[Federal Register Volume 60, Number 6 (Tuesday, January 10, 1995)] [Proposed Rules] [Pages 2557-2562] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 95-170] ======================================================================= ----------------------------------------------------------------------- DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [PS-80-93] RIN 1545-AS38 Rules for Certain Rental Real Estate Activities AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking and notice of public hearing. ----------------------------------------------------------------------- SUMMARY: This document contains proposed regulations providing rules for rental real estate activities of taxpayers engaged in certain real property trades or businesses. The proposed regulations reflect changes to the law made by the Omnibus Budget Reconciliation Act of 1993, and affect taxpayers subject to the limitations on passive activity losses and passive activity credits. DATES: Written comments must be received by April 10, 1995. Outlines of oral comments to be presented at a public hearing scheduled for Thursday, May 11, 1995, at 10 a.m. must be received by April 20, 1995. ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (PS-80-93), room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (PS-80-93), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC. The public hearing will be held in the auditorium of the Internal Revenue Building, 1111 Constitution Avenue NW., Washington, DC 20224. FOR FURTHER INFORMATION CONTACT: Concerning the regulations, William M. Kostak, (202) 622-3080; concerning submissions and the hearing, Carol Savage, (202) 622-8452 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Paperwork Reduction Act The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h)). Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, Washington, DC 20224. The collection of information is in Sec. 1.469-9(g). This information is required by the IRS to administer the rules under section 469(c)(7). This information will be used to determine whether a taxpayer that qualifies for relief under section 469(c)(7) has made the election to treat all of the taxpayer's interests in rental real estate as a single rental real estate activity as provided in section 469(c)(7)(A). The likely respondents are individuals or households, business or other for-profit institutions, and small businesses or organizations. Estimated total annual reporting burden for making or revoking the election: 3,015 hours. The estimated annual burden per respondent varies from 0.10 hours to 0.25 hours, depending on individual circumstances, with an estimated average of 0.15 hours. Estimated number of respondents: 20,000 electing/100 revoking. Estimated annual frequency of responses: on occasion. Background This document proposes amendments to 26 CFR part 1 to provide rules relating to the treatment of rental real estate activities of certain taxpayers under the passive activity loss and credit limitations of section 469. Section 469 disallows losses from passive activities to the extent they exceed income from passive activities and similarly disallows credits from passive activities to the extent they exceed tax liability allocable to passive activities. In general, passive activities are activities in which the taxpayer does not [[Page 2558]] materially participate. In addition, until the enactment of the Omnibus Budget Reconciliation Act of 1993 (OBRA 1993), all rental activities (including those in which a taxpayer materially participated) were passive. OBRA 1993 added a new section 469(c)(7), which provides that rental real estate activities of qualifying taxpayers are not subject to the rule that treats all rental activities as passive. Thus, a rental real estate activity of a qualifying taxpayer is not passive if the taxpayer materially participates in the activity. Second, the new rules provide that each of a qualifying taxpayer's interests in rental real estate is treated as a separate activity unless the taxpayer elects to treat all interests in rental real estate as a single activity. To qualify for this treatment under section 469(c)(7) for a taxable year, a taxpayer must perform, during that year, over 750 hours of personal services, and over half of the taxpayer's total personal services, in real property trades or businesses in which the taxpayer materially participates. A closely held C corporation is treated as satisfying these tests if more than 50 percent of its gross receipts for the taxable year are derived from real property trades or businesses in which it materially participates. For purposes of the qualification tests, a real property trade or business is defined as any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Explanation of Provisions 1. Treatment of Rental Real Estate Activities of Qualifying Taxpayers The proposed regulations provide that a rental real estate activity of a qualifying taxpayer will remain passive for a taxable year unless the taxpayer materially participates in the activity. This rule applies to all rental real estate activities of a qualifying taxpayer, including those giving rise to expenses described in section 212 of the Code. 2. Determination of Rental Real Estate Activities The proposed regulations provide that the election to treat