[Code of Federal Regulations]
[Title 26, Volume 6]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.469-4T]

[Page 439-479]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.469-4T  Definition of activity (temporary).

    (a) Overview--(1) Purpose and effect of overview. This paragraph (a) 
contains a general description of the rules contained in this section 
and is intended solely as an aid to readers. The provisions of this 
paragraph (a) are not a substitute for the more detailed rules contained 
in the remainder of this section and cannot be relied upon in cases in 
which those rules qualify the general description contained in this 
paragraph (a).
    (2) Scope and structure of Sec. 1.469-4T. This section provides 
rules under which a taxpayer's business and rental operations are 
treated as one or more activities for purposes of section 469 and the 
regulations thereunder. (See paragraph (b)(2)(ii) of this section for 
the definition of business and rental operations.) In general, these 
rules are divided into three groups:
    (i) Rules that identify the business and rental operations that 
constitute an undertaking (the undertaking rules).
    (ii) Rules that identify the undertaking or undertakings that 
constitute an activity (the activity rules).
    (iii) Rules that apply only under certain special circumstances (the 
special rules).
    (3) Undertaking rules--(i) In general. The undertaking is generally 
the smallest unit that can constitute an activity. (See paragraph (b)(1) 
of this section for the general rule and paragraph (k)(2)(iii) of this 
section for a special rule that permits taxpayers to

[[Page 440]]

treat a single rental real estate undertaking as multiple activities.) 
An undertaking may include diverse business and rental operations.
    (ii) Basic undertaking rule. The basic undertaking rule identifies 
the business and rental operations that constitute an undertaking by 
reference to their location and ownership. Under this rule, business and 
rental operations that are conducted at the same location and are owned 
by the same person are generally treated as part of the same 
undertaking. Conversely, business and rental operations generally 
constitute separate undertakings to the extent that they are conducted 
at different locations or are not owned by the same person. (See 
paragraph (c)(2)(i) of this section.)
    (iii) Circumstances in which location is disregarded. In some 
circumstances, the undertaking in which business and rental operations 
are included does not depend on the location at which the operations are 
conducted. Operations that are not conducted at any fixed place of 
business or that are conducted at the customer's place of business are 
treated as part of the undertaking with which the operations are most 
closely associated (see paragraph (c)(2)(iii)(C) of this section). In 
addition, operations that are conducted at a location but do not relate 
to the production of property at that location or to the transaction of 
business with customers at that location are treated, in effect, as part 
of the undertaking or undertakings that the operations support (see 
paragraph (c)(2)(ii) of this section).
    (iv) Rental undertakings. The basic undertaking rule is also 
modified if the undertaking determined under that rule includes both 
rental and nonrental operations. In such cases, the rental operations 
and the nonrental operations generally must be treated as separate 
undertakings (see paragraph (d)(1) of this section). This rule does not 
apply if more than 80 percent of the income of the undertaking 
determined under the basic rule is attributable to one class of 
operations (i.e., rental or nonrental) or if the rental operations would 
not be treated as part of a rental activity because of the exceptions 
contained in Sec. 1.469-1T(e)(3)(ii) (see paragraph (d)(2) of this 
section). In applying the rental undertaking rules, short-term rentals 
of real property (e.g., hotel-room rentals) are generally treated as 
nonrental operations (see paragraph (d)(3)(ii) of this section).
    (v) Oil and gas wells. Another exception to the basic undertaking 
rule treats oil and gas wells that are subject to the working-interest 
exception in Sec. 1.469-1T(e)(4) as separate undertakings (see 
paragraph (e) of this section).
    (4) Activity rules--(i) In general. The basic activity rule treats 
each undertaking in which a taxpayer owns an interest as a separate 
activity of the taxpayer (see paragraph (b)(1) of this section). In the 
case of trade or business undertakings, professional service 
undertakings, and rental real estate undertakings, additional rules may 
either require or permit the aggregation of two or more undertakings 
into a single activity.
    (ii) Aggregation of trade or business undertakings--(A) Trade or 
business undertakings. Trade or business undertakings include all 
nonrental undertakings other than oil and gas undertakings described in 
paragraph (a)(3)(v) of this section and professional service 
undertakings described in paragraph (a)(4)(iii) of this section (see 
paragraph (f)(1)(ii) of this section).
    (B) Similar, commonly-controlled undertakings treated as a single 
activity. An aggregation rule treats trade or business undertakings that 
are both similar and controlled by the same interests as part of the 
same activity. This rule is, however, generally inapplicable to small 
interests held by passive investors in such undertakings, except to the 
extent such interests are held through the same passthrough entity. (See 
paragraph (f)(2) of this section.) Undertakings are similar for purposes 
of this rule if more than half (by value) of their operations are in the 
same line of business (as defined in a revenue procedure issued pursuant 
to paragraph (f)(4)(iv) of this section) or if the undertakings are 
vertically integrated (see paragraph (f)(4)(iii) of this section). All 
the facts and circumstances are taken into account in determining 
whether undertakings are controlled by the same interests for purposes 
of the aggregation rule (see paragraph (j)(1) of this section). If, 
however, each member

[[Page 441]]

of a group of five or fewer persons owns a substantial interest in each 
of the undertakings, the undertakings may be rebuttably presumed to be 
controlled by the same interests (see paragraph (j) (2) and (3) of this 
section).
    (C) Integrated businesses treated as a single activity. Trade or 
business undertakings (including undertakings that have been aggregated 
because of their similarity and common control) are subject to a second 
aggregation rule. Under this rule undertakings that constitute an 
integrated business and are controlled by the same interests must be 
treated as part of the same activity. (See paragraph (g) of this 
section.)
    (iii) Aggregation of professional service undertakings. Professional 
service undertakings are nonrental undertakings that predominantly 
involve the provision of services in the fields of health, law, 
engineering, architecture, accounting, actuarial science, performing 
arts, or consulting (see paragraph (h)(1)(ii) of this section). In 
general, professional service undertakings that are either similar, 
related, or controlled by the same interests must be treated as part of 
the same activity (see paragraph (h)(2) of this section). The rules for 
determining whether trade or business undertakings are controlled by the 
same interests also apply with respect to professional service 
undertakings. Professional service undertakings are similar, however, if 
more than 20 percent (by value) of their operations are in the same 
field, and two professional service undertakings are related if one of 
the undertakings derives more than 20 percent of its gross income from 
persons who are customers of the other undertaking (see paragraph (h)(3) 
of this section).
    (iv) Rules for rental real estate--(A) Taxpayers permitted to 
determine rental real estate activities. The rules for aggregating 
rental real estate undertakings are generally elective. They permit 
taxpayers to treat any combination of rental real estate undertakings as 
a single activity. Taxpayers may also divide their rental real estate 
undertakings and then treat portions of the undertakings as separate 
activities or recombine the portions into activities that include parts 
of different undertakings. (See paragraph (k)(2) (i) and (iii) of this 
section.)
    (B) Limitations on fragmentation and aggregation of rental real 
estate. Taxpayers may not fragment their rental real estate in a manner 
that is inconsistent with their treatment of such property in prior 
taxable years or with the treatment of such property by the passthrough 
entity through which it is held (see paragraph (k) (2)(ii) and (3) of 
this section). There are no comparable limitations on the aggregation of 
rental real estate into a single activity. If however, the income or 
gain from a rental real estate undertaking is subject to 
recharacterization under Sec. 1.469-2T(f)(3) (relating to the rental of 
nondepreciable property), a coordination rule provides that the 
undertaking must be treated as a separate activity (see paragraph (k)(6) 
of this section.)
    (v) Election to treat nonrental undertakings as separate activities. 
Another elective rule permits taxpayers to treat a nonrental undertaking 
as a separate activity even if the undertaking would be treated as part 
of a larger activity under the aggregation rules applicable to the 
undertaking (see paragraph (o)(2) of this section). This elective rule 
is limited by consistency requirements similar to those that apply to 
rental real estate operations (see paragraph (o) (3) and (4) of this 
section). Moreover, in cases in which a taxpayer elects to treat a 
nonrental undertaking as a separate activity, the taxpayer's level of 
participation (i.e., material, significant, or otherwise) in the 
separate activity is the same as the taxpayer's level of participation 
in the larger activity in which the undertaking would be included but 
for the election (see paragraph (o)(6) of this section).
    (5) Special rules--(i) Consolidated groups and publicly traded 
partnerships. Special rules apply to the business and rental operations 
of consolidated groups of corporations and publicly traded partnerships. 
Under these rules, a consolidated group is treated as one taxpayer in 
determining its activities and those of its members (see paragraph (m) 
of this section), and business and rental operations owned through a 
publicly traded partnership cannot be aggregated with operations that 
are

