8607. What are the results if a taxpayer’s passive losses for a tax year are disallowed?cjumprcline202014-07-07T22:08:00Z2014-07-07T22:08:00Z14042307National Underwriter1952706148607. What happens if a taxpayer’s passive losses for a tax year are disallowed?Losses and credits that are disallowed under the passive loss rules may be carried over to offset passive income and the tax attributable to this income in later years..IRC Sec. 469(b). If passive losses (or credits) from a publicly traded partnership are carried forward, such losses (or credits) may only be offset by passive income (or tax attributable to passive income) from the same partnership..IRC Sec. 469(k)(1).Suspended losses and credits of an activity may also offset the income and tax of that activity when the activity ceases to be passive or there is a change in status of a closely-held corporation or personal service corporation. For a discussion of the treatment of losses allowed upon disposition of an interest in a passive activity, see Q 8612. The rules relating to the treatment of suspended losses and credits when the activity is disposed of require that losses and credits carried over from year to year be traceable to a particular activity. Because of this, where there are losses or credits from two or more activities which, in the aggregate, exceed passive gains from other passive activities, the amount disallowed and carried over must be allocated among the different activities and between capital and ordinary loss. Disallowed passive losses are allocated among activities in proportion to the loss from each activity. The disallowed loss allocated to an activity is then allocated ratably among deductions attributable to the activity. Disallowed credits are allocated ratably among all credits attributable to passive activities.In identifying the deductions or credits that are disallowed, the taxpayer is only required to separately account for those items that, if separately taken into account by the taxpayer, would result in an income tax liability different from that which would result if such deduction were not taken into account separately. Deductions arising from a rental real estate activity, or in connection with a capital or IRC Section 1231 asset, must be accounted for separately. Credits (other than the low-income housing or rehabilitation credits) arising from a rental real estate activity must also be accounted for separately..Temp. Treas. Reg. §1.469-1T(f). If an activity ceases to be passive (e.g., because the taxpayer begins to participate materially), its unused losses (or credits) from prior years continue to be passive, but may be used against the income (and tax liability) of that activity. If there is a change in the status of a closely-held C corporation or personal service corporation, its suspended losses from prior years will continue to be treated as if the status of the corporation had not changed..IRC Sec. 469(f).