8013 / When is a taxpayer considered to “materially participate” in an activity for purposes of the passive loss rules?

In determining whether an individual materially participates, the participation of the individual’s spouse is considered.³ Work done in the individual’s capacity as an investor is not treated as participation unless the individual is involved in the day-to-day management or operations of the activity. The extent to which an individual participates may be shown by any reasonable means.⁴

A closely held C corporation or a personal service corporation is considered to materially participate in an activity if (a) one or more stockholders who owns more than 50 percent (by value) of the outstanding stock of the corporation materially participates or (b) if the C corporation (other than a personal service corporation) has an active full-time manager throughout the year, at least three full-time nonowner employees whose services are directly related to the business of the corporation, and certain deductions of the business exceed 15 percent of the income for the year.⁵

Whether a trust materially participates in an activity is determined by reference to the persons who conduct the business activity on the trust’s behalf (such as its fiduciaries, employees, and agents), not just whether the trustee materially participates in the activity.⁶ See Q 8014 for the special rule for significant participation passive activities.