Podcast Summary: How Tax Works

Episode 36: Grouping and Separate Activities under Section 469

Host: Matthew Foreman, Co-Chair, Falcon Rappaport & Berkman’s Taxation Practice Group
Date: September 29, 2025

Overview

In this episode, Matthew Foreman dives into the tax law landscape surrounding grouping and separate activities under Section 469 of the Internal Revenue Code, commonly known as the passive activity loss (PAL) rules. The discussion aims to demystify how and when different trades or businesses should be combined or kept separate for tax purposes, as well as the practical and regulatory implications of those choices. Foreman provides real-life examples, regulatory context, and practical advice for tax professionals, business owners, and anyone interested in tax law intricacies.

Key Discussion Points & Insights

1. What is Grouping under Section 469?

• Single Economic Unit Concept
  • Activities are treated as a single trade or business if they form an “appropriate economic unit”—meaning they are integrated and interrelated, and conducted in coordination with or in reliance upon each other.
  • Taxpayers are allowed to use “any reasonable method” for grouping (as supported by the 1986 Senate report).
  • Quote: “One or more trade or business activities treated as a single activity if the activities constitute an appropriate economic unit.” — Matt Foreman [02:00]

Factors to Consider in Grouping (per Treasury Reg. 1.469-4(c)(2)):

• Similarities/differences in trades or businesses
• Common control and ownership
• Geographical proximity
• Interdependencies:
  • Cross-selling goods/services
  • Joint customers
  • Shared bookkeeping/recordkeeping
• Quote: “What the IRS and the Treasury Department are trying to get out of this... is the extent to which you view it as a single business.” — Matt Foreman [03:33]

2. Illustrative Examples of Grouping

• Grouping Allowed:
  • Two partnerships: one sells non-food items to grocery stores, the other owns a trucking business. Under “common control,” this could be a single business if the facts support integration. [04:45]
• Grouping NOT Allowed:
  • Airplane charter used by a real estate developer simply for travel: not considered a single economic unit (Brumbaugh TC Memo 2018-40). [05:00]
  • Quote: “Just because you use one business for another does not group them.” — Matt Foreman [05:27]

The Reasonableness Standard

• The IRS can’t change a reasonable grouping, even if it’s not the ‘best’ or a ‘perfect’ method.
• Quote: “It doesn’t matter whether it’s the right grouping. It matters whether... it is a reasonable grouping.” — Matt Foreman [05:27]

3. Limitations and Prohibited Groupings

Key prohibitions (with examples from the 1986 Senate report and Blue Book):

• Rentals vs. Trade or Business:
  • Rental activities generally cannot be grouped with an active trade or business.
  • Example: Automobile leasing and automobile manufacturing—cannot be grouped.
  • Travel agency using three floors of its own ten-floor building and leasing the rest—not groupable.
  • Rental apartment vs. hotel—cannot be grouped even if under common control.
• Quote: “The key is whether the grouping is reasonable... I’ve had successful audits with it.” — Matt Foreman [08:06]

Exceptions to the General Prohibition

Grouping may be allowed:

• If the rental activity is insubstantial in relation to the trade or business, or vice versa (e.g., a travel agency owning four floors, using three, and renting out one).
• If all owners of the trade/business also proportionately own the rental.
• Rental of real/personal property together (ex: furnished apartments)—allowed only if the personal property is ancillary to the real property.

4. Special Rules and Further Limitations

• Limited Partners cannot group with activities unless they are actively involved in management.

  • Quote: “Only people actively involved in the business can group.” — Matt Foreman [10:34]

• Publicly traded partnerships (PTPs): Each is a separate activity.

• Oil/gas working interests: Always separate unless specific exceptions apply.

• Trading activities: Can’t be grouped to manipulate interest deduction limits under 163(j).

5. Consistency & Disclosure Requirements [12:27]

• Rev. Proc. 2010-13:
  • Outlines exactly how groupings must be disclosed to the IRS.
  • Once you group, you can only regroup if there’s a material change in facts and circumstances or the original grouping was “clearly inappropriate.”
  • Quote: “Once grouped, you cannot regroup unless there is either a material change in facts or the grouping was clearly inappropriate...” — Matt Foreman [12:50]
• Filing Implications:
  • For partnerships/S corps, disclosures are made on Form 1065/1120S schedules.
  • If a partnership groups, a partner cannot create a different grouping.
  • Mistakes can be corrected via Rev. Proc. 2010-13, Sec 4.07, which allows retroactive corrections.
  • “If the partnership groups, the partner may not ungroup or change the grouping.” — Matt Foreman [15:05]
• IRS Regrouping Authority:
  • The IRS rarely invokes its authority to regroup, only if grouping is “not an appropriate economic unit” and the principal purpose is to circumvent Section 469.

6. Final Practical Notes

• Disposition of Activities:
  • Selling an entire activity frees up the associated passive losses.
  • Partial dispositions only release a proportionate amount; “substantially all” must be sold to fully unlock losses. 50% is NOT enough; think 80% or more.
  • Quote: “Define substantially all narrowly. 50% is not substantially all. 80%, yeah, 60% maybe, but 80% more so.” — Matt Foreman [18:33]

Notable Quotes & Memorable Moments

• On grouping standards:
  “It doesn’t matter whether it’s the right grouping. It matters whether... it is a reasonable grouping.” — Matt Foreman [05:27]

• On IRS audit focus:
  “They’re actually more focused on substantiating hours, which I find generally is actually the bigger problem.” — Matt Foreman [17:05]

• On practical compliance:
  “If there’s one thing that anyone who interacts with the IRS will tell you, it is that if you do what the IRS tells you to do, they will be happy.” — Matt Foreman [12:50]

• On grouping mistakes:
  “Once grouped, you cannot regroup unless there is either a material change in facts... or you made a whoopsie do.” — Matt Foreman [12:50]

Timestamps for Important Segments

• [02:00] – Defining “appropriate economic unit” and overview of grouping tests.
• [03:33] – Factors for grouping under IRS regulations.
• [04:45] – Groupable vs. non-groupable real-life examples.
• [05:27] – Reasonableness standard in grouping and IRS audit approaches.
• [08:06] – Rental and trade/business grouping prohibitions with NY real estate examples.
• [10:34] – Limited partners and grouping—restrictions and definitions.
• [12:27] – Consistency and disclosure requirements, how to report groupings.
• [15:05] – Partnerships, K-1 disclosures, partner limitations.
• [17:05] – IRS regrouping authority and practical audit focus.
• [18:33] – How passive losses are freed up upon sale or partial sale.

Tone & Style

Matt Foreman’s tone is approachable and conversational, mixing technical depth with humor (“whoopsie do,” “big honker,” “my battleship”) and practical anecdotes. He emphasizes reasonable compliance, real-world pitfalls, and how to efficiently interact with IRS procedures.

For listeners looking to grasp the essentials of Section 469 grouping and separate activities, this episode serves as a practical, example-driven guide, full of technical insights and real-world advice.