[[Page 442]]

not owned through the partnership (see paragraph (n) of this section).
    (ii) Transitional rule. A special rule applies for taxable years 
ending before August 10, 1989. In those years, taxpayers may organize 
business and rental operations into activities under any reasonable 
method (see paragraph (p)(1) of this section). A taxpayer will also be 
permitted to use any reasonable method to allocate disallowed deductions 
and credits among activities for the first taxable year in which the 
taxpayer's activities are determined under the general rules of Sec. 
1.469-4T (see paragraph (p)(3) of this section).
    (b) General rule and definitions of general application--(1) General 
rule. Except as otherwise provided in this section, each undertaking in 
which a taxpayer owns an interest shall be treated as a separate 
activity of the taxpayer. See paragraphs (f), (g), and (h) of this 
section for rules requiring certain nonrental undertakings to be treated 
as part of the same activity and paragraph (k) of this section for rules 
identifying the rental real estate undertakings (or portions thereof) 
that are included in an activity.
    (2) Definitions of general application. The following definitions 
set forth the meaning of certain terms for purposes of this section:
    (i) Passthrough entity. The term ``passthrough entity'' means a 
partnership, S corporation, estate, or trust.
    (ii) Business and rental operations--(A) In general. Except as 
provided in paragraph (b)(2)(ii)(B) of this section, the term ``business 
and rental operations'' means all endeavors that are engaged in for 
profit or the production of income and satisfy one or more of the 
following conditions for the taxable year:
    (1) Such endeavors involve the conduct of a trade or business 
(within the meaning of section 162) or are conducted in anticipation of 
such endeavors becoming a trade or business;
    (2) Such endeavors involve making tangible property available for 
use by customers; or
    (3) Research or experimental expenditures paid or incurred with 
respect to such endeavors are deductible under section 174 (or would be 
deductible if the taxpayer adopted the method described in section 
174(a)).
    (B) Operations conducted through nonpassthrough entities. For 
purposes of applying section 469 and the regulations thereunder, a 
taxpayer's activities do not include operations that a taxpayer conducts 
through one or more entities (other than passthrough entities). The 
following example illustrates the operation of this paragraph 
(b)(2)(ii)(B):

    Example. (i) A, an individual, owns stock of X, a closely held 
corporation (within the meaning of Sec. 1.469-1T(g)(2)(ii) that is 
directly engaged in the conduct of a real estate development business. A 
participates in X's real estate development business, but does not own 
any interest in the business other than through ownership of the stock 
of X.
    (ii) X is subject to section 469 (see Sec. 1.469-1T(b)(5)) and does 
not hold the real estate development business through another entity. 
Accordingly, for purposes of section 469 and the regulations thereunder, 
the operations of X's real estate development business are treated as 
part of X's activities.
    (iii) A is also subject to section 469 (see Sec. 1.469-1T(b)(1)), 
but A's only interest in the real estate development business is held 
through X. X is a C corporation and therefore is not a passthrough 
entity. Thus, for purposes of section 469 and the regulations 
thereunder, A's activities do not include the operations of X's real 
estate development business. Accordingly, A's participation in X's 
busines is not participation in an activity of A, and is not taken into 
account in determining whether A materially participates (within the 
meaning of Sec. 1.469-5T) or significantly participates (within the 
meaning of Sec. 1.469-1T(c)(2)) in any activity. (See, however, Sec. 
1.469-1T(g)(3) for rules under which a shareholder's participation is 
taken into account for purposes of determining whether a corporation 
materially or significantly participates in an activity.

    (c) Undertaking--(1) In general. Except as otherwise provided in 
paragraphs (d), (e), and (k)(2)(iii) of this section, business and 
rental operations that constitute a separate source of income production 
shall be treated as a single undertaking that is separate from other 
undertakings.
    (2) Operations treated as a separate source of income production--
(i) In general. Except as otherwise provided in this paragraph (c)(2), 
business and rental operations shall be treated for purposes of this 
paragraph (c) as a separate source of income production if and only if--

[[Page 443]]

    (A) Such operations are conducted at the same location (within the 
meaning of paragraph (c)(2)(iii) of this section) and are owned by the 
same person (within the meaning of paragraph (c)(2)(v) of this section); 
and
    (B) Income-producing operations (within the meaning of paragraph 
(c)(2)(iv) of this section) owned by such person are conducted at such 
location.
    (ii) Treatment of support operations--(A) In general. For purposes 
of section 469 and the regulations thereunder--
    (1) The support operations conducted at a location shall not be 
treated as part of an undertaking under paragraph (c)(2)(i) of this 
section; and
    (2) The income and expenses that are attributable to such operations 
and are reasonably allocable to an undertaking conducted at a different 
location shall be taken into account in determining the income or loss 
from the activity or activities that include such undertaking.
    (B) Support operations. For purposes of this paragraph (c)(2), the 
business and rental operations conducted at a location are treated as 
support operations to the extent that--
    (1) Such operations and an undertaking that is conducted at a 
different location are owned by the same person (within the meaning of 
paragraph (c)(2)(v) of this section);
    (2) Such operations involve the provision of property or services to 
such undertaking; and
    (3) Such operations are not income-producing operations (within the 
meaning of paragraph (c)(2)(iv) of this section).
    (iii) Location. For purposes of this paragraph (c)(2)--
    (A) The term ``location'' means, with respect to any business and 
rental operations, a fixed place of business at which such operations 
are regularly conducted;
    (B) Business and rental operations are conducted at the same 
location if they are conducted in the same physical structure or within 
close proximity of one another;
    (C) Business and rental operations that are not conducted at a fixed 
place of business or that are conducted on the customer's premises shall 
be treated as operations that are conducted at the location (other than 
the customer's premises) with which they are most closely associated;
    (D) All the facts and circumstances (including, in particular, the 
factors listed in paragraph (c)(3) of this section) are taken into 
account in determining the location with which business and rental 
operations are most closely associated; and
    (E) Oil and gas operations that are conducted for the development of 
a common reservoir are conducted within close proximity of one another.
    (iv) Income-producing operations. For purposes of this paragraph 
(c)(2), the term ``income-producing operations'' means business and 
rental operations that are conducted at a location and relate to (or are 
conducted in reasonable anticipation of)--
    (A) The production of property at such location;
    (B) The sale of property to customers at such location;
    (C) The performance of services for customers at such location;
    (D) Transactions in which customers take physical possession at such 
location of property that is made available for their use; or
    (E) Any other transactions that involve the presence of customers at 
such location.
    (v) Ownership by the same person. For purposes of this paragraph 
(c)(2), business and rental operations are owned by the same person if 
and only if one person (within the meaning of section 7701(a)(1)) is the 
direct owner of such operations.
    (3) Facts and circumstances determinations. In determining whether a 
location is the location with which business and rental operations are 
most closely associated for purposes of paragraph (c)(2)(iii)(D) of this 
section, the following relationships between operations that are 
conducted at such location and other operations are generally the most 
significant:
    (i) The extent to which other persons conduct similar operations at 
one location;
    (ii) Whether such operations are treated as a unit in the primary 
accounting records reflecting the results of such operations;

[[Page 444]]

    (iii) The extent to which other persons treat similar operations as 
a unit in the primary accounting records reflecting the results of such 
similar operations;
    (iv) The extent to which such operations involve products or 
services that are commonly provided together;
    (v) The extent to which such operations serve the same customers;
    (vi) The extent to which the same personnel, facilities, or 
equipment are used to conduct such operations;
    (vii) The extent to which such operations are conducted in 
coordination with or reliance upon each other;
    (viii) The extent to which the conduct of any such operations is 
incidental to the conduct of the remainder of such operations;
    (ix) The extent to which such operations depend on each other for 
their economic success; and
    (x) Whether such operations are conducted under the same trade name.
    (4) Examples. The following examples illustrate the application of 
this paragraph (c). In each example that does not state otherwise, the 
taxpayer is an individual and the facts, analysis, and conclusion relate 
to a single taxable year.