all interests in rental real estate as a single activity is binding for the taxable year in which it is made and for all future years in which the taxpayer is a qualifying taxpayer unless there is a material change in the taxpayer's facts and circumstances and the election is revoked. In addition, the regulations clarify that an electing taxpayer's limited partnership interests in rental real estate are combined with the taxpayer's other interests in rental real estate into a single rental real estate activity. The regulations also clarify that interests in rental real estate cannot be combined with other trades or businesses of the taxpayer into a single activity. For this purpose, however, any rental real estate that a taxpayer groups with a trade or business activity under Sec. 1.469-4(d)(1)(i) (A) or (C) is not treated as an interest in rental real estate. 3. Treatment of Limited Partners Section 469(c)(7) provides that the new rules for rental real estate activities are not to be construed as affecting the determination of whether a qualifying taxpayer materially participates with respect to any interest in a limited partnership as a limited partner. Thus, material participation with respect to a limited partnership interest is determined in accordance with section 469(h)(2), which provides that limited partners are treated as material participants only to the extent provided in regulations. The existing temporary regulations provide that material participation can generally be established by satisfying one of seven tests, but only three of these tests can be used to establish material participation with respect to limited partnership items. Accordingly, the proposed regulations provide that a qualifying taxpayer generally must establish material participation in a rental real estate activity held, in whole or part, through limited partnership interests under one of the three tests available to limited partners under the temporary regulations. This rule does not apply if the taxpayer elects to treat all interests in rental real estate as a single activity and less than 10 percent of the taxpayer's gross rental income from the activity is attributable to limited partnership interests. In that case, the taxpayer may use any of the seven tests under the temporary regulations to establish material participation in the activity. 4. Qualification Tests As noted above, a taxpayer qualifies for the treatment prescribed in section 469(c)(7) by performing personal services in real property trades or businesses in which the taxpayer materially participates. The proposed regulations provide that, for purposes of the qualification tests, the determination of a taxpayer's real property trades or businesses is based on all of the relevant facts and circumstances. A taxpayer may use any reasonable method of applying the facts and circumstances, but the determination must generally be applied consistently from year to year. The proposed regulations also provide that material participation in a real property trade or business is determined under the generally applicable rules of the existing temporary regulations. 5. Coordination With Former Passive Activity Rules The proposed regulations clarify the treatment of suspended losses and credits allocable to a nonpassive rental real estate activity. They provide that the former passive activity rules of section 469(f) apply. Thus, the suspended loss or credit may be used to offset income from, or tax liability allocable to, the rental real estate activity, and any remaining loss or credit is treated as a loss or credit from a passive activity. 6. Coordination With $25,000 Offset for Rental Real Estate Activities The proposed regulations clarify that a suspended loss or credit attributable to a nonpassive rental real estate activity may qualify under section 469(i) as a loss or credit from a rental real estate activity in which the taxpayer actively participates. Under section 469(i), such a loss or credit may be used to offset nonpassive income or tax liability attributable to nonpassive income, subject to a $25,000 limitation and an adjusted gross income phaseout. The proposed regulations also clarify that the $25,000 limitation is not reduced by losses or credits that are allowable under section 469(c)(7). 7. Regrouping Under the Activity Rules The regulations defining an activity for purposes of section 469 (Sec. 1.469-4) include a consistency requirement. Once a taxpayer has grouped activities, they may not be regrouped unless the grouping is clearly inappropriate or there has been a material change in the facts and circumstances. The proposed regulations provide an exception to the consistency requirement for the first taxable year in which section 469(c)(7) applies. In that year, a taxpayer is permitted to regroup its activities to the extent necessary or appropriate to avail itself of the new rules. The proposed regulations also provide that a taxpayer who adopted (or retained) a grouping of activities under Project PS-1-89 (the proposed definition of activity regulations) published in 1992 may regroup activities in the first taxable year in which the taxpayer determines tax liability under the rules of the final definition of activity regulations rather than under the proposed definition of activity regulations. The regulations also clarify that, in the first taxable year in [[Page 2559]] which a taxpayer applies the rules of either the proposed definition of activity regulations or the final definition of activity regulations in determining tax liability, the taxpayer must regroup its activities if its previous grouping is inconsistent with the applicable rules. Although the rules permitting or requiring a taxpayer to regroup activities refer to the taxpayer's determination of tax liability under section 469, they will be applied to partnerships and S corporations conducting activities subject to section 469. Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Comments and Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) that are submitted timely to the IRS. All comments will be available for public inspection and copying. A public hearing has been scheduled for Thursday, May 11, 1995, at 10:00 a.m. in the auditorium of the Internal Revenue Building. Because of access restrictions, visitors will not be admitted beyond the Internal Revenue Building lobby more than 15 minutes before the hearing starts. The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons that wish to present oral comments at the hearing must submit written comments and outlines of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by April 20, 1995. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing. Drafting Information The principal author of these regulations is William M. Kostak, Office of Assistant Chief Counsel (Passthroughs and Special Industries), IRS. However, other personnel from the IRS and Treasury Department participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART I--INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read as follows: Authority: 26 U.S.C. 7805. * * * Section 1.469-9 also issued under 26 U.S.C. 469(c)(6), (h)(2), and (l)(1). Par. 2. Section 1.469-0 is amended by: 1. Revising the entry for Sec. 1.469-4(h). 2. Revising the heading for Sec. 1.469-9 and adding entries for paragraphs (a) through (j) of Sec. 1.469-9. 3. Revising the entry for Sec. 1.469-11(b)(2) and removing the entries for Sec. 1.469-11(b)(2) (i) and (ii). 4. Revising the entry for Sec. 1.469-11(b)(3). 5. Adding an entry for Sec. 1.469-11(b)(4). 6. The revisions and additions read as follows: Sec. 1.469-0 Table of contents. * * * * * Sec. 1.469-4 Definition of Activity. * * * * * (h) Rules for grouping rental real estate activities for taxpayers qualifying under section 469(c)(7). * * * * * Sec. 1.469-9 Rules for certain rental real estate activities. (a) Scope and purpose. (b) Definitions. (1) Trade or business. (2) Real property trade or business. (3) Rental real estate. (4) Personal services. (5) Material participation. (6) Qualifying taxpayer. (c) Requirements for qualifying taxpayers. (1) In general. (2) Requirement of material participation in the real property trades or businesses. (3) Treatment of spouses. (4) Employees in real property trades or businesses. (d) General rule for determining real property trades or businesses. (1) Facts and circumstances. (2) Consistency requirement. (e) Treatment of rental real estate activities of a qualifying taxpayer. (1) In general. (2) Treatment as a former passive activity. (3) Grouping rental real estate activities with other activities. (f) Limited partnership interests in rental real estate activities. (1) In general. (2) De minimis exception. (g) Election to treat all interests in rental real estate as a single rental real estate activity. (1) In general. (2) Certain changes not material. (3) Filing a statement to make or revoke the election. (h) Interests in rental real estate held by certain passthrough entities. (1) General rule. (2) Special rule if a qualifying taxpayer holds a fifty-percent or greater interest in a passthrough entity. (i) [Reserved]. (j) $25,000 offset for rental real estate activities of qualifying taxpayers. (1) In general. (2) Example. * * * * * Sec. 1.469-11 Effective date and transition rules. * * * * * (b) * * * (2) Additional transition rule for 1992 amendments. (3) Fresh starts under consistency rules. (i) Regrouping when tax liability is first determined under Project PS-1-89. (ii) Regrouping when tax liability is first determined under Sec. 1.469-4. (iii) Regrouping when taxpayer is first subject to section 469(c)(7). (4) Certain investment credit property. * * * * * Par. 3. Section 1.469-4 is amended by revising paragraph (e)(1) and the heading of paragraph (h) and by adding the text of paragraph (h) to read as follows: Sec. 1.469-4 Definition of Activity. * * * * * (e) * * * (1) Original groupings. Except as provided in paragraph (e)(2) of this section and Sec. 1.469-11, once a taxpayer has grouped activities under this section, the taxpayer may not regroup those activities in subsequent taxable years. Taxpayers must comply with disclosure requirements that the Commissioner may prescribe with respect to both their original groupings and the addition and disposition of specific activities within those chosen groupings in subsequent taxable years. * * * * * (h) Rules for grouping rental real estate activities for taxpayers qualifying under section 469(c)(7). See Sec. 1.469-9 [[Page 2560]] for rules for certain rental real estate activities. Par. 4. The heading of section 1.469-9 is revised, and