one. I simply think the IRS might have a harder time arguing - when it comes to K1 activities that were lumped together and presented as 1 number on Schedule E, Page 2 – that grouping had not taken place. There is no case law that I know of here.
Part of the issue is how things get presented on a 1040 and what those specific requirements are. With Schedule E, Page 1, for example, those rules require a separate column for each property. Does this mean each property is a separate activity for Sec 469 purposes? No, it does not. But our software will likely run it out that way. When it comes to K1 entries, there are no detailed reporting requirements for “activities.” The instructions say to put the name of the entity and the EIN, that’s it. Despite this Rev Proc, the actual reporting presentation for K1 stuff is entirely opaque. This is why the Rev Proc came out in the first place. Obviously, it didn’t change how we must present things. But it did create this one thing – this disclosure requirement – that the IRS believes is the only thing that clearly manifests one’s decision to group. I’m just giving a little pushback here on that notion, when it comes to K1 activities.
Further, we are dealing with a Rev Proc here, not a statutory election, like with 469(c)(7).
In short, I recognize the validity of your argument. But I’m also saying that if push comes to shove, there’s a few defenses you can put forth.