    Example (1). The taxpayer is the sole owner of a department store 
and a restaurant and conducts both businesses in the same building. 
Thus, the department store and restaurant operations are conducted at 
the same location (within the meaning of paragraph (c)(2)(iii) of this 
section) and are owned by the same person (i.e., the taxpayer is the 
direct owner of the operations). In addition, the taxpayer conducts 
income-producing operations (within the meaning of paragraph (c)(2)(iv) 
of this section) at the location (i.e., property is sold to customers 
and services are performed for customers on the premises of the 
department store). Accordingly, the department store and restaurant 
operations are treated as a separate source of income production (see 
paragraph (c)(2) of this section) and as a single undertaking that is 
separate from other undertakings (see paragraph (c)(1) of this section).
    Example (2). (i) The facts are the same as in example (1), except 
that the taxpayer is also the sole owner of an automotive center that 
services automobiles and sells tires, batteries, motor oil, and 
accessories. The taxpayer operates the automotive center in a separate 
structure in the shopping mall in which the department store is located. 
Although the automotive center operations and the department store and 
restaurant operations are not conducted in the same physical structure, 
they are conducted within close proximity (within the meaning of 
paragraph (c)(2)(iii)(B) of this section) of one another. Thus, the 
department store, restaurant, and automotive center operations are 
conducted at the same location (within the meaning of paragraph 
(c)(2)(iii) of this section).
    (ii) As in example (1), the operations conducted at the same 
location are owned by the same person, and the taxpayer conducts income-
producing operations (within the meaning of paragraph (c)(2)(iv) of this 
section) at the location. Accordingly, the department store, restaurant, 
and automotive center operations are treated as a separate source of 
income production (see paragraph (c)(2) of this section) and as a single 
undertaking that is separate from other undertakings (see paragraph 
(c)(1) of this section).
    Example (3). (i) The facts are the same as in example (2), except 
that the automotive center is located several blocks from the shopping 
mall. As in example (1), the department store and restaurant operations 
are treating as a single undertaking that is separate from other 
undertakings. Because, however, the automotive center operations are not 
conducted within close proximity (within the meaning of paragraph 
(c)(2)(iii)(B) of this section) of the department store and restaurant 
operations, all of the taxpayer's operations are not conducted at the 
same location (within the meaning of paragraph (c)(2)(iii) of this 
section).
    (ii) All of the automotive center operations are conducted at the 
same location (within the meaning of paragraph (c)(2)(iii) of this 
section) and are owned by the same person (i.e., the taxpayer is the 
direct owner of the operations). In addition, the taxpayer conducts 
income producing operations (within the meaning of paragraph (c)(2)(iv) 
of this section) at the location (i.e., property is sold to customers 
and services are performed for customers on the premises of the 
automotive center). Accordingly, the automotive center operations are 
also treated as a separate source of income production (see paragraph 
(c)(2) of this section) and as a single undertaking that is separate 
from other undertakings (see paragraph (c)(1) of this section). See, 
however, paragraph (g) of this section for rules under which certain 
trade or business activities are treated as a single activity.
    Example (4). The taxpayer is the sole owner of a building and rents 
residential, office, and retail space in the building to various 
tenants. The taxpayer manages these rental operations from an office 
located in the building. The rental operations are conducted at the same 
location (within the meaning of paragraph (c)(2)(iii) of this section) 
and are owned by the same person (i.e.,

[[Page 445]]

the taxpayer is the direct owner of the operations). In addition, the 
taxpayer conducts income-producing operations (within the meaning of 
paragraph (c)(2)(iv) of this section) at the location (i.e., customers 
take physical possession in the building of property made available for 
their use). Accordingly, the rental operations are treated as a separate 
source of income production (see paragraph (c)(2) of this section) and 
as a single undertaking that is separate from other undertakings (see 
paragraph (c)(1) of this section). See paragraph (d) of this section for 
rules for determining whether this undertaking is a rental undertaking 
and paragraph (k) of this section for rules for identifying rental real 
estate activities.
    Example (5). (i) The facts are the same as in example (4), except 
that the taxpayer also uses the rental office in the building 
(``Building 1'') to manage rental operations in another 
building (``Building 2'') that the taxpayer owns. The rental 
operations conducted in Building 2 are treated as a separate 
source of income production under paragraph (c)(2) of this section and 
as a single undertaking that is separate from other undertakings (the 
``Building 2 undertaking'') under paragraph (c)(1) of this 
section.
    (ii) The operations conducted at the rental office in Building 
1 and the Building 2 undertaking are owned by the same 
person (i.e., the taxpayer is the direct owner of the operations). In 
addition, the operations conducted at the rental office with respect to 
the Building 2 undertaking relate to transactions in which 
customers take physical possession at another location of property that 
is made available for their use (i.e., the operations are not income-
producing operations (within the meaning of paragraph (c)(2)(iv) of this 
section)). Thus, to the extent the operations conducted at the rental 
office involve the management of the Building 2 undertaking, 
they are support operations (within the meaning of paragraph 
(c)(2)(ii)(B) of this section) with respect to the Building 2 
undertaking.
    (iii) Paragraph (c)(2)(ii)(A)(1) of this section provides that 
support operations are not treated as part of an undertaking under 
paragraph (c)(2)(i) of this section. Therefore, the support operations 
conducted at the rental office are not treated as part of the 
undertaking that consists of the rental operations conducted in Building 
1 (the ``Building 1 undertaking''). Paragraph 
(c)(2)(ii)(A)(2) of this section provides that the income and expenses 
that are attributable to support operations and are reasonably allocable 
to an undertaking conducted at a different location shall be taken into 
account in determining the income or loss from the activity that 
includes such undertaking. Accordingly, the income and expenses of the 
rental office that are reasonably allocable to the Building 2 
undertaking are taken into account in determining the income or loss 
from the activity or activities that include the Building 2 
undertaking. See paragraph (k) of this section for rules for identifying 
rental real estate activities.
    (iv) Rental office operations that involve the management of rental 
operations conducted in Building 1 are not support operations 
(within the meaning of paragraph (c)(2)(ii)(B) of this section) because 
they relate to an undertaking that is conducted at the same location 
(the ``Building 1 undertaking''). Thus, the rules for support 
operations in paragraph (c)(2)(ii)(A) of this section do not apply to 
such operations, and they are treated as part of the Building 1 
undertaking.
    Example (6). (i) The taxpayer conducts business and rental 
operations at eleven different locations (within the meaning of 
paragraph (c)(2)(iii) of this section). At ten of the locations the 
taxpayer owns grocery stores, and at the eleventh location the taxpayer 
owns a warehouse that receives goods and supplies them to the taxpayer's 
stores. The operations of each store are conducted at the same location 
(within the meaning of paragraph (c)(2)(iii) of this section) and are 
owned by the same person (i.e., the taxpayer is the direct owner of the 
operations). In addition, the taxpayer conducts income-producing 
operations (within the meaning of paragraph (c)(2)(iv) of this section) 
at each location (i.e., property is sold to customers on the store 
premises, and customers take physical possession on the store premises 
of property made available for their use). Accordingly, the operations 
of each of the ten grocery stores are treated as a separate source of 
income production (see paragraph (c)(2) of this section), and each store 
is treated as a single undertaking (a ``grocery store undertaking'') 
that is separate from other undertakings (see paragraph (c)(1) of this 
section). The operations conducted at the warehouse, however, do not 
include any income-producing operations (within the meaning of paragraph 
(c)(2)(iv) of this section). Accordingly, the warehouse operations do 
not satisfy the requirements of paragraph (c)(2)(i) of this section and 
are not treated as a separate undertaking under paragraph (c)(1) of this 
section.
    (ii) The warehouse operations and the grocery store undertakings are 
owned by the same person (i.e., the taxpayer is the direct owner of the 
operations), the operations conducted at the warehouse involve the 
provision of property to the grocery store undertakings, and the 
warehouse operations are not income-producing operations (within the 
meaning of paragraph (c)(2)(iv) of this section). Thus, the warehouse 
operations are support operations (within the meaning of paragraph 
(c)(2)(ii)(B) of this section) with respect to the grocery store 
undertakings.

[[Page 446]]

Paragraph (c)(2)(ii)(A)(2) of this section provides that the income and 
expenses that are attributable to support operations and are reasonably 
allocable to an undertaking conducted at a different location shall be 
taken into account in determining the income or loss from the activity 
or activities that include such undertaking. Accordingly, the income and 
expenses of the warehouse operations that are reasonably allocable to a 
grocery store undertaking are taken into account in determining the 
income or loss from the activity or activities that include such 
undertaking. See paragraph (f) of this section for rules under which 
certain similar, commonly-controlled undertakings are treated as a 
single activity.
    Example (7). (i) The facts are the same as in example (6), except 
that the warehouse operations also include the sale of goods to grocery 
stores that the taxpayer does not own (``other grocery stores''). 
Because of these sales, the taxpayer conducts income-producing 
operations (within the meaning of paragraph (c)(2)(iv) of this section) 
at the warehouse. The warehouse operations are conducted at the same 
location (within the meaning of paragraph (c)(2)(iii) of this section) 
and are owned by the same person (i.e., the taxpayer is the direct owner 
of the operations). Accordingly, prior to the application of the rules 
for support operations in paragraph (c)(2)(ii) of this section, the 
warehouse operations are treated as a separate source of income 
production (see paragraph (c)(2) of this section) and as a single 
undertaking (the ``separate warehouse undertaking'') that is separate 
from other undertakings (see paragraph (c)(1) of this section).
    (ii) As in example (6), the warehouse operations that involve 
supplying goods to the taxpayer's grocery store undertakings are support 
operations with respect to those undertakings. Therefore, those 
operations are not treated as part of the separate warehouse undertaking 
(see paragraph (c)(2)(ii)(A)(1) of this section), and the income and 
expenses of such operations are taken into account, as in example (6), 
in determining the income or loss from the activity or activities that 
include the taxpayer's grocery store undertakings.
    Example (8). (i) A partnership is formed to acquire real property 
and construct a building on the property. The partnership hires brokers 
to locate a suitable parcel of land, lawyers to negotiate zoning 
variances, easements, and building permits, and architects and engineers 
to design the improvements. After the architects and engineers have 
designed the improvements and other preliminaries have been completed, 
the partnership hires a general contractor who hires subcontractors and 
oversees construction. During the construction process and after 
construction has been completed, the partnership leases out space in the 
building. The partnership then operates the building as a rental 
property. The operations of acquiring the real property, negotiating 
contracts, overseeing the designing and construction of the 
improvements, leasing up the building, and operating the building are 
conducted at an office (the ``management office'') that is not at the 
same location (within the meaning of paragraph (c)(2)(iii) of this 
section) as the building.
    (ii) The operations conducted at the building site (e.g., excavating 
the land, pouring the concrete for the foundation, erecting the frame of 
the building, completing the exterior of the building, and building out 
the interior of the building) are conducted at the same location (within 
the meaning of paragraph (c)(2)(iii) of this section) and are owned by 
the same person (i.e., the partnership is the direct owner of the 
operations). In addition, the partnership conducts income-producing 
operations (within the meaning of paragraph (c)(2)(iv) of this section) 
at the location (i.e., during the construction period property (the 
building) is produced at the building site, and during the rental period 
customers take physical possession in the building of property made 
available for their use). Accordingly, the operations conducted at the 
building site are treated as a separate source of income production (see 
paragraph (c)(2) of this section) and as a single undertaking that is 
separate from other undertakings (see paragraph (c)(1) of this section).
    (iii) The operations conducted at the management office and the 
undertaking conducted at the building site are owned by the same person 
(i.e., the partnership is the direct owner of the operations). In 
addition, the operations conducted at the management office relate to 
transactions in which customers take physical possession at another 
location of property that is made available for their use (i.e., the 
operations are not income-producing operations (within the meaning of 
paragraph (c)(2)(iv) of this section)). Thus, to the extent the 
operations conducted at the management office involve the provision of 
services to the undertaking conducted at the building site, they are 
support operations (within the meaning of paragraph (c)(2)(ii)(B) of 
this section) with respect to such undertaking.
    (iv) Paragraph (c)(2)(ii)(A)(2) of this section provides that the 
income and expenses of support operations that are reasonably allocable 
to an undertaking conducted at a different location shall be taken into 
account in determining the income or loss from the activity that 
includes such undertaking. Accordingly, the income and expenses of the 
management office that are reasonably allocable to the undertaking 
conducted at the building site are taken into account in determining the 
income or loss from the activity or activities that include such 
undertaking.