the text of this section is added to read as follows: Sec. 1.469-9 Rules for certain rental real estate activities. (a) Scope and purpose. This section provides guidance to taxpayers engaged in certain real property trades or businesses on applying section 469(c)(7) to their rental real estate activities. (b) Definitions. The following definitions apply for purposes of this section: (1) Trade or business. A Trade or business is any trade or business determined by treating the types of activities in Sec. 1.469-4(b)(1) as if they involved the conduct of a trade or business, and any interest in rental real estate, including any interest in rental real estate that gives rise to deductions under section 212. (2) Real property trade or business. Real property trade or business is defined in section 469(c)(7)(C). (3) Rental real estate. Rental real estate is any real property used by customers or held for use by customers in a rental activity within the meaning of Sec. 1.469-1T(e)(3). However, any rental real estate that the taxpayer grouped with a trade or business activity under Sec. 1.469-4(d)(1)(i) (A) or (C) is not an interest in rental real estate for purposes of this section. (4) Personal services. Personal services means any work performed by an individual in connection with a trade or business. However, personal services do not include any work performed by an individual in the individual's capacity as an investor as described in Sec. 1.469- 5T(f)(2)(ii). (5) Material participation. Material participation has the same meaning as under Sec. 1.469-5T. Paragraph (f) of this section contains rules applicable to limited partnership interests in rental real estate that a qualifying taxpayer elects to aggregate with other interests in rental real estate of that taxpayer. (6) Qualifying taxpayer. A qualifying taxpayer is a taxpayer that owns at least one interest in rental real estate and meets the requirements of paragraph (c) of this section. (c) Requirements for qualifying taxpayers--(1) In general. A qualifying taxpayer must meet the requirements of section 469(c)(7)(B). A closely held C corporation meets these requirements by satisfying the requirements of section 469(c)(7)(D)(i). For purposes of section 469(c)(7)(D)(i), gross receipts do not include items of portfolio income within the meaning of Sec. 1.469-2T(c)(3). (2) Requirement of material participation in the real property trades or businesses. A taxpayer must materially participate in a real property trade or business in order for the personal services provided by the taxpayer in that real property trade or business to count towards meeting the requirements of paragraph (c)(1) of this section. (3) Treatment of spouses. Spouses filing a joint return are qualifying taxpayers only if one spouse separately satisfies both requirements of section 469(c)(7)(B). In determining the real property trades or businesses in which a married taxpayer materially participates (but not for any other purpose under this paragraph (c)), work performed by the taxpayer's spouse in a trade or business is treated as work performed by the taxpayer under Sec. 1.469-5T(f)(3), regardless of whether the spouses file a joint return for the year. (4) Employees in real property trades or businesses. For purposes of paragraph (c)(1) of this section, personal services performed during a taxable year as an employee generally will be treated as performed in a trade or business but will not be treated as performed in a real property trade or business, unless the taxpayer is a five-percent owner (within the meaning of section 416(i)(1)(B)) in the employer at all times during the taxable year. (d) General rule for determining real property trades or businesses--(1) Facts and circumstances. The determination of a taxpayer's real property trades or businesses for purposes of paragraph (c) of this section is based on all of the relevant facts and circumstances. A taxpayer may use any reasonable method of applying the facts and circumstances in determining the real property trades or businesses in which the taxpayer provides personal services. Depending on the facts and circumstances, a real property trade or business consists either of one or more than one trade or business specifically described in section 469(c)(7)(C). (2) Consistency requirement. Once a taxpayer determines the real property trades or businesses in which personal services are provided for purposes of paragraph (c) of this section, the taxpayer may not redetermine those real property trades or businesses in subsequent taxable years unless the original determination was clearly inappropriate or there has been a material change in the facts and circumstances that makes the original determination clearly inappropriate. (e) Treatment of rental real estate activities of a qualifying taxpayer--(1) In general. Section 469(c)(2) does not apply to any rental real estate activity of a taxpayer for a taxable year in which the taxpayer is a qualifying taxpayer under paragraph (c) of this section. Instead, a rental real estate activity of a qualifying taxpayer is a passive activity under section 469 for the taxable year unless the taxpayer materially participates in the activity. Each interest in rental real estate of a qualifying taxpayer will be treated as a separate rental real estate