Fred and Wilma Flintstone are the sole shareholders of Bedrock Rock (BR), a busi

Question

Fred and Wilma Flintstone are the sole shareholders of Bedrock Rock (BR), a business organized as a C corporation that provides natural stone and rock countertops. In addition, they co-own Cave Dwellings (CD), an unincorporated business that holds a single property – a warehouse to store the rock sold by BR and allow potential customers to examine rock countertops for purchase. BR leases the warehouse from CD. In 2017, Bedrock Rock (BR) generated substantial taxable income ($400,000) as business was quite good.   CD, on the other hand generated a taxable loss of $40,000 for the year. Fred and Wilma are material participants in both BR and CD.

Fred and Wilma would like to report the taxable results of BR and CD as a single activity to avoid any potential issues with the deferral of the loss on CD as a passive activity. You may assume that the rent charged by CD to BR is ordinary and reasonable in amount.

Your Assignment:

Please prepare a tax research memo in good form addressing the issue as to whether the Flintstones may group the two activities as a single activity or if they must report them separately and what the tax consequences are of each choice.   . You will need to support your conclusion using primary sources of tax law. Your textbook is NOT primary authority. You should refer to only (i.e., legislative) sources of tax law to respond to this question. You may research ANY tax authority (primary or secondary) but your solution must be derived and supported using only primary authority.

Content will be broken down into 3 components: (1) Facts, (2) Analysis and (3) Conclusion. Can Fred and WIlma Flinstone group the two activities as a single activity or if they must report them separately and what the tax consequences are of each choice.  

Explanation / Answer

The issue here is whether Fred and Wilma can report the activity as a single activity. This would allow the Flintstones to offset per se passive rental income with non-passive business income. Failure to group could mean the rental loss would be treated as passive (see IRC 469(c)(2) and only deductible up to the amount of passive income. (see IRC 469(a)).

Under Reg 1.469-4, the taxpayer can make a grouping election to group an activity as a single activity. However, rentals may not be grouped. There are two exceptions to the grouping issue. First, the rental may be insubstantial (see Reg 1.469-4(d)(1)(A) or second, the rental must be owned in the same percentage as the other activity. (See Reg 1.469-4(d)(1)(C)

Here, the rental activity is owned in the same percentage as the business activity. This means the entity may be grouped as one, so the possibly passive income from the per se rental can offset the non-passive income from the bedrock business.

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.