[[Page 447]]

    (v) Until the building is first held out for rent and is in a state 
of readiness for rental, the undertaking conducted at the building site 
is a trade or business undertaking (within the meaning of paragraph 
(f)(1)(ii) of this section). See paragraph (d) of this section for rules 
for determining whether the undertaking is a rental undertaking for 
periods after the building is first held out for rent and is in a state 
of readiness for rental and paragraph (k) of this section for rules for 
identifying rental real estate activities.
    Example (9). The taxpayer owns 15 oil wells pursuant to a single 
working interest (within the meaning of Sec. 1.469-1T (e)(4)(iv). All 
of the wells are drilled and operated for the development of a common 
reservoir. Thus, all of the wells are at the same location (see 
paragraph (c)(2)(iii)(E) of this section). All of the wells are owned by 
the same person (i.e., the taxpayer is the direct owner of the 
operations), and the taxpayer conducts income-producing operations 
(within the meaning of paragraph (c)(2)(iv) of this section) at the 
location (i.e., oil wells are drilled in reasonable anticipation of 
producing oil at the location). Accordingly, the operations of the wells 
are treated as a separate source of income production (see paragraph 
(c)(2) of this section) and as a single undertaking that is separate 
from other undertakings (see paragraph (c)(1) of this section). See 
paragraph (e) of this section for rules under which certain oil and gas 
operations are treated as multiple undertakings even if they would be 
part of the same undertaking under the rules of this paragraph (c).
    Example (10). (i) Partnership X owns an automobile dealership and 
partnership Y owns an automobile repair shop. The dealership and repair 
shop operations are conducted in the same physical structure. 
Individuals A, B, and C are the only partners in partnerships X and Y, 
and each of the partners owns a one-third interest in both partnerships.
    (ii) The dealership operations and the repair-shop operations are 
conducted at the same location (within the meaning of paragraph 
(c)(2)(iii) of this section), but are owned by different persons (i.e., 
X is the direct owner of the dealership operations, and Y is the direct 
owner of the repair-shop operations). Moreover, indirect ownership of 
the operations is not taken into account under paragraph (c)(2)(v) of 
this section. Thus, it is irrelevant that the two partnerships are owned 
by the same persons in identical proportions. Accordingly, the 
dealership and repair-shop operations are not treated as part of the 
same source of income production (see paragraph (c)(2) of this section) 
or as a single undertaking that is separate from other undertakings (see 
paragraph (c)(1) of this section). See, however, paragraph (g) of this 
section for rules under which certain trade or business activities are 
treated as a single activity.
    Example (11). (i) The taxpayer owns and operates a delivery service. 
The business consists of a central office, retail establishments, and 
messengers who transport packages from one place to another. Customers 
may bring their packages to a retail establishment for delivery 
elsewhere or, by calling the central office, may have packages picked up 
at their homes or offices. The central office dispatches messengers and 
coordinates all pickups and deliveries. Customers may pay for deliveries 
when they drop off or pick up packages at a retail establishment, or the 
central office will bill the customer for services rendered. In 
addition, many packages are routed through the central office.
    (ii) The operations conducted at the central office are conducted at 
the same location (within the meaning of paragraph (c)(2)(iii) of this 
section) and are owned by the same person (i.e., the taxpayer is the 
direct owner of the operations). The operations actually conducted at 
the central office, however, do not include any income-producting 
operations (within the meaning of paragraph (c)(2)(iv) of this section).
    (iii) Under paragraph (c)(2)(iii) (C) and (D) of this section, 
business and rental operations that are not conducted at a fixed place 
of business or that are conducted on the customer's premises are treated 
as operations that are conducted at the location (other than the 
customer's premises) with which they are most closely associated, and 
all the facts and circumstances are taken into account in determining 
the location with which business and rental operations are most closely 
associated. The facts and circumstances in this case (including the 
facts that the central office dispatches messengers, coordinates all 
pickups and deliveries, and is the transshipment point for many 
packages) establish that the operations of delivering packages from one 
location to another are most closely associated with the central office. 
Thus, the delivery operations are treated as operations that are 
conducted at the central office, and the deliveries are treated as 
income-producing operations (i.e., the performance of services for 
customers) that the taxpayer conducts at the central office. 
Accordingly, the operations conducted at the central office are treated 
as a separate source of income production (see paragraph (c)(2) of this 
section) and as a single undertaking that is separate from other 
undertakings (see paragraph (c)(1) of this section).
    (iv) The operations conducted at each retail establishment are 
conducted at the same location (within the meaning of paragraph 
(c)(2)(iii) of this section) and are owned by the same person (i.e., the 
taxpayer is the direct owner of the operations). At each retail

[[Page 448]]

establishment, the taxpayer's operations include transactions that 
involve the presence of customers at the establishment. Thus, the 
taxpayer conducts income-producing operations (within the meaning of 
paragraph (c)(2)(iv)(E) of this section) at the retail establishments. 
Accordingly, the operations of each retail establishment are treated as 
a separate source of income production (see paragraph (c)(2) of this 
section) and as a single undertaking that is separate from other 
undertakings (see paragraph (c)(1) of this section). See, however, 
paragraph (f) of this section for rules under which certain similar, 
commonly-controlled undertakings are treated as a single activity.
    Example (12). (i) The taxpayer is the sole owner of a saw mill and a 
lumber yard. The taxpayer's business operations consist of converting 
timber into lumber and other wood products and selling the resulting 
products. The timber is processed at the saw mill, and the resulting 
products are transported to the lumber yard where they are sold. The saw 
mill and the lumber yard are at different locations (within the meaning 
of paragraph (c)(2)(iii) of this section). The transportation operations 
are managed at the saw mill.
    (ii) The operations conducted at the saw mill are conducted at the 
same location (within the meaning of paragraph (c)(2)(iii) of this 
section) and are owned by the same person (i.e., the taxpayer is the 
direct owner of the operations). In addition, the taxpayer conducts 
income-producing operations (within the meaning of paragraph (c)(2)(iv) 
of this section) at the location (i.e., lumber is produced at the mill). 
Similarly, the selling operations at the lumber yard are conducted at 
the same location (within the meaning of paragraph (c)(2)(iii) of this 
section) and are owned by the same person (i.e., the taxpayer is the 
direct owner of the operations). In addition, the taxpayer conducts 
income-producing operations (within the meaning of paragraph (c)(2)(iv) 
of this section) at the location (i.e., lumber is sold to customers at 
the lumber yard). Thus, the milling operations and the selling 
operations are treated as separate sources of income production (see 
paragraph (c)(2) of this section) and as separate undertakings (see 
paragraph (c)(1) of this section).
    (iii) The operations conducted at the mill involve the provision of 
property to the lumber-yard undertaking. Nonetheless, the milling 
operations are income-producing operations because they relate to the 
production of property at the mill, and an undertaking's income-
producing operations are not treated as support operations (see 
paragraph (c)(2)(ii)(B)(3) of this section). Accordingly, the milling 
operations are not support operations with respect to the lumber-yard 
undertaking. See, however, paragraph (f) of this section for rules under 
which certain vertically-integrated undertakings are treated as part of 
the same activity.
    (iv) The operations of transporting finished products from the saw 
mill to the lumber yard are not conducted at a fixed location. Under 
paragraphs (c)(2)(iii) (C) and (D) of this section, business and rental 
operations that are not conducted at a fixed place of business or that 
are conducted on the customer's premises are treated as operations that 
are conducted at the location (other than the customer's premises) with 
which they are most closely associated, and all the facts and 
circumstances are taken into account in determining the location with 
which business and rental operations are most closely associated. The 
facts and circumstances in this case (including the fact that the 
transportation operations are managed at the saw mill) establish that 
the transportation operations are most closely associated with the saw 
mill. Thus, the transportation operations are treated as operations that 
are conducted at the mill and as part of the undertaking that consists 
of the milling operations.

