Question

4.         In the following set of problems, determine whether or not the taxpayer(s) "materially participates" for purposes of IRC §469. If the taxpayer(s) does not materially participate, determine, in the alternative, if the taxpayer(s) "significantly participate".

a.         In addition to working full-time as an accountant, Mario is also part owner of the Mud Flats Restaurant. The restaurant has several full-time employees. During the course of the year his involvement in the restaurant includes responsibility for controlling cash receipts, paying bills, reviewing and approving major purchases and tending bar on Tuesday and Thursday evenings. In 20XX, Mario spent 524 hours on restaurant business.

b.         Bob and Tim have a weekend business repairing and restoring Harley Davidson motorcycles. Both are employed full-time in other activities. The weekend business would be considered a trade or business activity. Bob and Tim are the only participants in the activity for the taxable year. The business is done entirely on Saturdays. Each participates in the activity approximately 400 hours during the year.

c.         Same facts as in Problem b (above) except that Tim's participation is only 200 hours. However, in addition to the motorcycle business Tim is involved in a partnership that builds and sells kayaks. His involvement in the kayak business totals approximately 350 hours during the year.

d.         John is the 100 percent shareholder of Steelfab involved in the specialty fabrication of metal products. He has been involved full-time in the operations of the company every year since he started it in 1990. At the beginning of 20XX, John plans to turn over the management to his son and spend the next six years (20X1-20X6) meditating in Nepal. How is John treated in years 20X1 through 20X6?

e.         Frank has an interest in a partnership that feeds and sells cattle. The general partner of the partnership periodically mails Frank a letter setting forth certain proposed actions and decisions with respect to the cattle-feeding operation. Such actions and decisions include, for example, what kind of feed to purchase, how much to purchase, when to purchase it, how often to feed cattle and when to sell cattle. The letters explain the proposed actions and decisions, emphasize that taking or not taking a particular action or decision is solely within the discretion of Frank and other partners, and ask Frank to indicate a decision with respect to each proposed action by answering certain questions. The general partner receives a fee for such services.

Answer 1

ANs 4 a) In this case since Mario is spending more than 500 hours in restaurant business in a single tax year hence per material participation test that says if any individual spends more than 500 hours in a business in a single tax year then the effort will be considered as material participation. Hence, here Mario’s participation in restaurant business can be considered as material participation.

Ans 4 b) In this case Bob and Tim’s participation would be considered as significant participation since as per significant participation test if any individual participate more than 100 hours and less than 500 hours in a trade or business activity it will be considered as significant participation, hence as stated above Bob and Tim’s participation would be considered as significant participation.

Ans 4 c) As long as the two activities are not grouped in this case, Tim’s involvement can be considered in the both cases as significant participation since individually both the activity’s effort is not going beyond 500 hours.

ANs 4 d) Since John is not participating in business from the period 20X1 to 20X6, it is not considered as material participation as material participation test. Neither will it be considered as significant participation, since John is not spending any hours between these periods.