Material Participation as Significant Participation Activity

Tax Court Ruling Highlights Importance of Grouping Election

Robert S. Barnett, JD, MST, CPA

A recent case serves as a convenient reminder for 2020 tax return elections. In Gurpreet S. Padda, et al. v. Comm'r (TCM 2020-154), a physician met the test for significant participation activities with respect to several restaurants and a brewery in which he was a substantial owner. The entities were established as limited liability companies; although the physician operated several medical facilities and clinics, he was able to prove that he devoted substantial time and efforts to the restaurants and brewery. The restaurants and brewery incurred substantial losses that offset income from the medical practice. The central issue relevant to this article was whether Padda met the material participation requirement to avoid the passive activity loss limitation.