    (d) Rental undertaking--(1) In general. This paragraph (d) applies 
to operations that are treated, under paragraph (c) of this section and 
before the application of paragraph (d)(1)(i) of this section, as a 
single undertaking that is separate from other undertakings (a 
``paragraph (c) undertaking''). For purposes of this section--
    (i) A paragraph (c) undertaking's rental operations and its 
operations other than rental operations shall be treated, except as 
otherwise provided in paragraph (d)(2) of this section, as two separate 
undertakings;
    (ii) The income and expenses that are reasonably allocable to an 
undertaking (determined after the application of paragraph (d)(1)(i) of 
this section) shall be taken into account in determining the income or 
loss from the activity or activities that include such undertaking; and
    (iii) An undertaking (determined after the application of paragraph 
(d)(1)(i) of this section) shall be treated as a rental undertaking if 
and only if such undertaking, considered as a separate activity, would 
constitute a rental activity (within the meaning of Sec. 1.469-
1T(e)(3)).
    (2) Exceptions. Paragraph (d)(1)(i) of this section shall not apply 
to a paragraph (c) undertaking for any taxable year in which--

[[Page 449]]

    (i) The rental operations of the paragraph (c) undertaking, 
considered as a separate activity, would not constitute a rental 
activity (within the meaning of Sec. 1.469-1T(e)(3));
    (ii) Less than 20 percent of the gross income of the paragraph (c) 
undertaking is attributable to rental operations; or
    (iii) Less than 20 percent of the gross income of the paragraph (c) 
undertaking is attributable to operations other than rental operations.
    (3) Rental operations. For purposes of this paragraph (d), a 
paragraph (c) undertaking's rental operations are determined under the 
following rules:
    (i) General rule. Except as otherwise provided in paragraph (d)(3) 
(ii) or (iii) of this section, a paragraph (c) undertaking's rental 
operations are all of the undertaking's business and rental operations 
that involve making tangible property available for use by customers and 
the provision of property and services in connection therewith.
    (ii) Real property provided for short-term use. A paragraph (c) 
undertaking's operations that involve making short-term real property 
available for use by customers and the provision of property and 
services in connection therewith shall not be treated as rental 
operations if such operations, considered as a separate activity, would 
not constitute a rental activity. An item of property is treated as 
short-term real property for this purpose if and only if such item is 
real property that the paragraph (c) undertaking makes available for use 
by customers and the average period of customer use (within the meaning 
of Sec. 1.469-1T(e)(3)(iii)) for all of the paragraph (c) undertaking's 
real property of the same type as such item is 30 days or less.
    (iii) Property made available to licensees. A paragraph (c) 
undertaking's operations that involve making tangible property available 
during defined business hours for nonexclusive use by various customers 
shall not be treated as rental operations. (See Sec. 1.469-
1T(e)(3)(ii)(E).)
    (4) Examples. The following examples illustrate the application of 
this paragraph (d). In each example that does not state otherwise, the 
taxpayer is an individual and the facts, analysis, and conclusions 
relate to a single taxable year.

    Example (1). (i) The taxpayer owns a building in which the taxpayer 
rents office space to tenants and operates a parking garage that is used 
by tenants and other persons. (Assume that, under paragraph (c)(1) of 
this section, the operations conducted in the building are treated as a 
single paragraph (c) undertaking.) The taxpayer's tenants typically 
occupy an office for at least one year, and the services provided to 
tenants are those customarily provided in office buildings. Some persons 
(including tenants) rent spaces in the parking garage on a monthly or 
annual basis. In general, however, spaces are rented on an hourly or 
daily basis, and the average period for which all customers (including 
tenants) use the parking garage is less than 24 hours. The paragraph (c) 
undertaking derives 75 percent of its gross income from office-space 
rentals and 25 percent of its gross income from the parking garage. The 
operations conducted in the building are not incidental to any other 
activity of the taxpayer (within the meaning of Sec. 1.469-
1T(e)(3)(vi)).
    (ii) The parking spaces are real property and the average period of 
customer use (within the meaning of Sec. 1.469-1T(e)(3)(iii)) for the 
parking spaces is 30 days or less. Thus, the parking spaces are short-
term real properties (within the meaning of paragraph (d)(3)(ii) of this 
section). (For this purpose, individual parking spaces that are rented 
on a monthly or annual basis are, nevertheless, short-term real 
properties because all the parking spaces are property of the same type, 
and the average rental period taking all parking spaces into account is 
30 days or less.) In addition, the parking-garage operations involve 
making short-term real properties available for use by customers and the 
provision of property and services in connection therewith.
    (iii) Paragraph (d)(3) (i) and (ii) of this section provides, in 
effect, that a paragraph (c) undertaking's operations that involve 
making short-term real properties available for use by customers and the 
provision of property and services in connection therewith are treated 
as rental operations if and only if the operations, considered as a 
separate activity, would constitute a rental activity (within the 
meaning of Sec. 1.469-1T(e)(3)). In this case, the parking-garage 
operations, if considered as a separate activity, would not constitute a 
rental activity because the average period of customer use for the 
parking spaces is seven days or less (see Sec. 1.469-1T(e)(3)(ii)(A)). 
Accordingly, the parking-garage operations are not treated as rental 
operations.
    (iv) The paragraph (c) undertaking's remaining operations involve 
the provision of tangible property (the office spaces) for use

[[Page 450]]

by customers and the provision of property and services in connection 
therewith. The average period of customer use for the office spaces 
exceeds 30 days. Thus, the office spaces are not short-term real 
properties, and the undertaking's operations involving the rental of 
office spaces are rental operations.
    (v) Paragraph (d)(1)(i) of this section provides, with certain 
exceptions, that a paragraph (c) undertaking's rental operations and its 
operations other than rental operations are treated as two separate 
undertakings. In this case, at least 20 percent of the paragraph (c) 
undertaking's gross income is attributable to rental operations (the 
office-space operations) and at least 20 percent is attributable to 
operations other than rental operations (the parking-garage operations). 
Thus, the exceptions in paragraph (d)(2) (ii) and (iii) of this section 
do not apply. In addition, the average period of customer use for the 
office spaces exceeds 30 days, extraordinary personal services (within 
the meaning of Sec. 1.469-1T(e)(3)(v)) are not provided, and the rental 
of the office spaces is not treated as incidental to a nonrental 
activity under Sec. 1.469-1T(e)(3)(vi) (relating to incidental rentals 
that are not treated as a rental activity). Thus, the rental operations, 
if considered as a separate activity, would constitute a rental 
activity, and the exception in paragraph (d)(2)(i) of this section does 
not apply. Accordingly, the rental operations and the parking-garage 
operations are treated as two separate undertakings (the ``office-space 
undertaking'' and the ``parking-garage undertaking'').
    (vi) Paragraph (d)(1)(iii) of this section provides that an 
undertaking (determined after the application of paragraph (d)(1)(i) of 
this section) is treated as a rental undertaking if and only if the 
undertaking, considered as a separate activity, would constitute a 
rental activity. In this case, the office-space undertaking, if 
considered as a separate activity, would constitute a rental activity 
(see (v) above), and the parking-garage undertaking, if considered as a 
separate activity, would not constitute a rental activity (see (iii) 
above). Accordingly, the office-space undertaking is treated as a rental 
undertaking, and the parking-garage undertaking is not.
    Example (2). (i) The taxpayer owns a building in which the taxpayer 
rents apartments to tenants and operates a restaurant. (Assume that, 
under paragraph (c)(1) of this section, the operations conducted in the 
building are treated as a single paragraph (c) undertaking.) The 
taxpayer's tenants typically occupy an apartment for at least one year, 
and the services provided to tenants are those customarily provided in 
residential apartment buildings. The paragraph (c) undertaking derives 
85 percent of its gross income from apartment rentals and 15 percent of 
its gross income from the restaurant. The operations conducted in the 
building are not incidental to any other activity of the taxpayer 
(within the meaning of Sec. 1.469-1T(e)(3)(vi)).
    (ii) The operations with respect to apartments (the ``apartment 
operations'') involve the provision of tangible property (the 
apartments) for use by customers and the provision of property and 
services in connection therewith. In addition, the apartments are not 
short-term real properties (within the meaning of paragraph (d)(3)(ii) 
of this section) because the average period of customer use (within the 
meaning of Sec. 1.469-1T(e)(3)(iii)) for the apartments exceeds 30 
days. Accordingly, the apartment operations are rental operations 
(within the meaning of paragraph (d)(3) of this section). The restaurant 
operations do not involve the provision of tangible property for use by 
customers or the provision of property or services in connection 
therewith. Thus, the restaurant operations are not rental operations.
    (iii) Paragraph (d)(1)(i) of this section provides, with certain 
exceptions, that a paragraph (c) undertaking's rental operations and its 
operations other than rental operations are treated as two separate 
undertakings. In this case, however, the exception in paragraph 
(d)(2)(iii) of this section applies because less than 20 percent of the 
paragraph (c) undertaking's gross income is attributable to operations 
other than rental operations (the restaurant operations). Accordingly, 
the rental operations and the restaurant operations are not treated as 
two separate undertakings under paragraph (d)(1)(i) of this section.
    (iv) Paragraph (d)(1)(iii) of this section provides that an 
undertaking (determined after the application of paragraph (d)(1)(i) of 
this section) is treated as a rental undertaking if and only if the 
undertaking, considered as a separate activity, would constitute a 
rental activity. In this case, the undertaking (determined after the 
application of paragraph (d)(1)(i) of this section) includes both the 
apartment operations and the restaurant operations, and the gross income 
of this undertaking represents amounts paid principally for the use of 
tangible property (the apartments). Moreover, the average period of 
customer use for the apartments exceeds 30 days, extraordinary personal 
services (within the meaning of Sec. 1.469-1T(e)(3)(v)) are not 
provided, and the rental of the apartments is not treated as incidental 
to a nonrental activity under Sec. 1.469-1T(e)(3)(vi) (relating to 
incidental rentals that are not treated as a rental activity). Thus, the 
undertaking, if considered as a separate activity, would constitute a 
rental activity. Accordingly, the undertaking is treated as a rental 
undertaking.
    Example (3). (i) The taxpayer owns a building in which the taxpayer 
rents hotel rooms,