activity, unless the taxpayer makes an election under paragraph (g) of this section to treat all interests in rental real estate as a single rental real estate activity. (2) Treatment as a former passive activity. For any taxable year in which a qualifying taxpayer materially participates in a rental real estate activity, that rental real estate activity will be treated as a former passive activity under section 469(f) if disallowed deductions or credits are allocated to the activity under Sec. 1.469-1(f)(4). (3) Grouping rental real estate activities with other activities. For purposes of this section, a qualifying taxpayer may not group a rental real estate activity with any other activity of the taxpayer. For example, if a qualifying taxpayer develops real property, constructs buildings, and owns an interest in rental real estate, the taxpayer's interest in rental real estate may not be grouped with the taxpayer's development activity or construction activity. Thus, only the participation of the taxpayer with respect to the rental real estate may be used to determine if the taxpayer materially participates in the rental real estate activity under Sec. 1.469-5T. (f) Limited partnership interests in rental real estate activities--(1) In general. If a taxpayer elects under paragraph (g) of this section to treat all interests in rental real estate as a single rental real estate activity, and at least one interest in rental real estate is held by the taxpayer as a limited partnership interest (within the meaning of Sec. 1.469-5T(e)(3)), the combined rental real estate activity will be treated as a limited partnership interest of the taxpayer for purposes of determining material participation. Accordingly, the taxpayer will not be treated under this section as materially participating in the combined rental real estate activity unless the taxpayer materially participates in the activity under the tests listed in Sec. 1.469-5T(e)(2) (dealing with the tests for determining the material participation of a limited partner). (2) De minimis exception. If a qualifying taxpayer elects under [[Page 2561]] paragraph (g) of this section to treat all interests in rental real estate as a single rental real estate activity, and the taxpayer's share of gross rental income from all of the taxpayer's limited partnership interests in rental real estate is less than ten percent of the taxpayer's share of gross rental income from all of the taxpayer's interests in rental real estate for the taxable year, paragraph (f)(1) of this section does not apply. Thus the taxpayer may determine material participation under the seven tests listed in Sec. 1.469-5T(a). (g) Election to treat all interests in rental real estate as a single rental real estate activity--(1) In general. A qualifying taxpayer may make an election to treat all of the taxpayer's interests in rental real estate as a single rental real estate activity. This election is binding for the taxable year in which it is made and for all future years in which the taxpayer is also a qualifying taxpayer. However, if there is a material change in a taxpayer's facts and circumstances, the taxpayer may revoke the election using the procedure described in paragraph (g)(3) of this section. (2) Certain changes not material. The fact that an election is less advantageous to the taxpayer in a particular taxable year is not, of itself, a material change in the taxpayer's facts and circumstances. Similarly, a break in the taxpayer's status as a qualifying taxpayer is not, of itself, a material change in the taxpayer's facts and circumstances. (3) Filing a statement to make or revoke the election. A qualifying taxpayer makes the election to treat all interests in rental real estate as a single rental real estate activity by filing a statement with the taxpayer's original income tax return for the taxable year. This statement must contain a declaration that the taxpayer is a qualifying taxpayer for the taxable year and is making the election pursuant to section 469(c)(7)(A). The taxpayer may make this election for any taxable year in which section 469(c)(7) is applicable. A taxpayer may revoke the election only in the taxable year in which a material change in the taxpayer's facts and circumstances occurs. To revoke the election, the taxpayer must file a statement with the taxpayer's original income tax return for that year. This statement must contain a declaration that the taxpayer is revoking the election under section 469(c)(7)(A) and an explanation of the nature of the material change. (h) Interests in rental real estate held by certain passthrough entities--(1) General rule. Except as provided in paragraph (h)(2) of this section, a qualifying taxpayer's interest in rental real estate held by a partnership or an S corporation (passthrough entity) is treated as a single interest in rental real estate if the passthrough entity grouped its rental real estate as one rental activity under Sec. 1.469-4(d)(5). If the passthrough entity groups its rental real estate into separate rental activities under Sec. 1.469-4(d)(5), each rental real estate activity of a passthrough entity will be treated as a separate interest in rental real estate of a qualifying taxpayer. However, a taxpayer may elect under paragraph (g) of this section to treat all