Prior to the enactment in 1986 of the passive activity loss rules in the Internal Revenue Code (IRC), many lawyers, doctors, and other high-income individuals would invest in tax shelters that generated tax losses, which could be used to offset their other income. Popular tax shelters involved real estate, farming, and oil and gas, all of which were designed to require little managerial input from the investor. The passive activity loss rules now prevent an individual taxpayer from deducting his losses from certain “passive” activities against that individual’s active income (such as wages) or portfolio income (such as interest and dividends). A trade or business activity is considered passive for a taxable year if the individual does not materially participate in the activity during the taxable year. However, nearly all rental real estate activities are considered per se passive activities, regardless of the taxpayer’s level of involvement, unless the taxpayer can prove that he is a “real estate professional.” Real estate professionals generally include property developers, construction contractors, real estate brokers, hotel managers, and other professionals working full-time in the real estate business. The taxpayer in Miller v. Commissioner, T.C. Memo 2011-219, managed the rare feat of proving that he was a real estate professional while also holding a regular job as a ship captain.
‘Miller v. Commisioner’
Tom Miller lived in the San Francisco Bay area with his wife, Nancy. Miller worked for the San Francisco Bar Pilots Association (SFBPA) as a ship pilot, where his schedule consisted of working seven days and then having seven days off, but he was generally not required to actually work for all of his seven days “on.”
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