[[Page 451]]

meeting rooms, and parking spaces to customers, rents space to various 
retailers, and operates a restaurant and health club. (Assume that, 
under paragraph (c)(1) of this section, the operations conducted in the 
building are treated as a single paragraph (c) undertaking.) Although 
some customers occupy hotel rooms for extended periods (including some 
customers who reside in the hotel), customers use hotel rooms for an 
average period of two days and meeting rooms for an average period of 
one day. The services provided to persons using the hotel rooms and 
meeting rooms are those customarily provided in hotels (including wake-
up calls, valet services, and delivery of food and beverages to rooms). 
Some customers rent spaces in the parking garage on a monthly or annual 
basis. In general, however, parking spaces are rented on an hourly or 
daily basis, and the average period for which customers use the parking 
garage is less than 24 hours. Retail tenants typically occupy their 
space for at least one year, and the services provided to retail tenants 
are those customarily provided in commercial buildings. The paragraph 
(c) undertaking derives 45 percent of its gross income from renting 
hotel rooms, meeting rooms, and parking spaces, 35 percent of its gross 
income from renting retail space, and 20 percent of its gross income 
from the restaurant and health club. The operations conducted in the 
building are not incidental to any other activity of the taxpayer 
(within the meaning of Sec. 1.469-1T(e)(3)(vi)).
    (ii) The parking spaces, hotel rooms, and meeting rooms are real 
property of three different types, but the average period of customer 
use (within the meaning of Sec. 1.469-1T (e)(3)(iii)) for property of 
each type is 30 days or less. Thus, the parking spaces, hotel rooms, and 
meeting rooms are short-term real properties. (For this purpose, 
individual parking spaces or hotel rooms that are rented for extended 
periods are, nevertheless, short-term real properties if the average 
rental period for all parking spaces is 30 days or less and the average 
rental period for all hotel rooms is 30 days or less.) In addition, the 
parking garage operations, the operations with respect to hotel rooms 
(the ``hotel-room operations''), and the operations with respect to 
meeting rooms (the ``meeting-room operations'') involve making short-
term real properties available for use by customers and the provision of 
property and services in connection therewith.
    (iii) Paragraph (d)(3) (i) and (ii) of this section provides, in 
effect, that a paragraph (c) undertaking's operations that involve 
making short-term real properties available for use by customers and the 
provision of property and services in connection therewith are treated 
as rental operations if and only if the operations, considered as a 
separate activity, would constitute a rental activity (within the 
meaning of Sec. 1.469-1T (e)(3)). In this case the parking-garage, 
hotel-room and meeting-room operations, if considered as separate 
activities, would not constitute rental activities because the average 
period of customer use for parking spaces, hotel rooms, and meeting 
rooms does not exceed seven days (see Sec. 1.469-1T (e)(3)(ii)(A)). 
Accordingly, the parking-garage, hotel-room, and meeting-room operations 
are not treated as rental operations.
    (iv) The operations with respect to retail space in the building 
(the ``retail-space operations'') involve the provision of tangible 
property (the retail spaces) for use by customers and the provision of 
property and services in connection therewith. In addition, the retail 
spaces are not short-term real properties (within the meaning of 
paragraph (d)(3)(ii) of this section) because the average period of 
customer use (within the meaning of Sec. 1.469-1T (e)(3)(iii)) for the 
retail spaces exceeds 30 days. Accordingly, the retail-space operations 
are rental operations.
    (v) The health-club operations involve making tangible property 
available for use by customers, but the property is customarily made 
available during defined business hours for nonexclusive use by various 
customers. Accordingly, the health-club operations are not rental 
operations (see paragraph (d)(3)(iii) of this seciton). The restaurant 
operations do not involve the provision of tangible property for use by 
customers or the provision of property or services in connection 
therewith. Accordingly, the restaurant operations also are not rental 
operations.
    (vi) Paragraph (d)(1)(i) of this section provides, with certain 
exceptions, that a paragraph (c) undertaking's rental operations and its 
operations other than rental operations are treated as two separate 
undertakings. In this case, at least 20 percent of the paragraph (c) 
undertaking's gross income is attributable to rental operations (35 
percent of the paragraph (c) undertaking's gross income is from the 
retail-space operations) and at least 20 percent is attributable to 
operations other than rental operations (45 percent from the hotel-room, 
meeting-room and parking-garage operations and 20 percent from the 
restaurant and health-club operations). Thus, the exceptions in 
paragraph (d)(2) (ii) and (iii) of this section do not apply. In 
addition, the average period of customer use for the retail space 
exceeds 30 days, extraordinary personal services (within the meaning of 
Sec. 1.469-1T (e)(3)(v)) are not provided, and the rental of the retail 
space is not treated as incidental to a nonrental activity under Sec. 
1.469-1T (e)(3)(vi) (relating to incidental rentals that are not treated 
as a rental activity). Thus, the retail-space operations, if considered 
as a separate activity, would constitute a rental activity, and the

[[Page 452]]