interests in rental real estate, including the rental real estate interests held through passthrough entities, as a single rental real estate activity. (2) Special rule if a qualifying taxpayer holds a fifty-percent or greater interest in a passthrough entity. If a qualifying taxpayer holds a fifty-percent or greater interest in the capital, income, gain, loss, deduction, or credit of a passthrough entity at any time during the taxable year, each interest in rental real estate held by the passthrough entity will be treated as a separate interest in rental real estate of the qualifying taxpayer, regardless of the passthrough entity's grouping of activities under Sec. 1.469-4(d)(5). However, the taxpayer may elect under paragraph (g) of this section to treat all interests in rental real estate, including the rental real estate interests held through passthrough entities, as a single rental real estate activity. (i) [Reserved]. (j) $25,000 offset for rental real estate activities of qualifying taxpayers--(1) In general. A qualifying taxpayer's passive losses and credits from rental real estate activities (including suspended passive activity losses and credits from rental real estate activities in which the taxpayer materially participates) are allowed to the extent permitted under section 469(i). (2) Example. The following example illustrates the application of this paragraph (j). Example. (i) Taxpayer A owns building X and building Y, both interests in rental real estate. In 1995, A is a qualifying taxpayer within the meaning of paragraph (c) of this section. A does not elect to treat X and Y as one activity under section 469(c)(7)(A) and paragraph (g) of this section. As a result, X and Y are treated as separate activities pursuant to section 469(c)(7)(A)(ii). A materially participates in X which has $100,000 of passive losses disallowed from prior years and produces $20,000 of losses in 1995. A does not materially participate in Y which produces $40,000 of income in 1995. A also has $50,000 of income from other nonpassive sources in 1995. A otherwise meets the requirements of section 469(i). (ii) Because X is not a passive activity in 1995, the $20,000 of losses produced by X in 1995 are nonpassive losses that may be used by A to offset part of the $50,000 of nonpassive income. Accordingly, A is left with $30,000 ($50,000-$20,000) of nonpassive income. In addition, A may use the prior year disallowed passive losses of X to offset any income from X and passive income from other sources. Therefore, A may offset the $40,000 of passive income from Y with $40,000 of passive losses from X. (iii) Because A has $60,000 ($100,000-$40,000) of passive losses remaining from X and meets all of the requirements of section 469(i), A may offset up to $25,000 of nonpassive income with passive losses from X pursuant to section 469(i). As a result, A has $5,000 ($30,000-$25,000) of nonpassive income remaining and disallowed passive losses from X of $35,000 ($60,000-$25,000) in 1995. Par. 5. Section 1.469-11 is amended as follows: 1. Paragraph (a)(2) is amended by removing ``; and'' and adding ``;'' in its place. 2. Paragraph (a)(3) is redesignated as paragraph (a)(4) and a new paragraph (a)(3) is added. 3. Paragraph (b)(2)(ii) is removed, paragraph (b)(2)(i) is redesignated as paragraph (b)(2), and the heading for paragraph (b)(2) is revised. 5. Paragraph (b)(3) is redesignated as paragraph (b)(4). 6. A new paragraph (b)(3) is added. 7. The added and revised provisions read as follows: Sec. 1.469-11 Effective date and transition rules. (a) * * * (3) The rules contained in Sec. 1.469-9 apply for taxable years beginning on or after January 1, 1995, and to elections made under Sec. 1.469-9(g) with returns filed on or after January 1, 1995; and * * * * * * * * (b) * * * (2) Additional transition rule for 1992 amendments. * * * (3) Fresh starts under consistency rules--(i) Regrouping when tax liability is first determined under Project PS-1-89. For the first taxable year in which a taxpayer determines its tax liability under Project PS-1-89, the taxpayer may regroup its activities without regard to the manner in which the activities were grouped in the preceding taxable year and must regroup its activities if the grouping in the preceding taxable year is inconsistent with the rules of Project PS-1- 89. (ii) Regrouping when tax liability is first determined under Sec. 1.469-4. For the first taxable year in which a [[Page 2562]] taxpayer determines its tax liability under Sec. 1.469-4, rather than under the rules of Project PS-1-89, the taxpayer may regroup its activities without regard to the manner in which the activities were grouped in the preceding taxable year and must regroup its activities if the grouping in the preceding taxable year is inconsistent with the rules of Sec. 1.469-4. (iii) Regrouping when taxpayer is first subject to section 469(c)(7). For the first taxable year beginning after December 31, 1993, a taxpayer may regroup its activities to the extent necessary or appropriate to avail itself of the provisions of section 469(c)(7) and without regard to the manner in which the activities were grouped in the preceding taxable year. * * * * * Margaret Milner Richardson, Commissioner of Internal Revenue. [FR Doc. 95-170 Filed 1-9-95; 8:45 am] BILLING CODE 4830-01-P