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Passive or material? Lane Mitchell is a married individual

Lane Mitchell is a married individual who files a separate return for the taxable year. He is employed full time as an accountant and also owns an interest in a minor league baseball team. He does no work in connection with the baseball activity and anticipates that it will produce a loss. He pays his wife to work as an office receptionist in connection with the activity. Her work requires an average of 20 hours a week. Write a letter to Lane and explain whether he will be allowed to deduct his share of the loss from the activity.

I need to know if this is passive or material. I have been looking and I am so confused on how to do this one. I need help formatting my response to him.

Solution Preview

Tax rules classify losses in which the taxpayer is not "materially participate" as passive. Rental income is specifically noted as passive. What we have here is not rental activity so the question is whether the taxpayer is participating in a material way. The clue here is that he does no work in connection with the baseball activity. That is, he has no participation so we don't have to measure the level of participation and decide if it is material.

However, since the wife works there, the spouse counts!

"Participating spouse. If you are married, ...

Solution Summary

Your tutorial is 357 words and a reference and includes a short letter to Lane about his baseball team interests.

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