exception in paragraph (d)(2)(i) of this section does not apply. 
Accordingly, the retail-space operations are treated as an undertaking 
(the ``retail-space undertaking'') and all the other operations 
conducted in the building (i.e., renting hotel and meeting rooms and 
parking spaces and operating the restaurant and health club) are treated 
as a separate undertaking (the ``hotel undertaking'').
    (vii) Paragraph (d)(1)(iii) of this section provides that an 
undertaking (determined after the application of paragraph (d)(1)(i) of 
this section) is treated as a rental undertaking if and only if the 
undertaking, considered as a separate activity, would constitute a 
rental activity. In this case, the retail-space undertaking, if 
considered as a separate activity, would constitute a rental activity 
(see (iv) above). Accordingly, the retail-space undertaking is treated 
as a rental undertaking. The hotel undertaking, if considered as a 
separate activity, would not constitute a rental activity because all 
tangible property provided for the use of customers in the hotel 
undertaking is either property for which the average period of customer 
use is seven days or less (see Sec. 1.469-1T (e)(3)(ii)(A)) or property 
customarily made available during defined business hours for 
nonexclusive use by various customers (see Sec. 1.469-1T 
(e)(3)(ii)(E)). Accordingly, the hotel undertaking is not treated as a 
rental undertaking.
    Example (4). (i) A law partnership owns a ten-story building. The 
partnership uses eight floors of the building in its law practice and 
leases two floors to one or more tenants. (Assume that, under paragraph 
(c)(1) of this section, the operations conducted in the building are 
treated as a single paragraph (c) undertaking.) Tenants typically occupy 
space on the two rented floors for at least one year, and the services 
provided to tenants are those customarily provided in office buildings. 
The paragraph (c) undertaking derives 90 percent of its gross income 
from rendering legal services and 10 percent of its gross income from 
renting space. The operations conducted in the building are not 
incidental to any other activity of the taxpayer (within the meaning of 
Sec. 1.469-1T (e)(3)(vi)).
    (ii) The operations with respect to the office space leased to 
tenants (the ``office-space operations'') involve the provision of 
tangible property (the office space) for use by customers and the 
provision of property and services in connection therewith. In addition, 
the office spaces are not short-term real properties (within the meaning 
of paragraph (d)(3)(ii) of this section) because the average period of 
customer use (within the meaning of Sec. 1.469-1T(e)(3)(iii)) for the 
office space exceeds 30 days. Accordingly, the office-space operations 
are rental operations (within the meaning of paragraph (d)(3) of this 
section).
    (iii) The operations that involve the performance of legal services 
(the ``law-practice operations'') do not involve the provision of 
tangible property for use by customers or the provision of property or 
services in connection therewith. Accordingly, the law-practice 
operations are not rental operations.
    (iv) Paragraph (d)(1)(i) of this section provides, with certain 
exceptions, that a paragraph (c) undertaking's rental operations and its 
operations other than rental operations are treated as two separate 
undertakings. In this case, however, the exception in paragraph 
(d)(2)(ii) of this section applies because less than 20 percent of the 
paragraph (c) undertaking's gross income is attributable to rental 
operations (the office-space operations). Accordingly, the law-practice 
operations and the office-space operations are not treated as two 
separate undertakings under paragraph (d)(1)(i) of this section.
    (v) Paragraph (d)(1)(iii) of this section provides that an 
undertaking (determined after the application of paragraph (d)(1)(i) of 
this section) is treated as a rental undertaking only if the 
undertaking, considered as a separate activity, would constitute a 
rental activity. In this case, the undertaking (determined after the 
application of paragraph (d)(1)(i) of this section) includes both the 
law-practice operations and the office-space operations, and the gross 
income of this undertaking does not represent amounts paid principally 
for the use of tangible property. Thus, the undertaking, if considered 
as a separate activity, would not constitute a rental activity. 
Accordingly, the undertaking is not treated as a rental undertaking.
    Example (5). (i) The facts are the same as in example (4), except 
that the building is owned by a separate partnership (the ``real estate 
partnership''), which leases eight floors of the building to the law 
partnership for use in its law practice and two floors to one or more 
other tenants. The law partnership and real estate partnership are owned 
by the same individuals in identical proportions.
    (ii) The operations conducted in the building are owned by two 
different persons (i.e., the law partnership and the real estate 
partnership). (See paragraph (c)(2)(v) of this section.) Thus, the 
operations conducted in the building are not treated as a single 
undertaking under paragraph (c)(1) of this section. Instead, each 
partnership's share of such operations is treated as a separate 
paragraph (c) undertaking (the ``law-practice undertaking'' and the 
``office-space undertaking'').
    (iii) Paragraph (d)(1)(iii) of this section provides that an 
undertaking (determined after the application of paragraph (d)(1)(i) of 
this section) is treated as a rental undertaking if and only if the 
undertaking, considered as a separate activity, would constitute

[[Page 453]]

a rental activity. In this case, the office-space undertaking, if 
considered as a separate activity, would constitute a rental activity 
because all of the undertaking's gross income (including rents paid by 
the law partnership) represents amounts paid principally for the use of 
tangible property (the office space), the average period of customer use 
for the office space exceeds 30 days, extraordinary personal services 
(within the meaning of Sec. 1.469-1T(e)(3)(v)) are not provided, and 
the rental of the office space is not treated as incidental to a 
nonrental activity under Sec. 1.469-1T(e)(3)(vi) (relating to 
incidental rentals that are not treated as a rental activity). 
Accordingly, the office-space undertaking is treated as a rental 
undertaking. See, however, Sec. 1.469-2T(f)(6) (relating to certain 
rentals of property to a trade or business activity in which the 
taxpayer materially participates).
    (iv) The law-practice undertaking, if considered as a separate 
activity, would not constitute a rental activity because none of the 
undertaking's gross income represents amounts paid principally for the 
use of tangible property. Accordingly, the law-practice undertaking is 
not treated as a rental undertaking.
    Example (6). (i) The taxpayer owns a building in which the taxpayer 
operates a nursing home and a medical clinic. (Assume that, under 
paragraph (c)(1) of this section, the operations conducted in the 
building are treated as a single paragraph (c) undertaking.) The 
nursing-home operations consist of renting apartments in the nursing 
home to elderly and handicapped persons and providing medical care, 
meals, and social activities. (Assume that these services are 
extraordinary personal services (within the meaning of Sec. 1.469-
1T(e)(3)(v)). The medical clinic provides medical care to nursing-home 
residents and other individuals. Nursing-home residents typically occupy 
an apartment for at least one year. The paragraph (c) undertaking 
derives 55 percent of its gross income from nursing-home operations 
(including the provision of medical services to nursing-home residents) 
and 45 percent of its gross income from medical-clinic operations. The 
operations conducted in the building are not incidental to any other 
activity of the taxpayer (within the meaning of Sec. 1.469-
1T(e)(3)(vi)).
    (ii) The paragraph (c) undertaking's nursing-home operations involve 
the provision of tangible property (the apartments) for use by customers 
and the provision of property and services in connection therewith. In 
addition, the apartments are not short-term real properties (within the 
meaning of paragraph (d)(3)(ii) of this section) because the average 
period of customer use (within the meaning of Sec. 1.469-1T(e)(3)(iii)) 
for the apartments exceeds 30 days. Accordingly, the nursing-home 
operations are rental operations (within the meaning of paragraph (d)(3) 
of this section). The medical-clinic operations do not involve the 
provision of tangible property for use by customers or the provision of 
property or services in connection therewith. Thus, the medical-clinic 
operations are not rental operations.
    (iii) Paragraph (d)(1)(i) of this section provides, with certain 
exceptions, that a paragraph (c) undertaking's rental operations and its 
operations other than rental operations are treated as two separate 
undertakings. In this case, however, the nursing-home operations, if 
considered as a separate activity, would not constitute a rental 
activity because extraordinary personal services are provided in 
connection with making nursing-home apartments available for use by 
customers (see Sec. 1.469-T(e)(3)(ii)(C)). Thus, the exception in 
paragraph (d)(2)(i) of this section applies, and the nursing-home 
operations and the medical-clinic operations are not treated as two 
separate undertakings under paragraph (d)(1)(i) of this section.
    (iv) Paragraph (d)(1)(iii) of this section provides that an 
undertaking (determined after the application of paragraph (d)(1)(i) of 
this section) is treated as a rental undertaking only if the 
undertaking, considered as a separate activity, would constitute a 
rental activity. In this case, the nursing-home operations, if 
considered as a separate activity, would not constitute a rental 
activity (see (iii) above). Thus, an undertaking that includes no rental 
operations other than the nursing-home operations would not, if 
considered as a separate activity, constitute a rental activity. 
Accordingly, the undertaking is not treated as a rental undertaking.
    Example (7). (i) The taxpayer rents and sells videocassettes. 
(Assumes that, under paragraph (c)(1) of this section, the videocassette 
operations are treated as a single paragraph (c) undertaking.) Renters 
of videocassettes typically keep the videocassettes for one or two days, 
and do not receive any other property or services in connection with 
videocassette rentals. The paragraph (c) undertaking derives 70 percent 
of its gross income from renting videocassettes and 30 percent of its 
gross income from selling videocassettes. The videocassette operations 
are not incidental to any other activity of the taxpayer (within the 
meaning of Sec. 1.469-1T(e)(3)(vi)).
    (ii) The rental of videocassettes involves the provision of tangible 
property (the videocassettes) for use by customers. In addition, the 
special rules for short-term real properties contained in paragraph 
(d)(3)(ii) of this section do not apply in this case because the 
videocassettes are not real property. Thus, the operations that involve 
videocassette rentals are rental operations (within the meaning of 
paragraph (d)(3) of this section). The sale of videocassettes does not 
involve the provision of tangible property for use by

