Trying a variation on an old gambit, Larry Williams & Dora Williams, Docket No. 23883-12, filed 3/10/14, run aground on the same reef that sank two of the subjects of my previous blogposts, “Passive Aggressive”, 8/8/12, and “Passive Aggressive – Part Deux”, 11/13/12.

And STJ Armen, The Judge With a Heart, cites both cases that gave rise to those blogposts in this designated hitter.

Rob has a Sub S that owns real estate, which the Sub S rents to Rob’s C Corp. No dispute that the C Corp is an active business in which Rob materially participates, thus invoking Reg. Sec. 1.469-2(f)(6), the so-called “self-rental rule”, which activates the famously passive rental of real estate, thereby torpedoing Rob’s passive losses.

Rob’s argument? Sub S corporations aren’t subject to Section 469, the parent of the passive loss rules.

STJ Armen: “Although the Court agrees that section 469(a) does not literally apply to S corporations, which generally are not taxpayers, section 469(a) does apply to petitioners (as taxpayers who are individuals) and serves to disallow their passive activity loss. See sec. 469(a)(2), describing those persons who, as taxpayers, are subject to the general disallowance rule of sec. 469(a)(1).

“For purposes of section 469, a taxpayer’s ‘activities’ include those activities that the taxpayer conducts through an S corporation. Sec. 1.469-4(a), Income Tax Regs.; see Dirico v. Commissioner,139 T.C. 396, 402 (2012). Generally, the passive or nonpassive character of each item of gross income and deduction allocated to the taxpayer from an S corporation is determined by reference to the taxpayer’s participation in the activity. Sec. 1.469-2T(e)(1), Temporary Income Tax Regs., 53 Fed. Reg. 5718 (Feb 25, 1988); see also Dunn v. Commissioner,T.C. Memo. 2010-198, 2010 WL 3564725 at *11 n.21. Additionally, the selfrental rule of section 1.469-2(f)(6), Income Tax Regs., applies to an S corporation’s rental income passed through to the taxpayer from property rented to a C corporation and used in the C corporation’s business if the taxpayer materially participates in the business activity of the C corporation. Veriha v. Commissioner, 139 T.C. 45 (2012). Order, at p. 4.

Alert readers will recall that Veriha was the star of “Passive Aggressive”, op. cit., and Dirico was the star of “Passive Aggressive – Part Deux”, op. cit.

Interesting from a procedural point of view, this Order denies Rob’s motion for summary judgment, which STJ Armen recharacterizes as a motion for partial summary judgment. So maybe there’s more to follow here.