8011 / Under the passive loss rules, what is a passive activity?
A passive activity is any activity (see Q 8016 for rules defining an activity) that involves the conduct of a trade or business in which the taxpayer does not “materially participate.”1 The IRC indicates that regulations may define the term “trade or business” to include activities in connection with a trade or business or activities that are engaged in for the production of income under IRC Section 212. The Service has studied this matter.2 Regulations provide that the Service will treat real property held for the production of income under IRC Section 212 as a trade or business for purposes of the rental real estate with material participation exception (see Q 8021).
The term “passive activity” does not include a working interest in an oil or gas property that the taxpayer holds directly or through an entity that does not limit the liability of the taxpayer with respect to the interest (see Q 7862).3 It also does not include the activity of trading personal property (e.g., stocks or bonds) on behalf of the owners of interests in the activity.4
Example: ABC partnership is a trader of stocks, bonds, and other securities (within the meaning of IRC Section 1236(c)). The capital employed by the partnership in the trading activity consists of amounts contributed by the partners in exchange for their partnership interests, and funds borrowed by the partnership. The partnership derives gross income from the activity in the form of interest, dividends, and capital gains. Under these facts, the partnership is treated as conducting an activity of trading personal property for the account of its partners. Accordingly, the activity is not a passive activity.5