[[Page 454]]

customers or the provision of property or services in connection 
therewith. Thus, the operations that involve videocassette sales are not 
rental operations.
    (iii) Paragraph (d)(1)(i) of this section provides, with certain 
exceptions, that a paragraph (c) undertaking's rental operations and its 
operations other than rental operations are treated as two separate 
undertakings. In this case, however, the rental operations, if 
considered as a separate activity, would not constitute a rental 
activity because the average period of customer use for rented 
videocassettes does not exceed seven days (see Sec. 1.469-
1T(e)(3)(ii)(A)). Accordingly, the exception in paragraph (d)(2)(i) of 
this section applies, and the videocassette-rental operations and 
videocassette-sales operations are not treated as two separate 
undertakings under paragraph (d)(1)(i) of this section.
    (iv) Paragraph (d)(1)(iii) of this section provides that an 
undertaking (determined after the application of paragraph (d)(1)(i) of 
this section) is treated as a rental undertaking only if the 
undertaking, considered as a separate activity, would constitute a 
rental activity. In this case, the videocassette-rental operations, if 
considered as a separate activity, would not constitute a rental 
activity (see (iii) above). Thus, an undertaking that includes no rental 
operations other than the videocassette-rental operations would not, if 
considered as a separate activity, constitute a rental activity. 
Accordingly, the undertaking is not treated as a rental undertaking.
    Example (8). (i) The taxpayer owns a building in which the taxpayer 
sells, leases, and services automobiles. (Assume that, under paragraph 
(c)(1) of this section, the operations conducted in the building are 
treated as a single paragraph (c) undertaking.) The minimum lease term 
for any leased automobile is 31 days, and the services provided to 
lessees (including periodic oil changes, lubrication, and routine 
services and repairs) are those customarily provided in long-term 
automobile leases. The paragraph (c) undertaking derives 75 percent of 
its gross income from selling automobiles, 15 percent of its gross 
income from servicing automobiles other than leased automobiles, and 10 
percent of its gross income from leasing automobiles. The taxpayer's 
automobile operations are not incidental to any other activity of the 
taxpayer (within the meaning of Sec. 1.469-1T(e)(3)(vi)).
    (ii) The paragraph (c) undertaking's automobile-leasing operations 
involve the provision of tangible property (the automobiles) for use by 
customers and the provision of services in connection therewith. In 
addition, the special rules for short-term real properties contained in 
paragraph (d)(3)(ii) of this section do not apply in this case because 
the automobiles are not real property. Accordingly, the automobile-
leasing operations are rental operations (within the meaning of 
paragraph (d)(3) of this section). The paragraph (c) undertaking's 
automobile-sales operations and servicing operations for automobiles 
other than leased automobiles (the ``selling-and-servicing operations'') 
do not involve the provision of tangible property for use by customers 
or the provision of property or services in connection therewith. Thus, 
the selling-and-servicing operations are not rental operations.
    (iii) Paragraph (d)(1)(i) of this section provides, with certain 
exceptions, that a paragraph (c) undertaking's rental operations and its 
operations other than rental operations are treated as two separate 
undertakings. In this case, however, the exception in paragraph 
(d)(2)(ii) of this section applies because less than 20 percent of the 
paragraph (c) undertaking's gross income is attributable to rental 
operations (the ``automobile-leasing operations''). Accordingly, the 
rental operations and the selling-and-servicing operations are not 
treated as two separate undertakings under paragraph (d)(1)(i) of this 
section.
    (iv) Paragraph (d)(1)(iii) of this section provides that an 
undertaking (determined after the application of paragraph (d)(1)(i) of 
this section) is treated as a rental undertaking only if the 
undertaking, considered as a separate activity, would constitute a 
rental activity. In this case, the undertaking (determined after the 
application of paragraph (d)(1)(i) of this section) includes both the 
selling-and-servicing operations and the automobile-leasing operations, 
and the gross income of the undertaking does not represent amounts paid 
principally for the use of tangible property. Thus, the undertaking, if 
considered as a separate activity, would not constitute a rental 
activity. Accordingly, the undertaking is not treated as a rental 
undertaking.
    Example (9). (i) The facts are the same as in example (8), except 
that the paragraph (c) undertaking derives 60 percent of its gross 
income from selling automobiles, 15 percent of its gross income from 
servicing automobiles other than leased automobiles, and 25 percent of 
its gross income from leasing automobiles.
    (ii) Paragraph (d)(1)(i) of this section provides, with certain 
exceptions, that a paragraph (c) undertaking's rental operations and its 
operations other than rental operations are treated as two separate 
undertakings. In this case, more than 20 percent of the paragraph (c) 
undertaking's gross income is attributable to rental operations (the 
automobile-leasing operations), and more than 20 percent is attributable 
to operations other than rental operations (the selling-and-servicing 
operations). Thus, the exceptions in paragraph (d)(2) (ii) and (iii) of 
this

[[Page 455]]

section do not apply. In addition, the average period of customer use 
for leased automobiles exceeds 30 days, extraordinary personal services 
(within the meaning of Sec. 1.469-1T(e)(3)(v)) are not provided, and 
the leasing of the automobiles is not treated as incidental to a 
nonrental activity under Sec. 1.469-1T(e)(3)(vi) (relating to 
incidental rentals that are not treated as a rental activity). Thus, the 
leasing operations, if considered as a separate activity, would 
constitute a rental activity, and the exception in paragraph (d)(2)(i) 
of this section does not apply. Accordingly, the rental operations and 
the selling-and-servicing operations are treated as two separate 
undertakings (the ``automobile-leasing undertaking'' and the 
``automobile selling-and-servicing undertaking'').
    (iii) Paragraph (d)(1)(iii) of this section provides that an 
undertaking (determined after the application of paragraph (d)(1)(i) of 
this section) is treated as a rental undertaking if and only if the 
undertaking, considered as a separate activity, would constitute a 
rental activity. In this case, the automobile-leasing undertaking would, 
if considered as a separate activity, constitute a rental activity, and 
the automobile selling-and-servicing undertaking would not, if 
considered as a separate activity, constitute a rental activity (see 
example (8) and (ii) above). Accordingly, the automobile-leasing 
undertaking is treated as a rental undertaking, and the automobile 
selling-and-servicing undertaking is not.

    (e) Special rules for certain oil and gas operations--(1) Wells 
treated as nonpassive under Sec. 1.469-1T(e)(4)(i). An oil or gas well 
shall be treated as an undertaking that is separate from other 
undertakings in determining the activities of a taxpayer for a taxable 
year if the following conditions are satisfied:
    (i) The well is drilled or operated pursuant to a working interest 
(within the meaning of Sec. 1.469-1T(e)(4)(iv)) and at any time during 
such taxable year the taxpayer holds such working interest either--
    (A) Directly; or
    (B) Through an entity that does not limit the liability of the 
taxpayer with respect to the drilling or operation of such well pursuant 
to such working interest; and
    (ii) The taxpayer would not be treated as materially participating 
(within the meaning of Sec. 1.469-5T) for the taxable year in the 
activity in which such well would be included if the taxpayer's 
activities were determined without regard to this paragraph (e).
    (2) Business and rental operations that constitute an undertaking. 
In any case in which an oil or gas well is treated under this paragraph 
(e) as an undertaking that is separate from other undertakings, the 
business and rental operations that constitute such undertaking are the 
business and rental operations that are attributable to such well.
    (3) Examples. The following examples illustrate the application of 
this paragraph (e). In each example, the taxpayer is an individual whose 
taxable year is the calendar year.

    Example (1). During 1989, A directly owns an undivided interest in a 
working interest (within the meaning of Sec. 1.469-1T(e)(4)(iv)) in two 
oil wells. A does not participate in the activity in which the wells 
would be included if A's activities were determined without regard to 
this paragraph (e). Under paragraph (e)(1) of this section, each well is 
treated as a separate undertaking in determining A's activities for 1989 
because A holds the working interest directly and would not be treated 
as materially participating for 1989 in the activity in which the wells 
would be included if A's activities were determined without regard to 
this paragraph (e). The aggregation rules in paragraph (f) of this 
section do not apply to these undertakings (see paragraph (f)(1)(ii)(B) 
of this section). Thus, each of the undertakings is treated as a 
separate activity under paragraph (b)(1) of this section. The result is 
the same even if A has net income from one or both wells for 1989 and 
even if the wells would otherwise be treated as part of the same 
undertaking under paragraph (c) of this section. The result would also 
be the same if A held the working interest through an entity, such as a 
general partnership, that does not limit A's liability with respect to 
the drilling or operation of the wells pursuant to the working interest.
    Example (2). (i) During 1989, B is a general partner in a 
partnership that owns a working interest (within the meaning of Sec. 
1.469-1T(e)(4)(iv)) in an oil well. B does not own any interest in the 
well other than through the partnership. At the end of 1989, however, 
B's partnership interest is converted into a limited partnership 
interest, and during 1990 B holds the working interest only as a limited 
partner. B does not participate in the activity in which the well would 
be included if B's activities were determined without regard to this 
paragraph (e).
    (ii) Under paragraph (e)(1) of this section, the well is treated as 
a separate undertaking in determining B's activities for 1989 because B 
holds the working interest during 1989

[[Page 456]]

through an entity that does not limit B's liability with respect to the 
drilling or operation of the well pursuant to the working interest, and 
B would not be treated as materially participating for 1989 in the 
activity in which the well would be included if B's activities were 
determined without regard to this paragraph (e). Throughout 1990, 
however, B's liability with respect to the drilling and operation of the 
well is limited by the entity through which B holds the working interest 
(i.e., the limited partnership). Accordingly, paragraph (e)(1) of this 
section does not apply to the well in 1990, and the well may be included 
under paragraph (c) of this section in an undertaking that includes 
other operations.
    Example (3). The facts are the same as in example (2), except that 
B's partnership interest is converted into a limited partnership 
interest at the end of November 1989. An oil or gas well may be treated 
as a separate undertaking under paragraph (e)(1) of this section if at 
any time during the taxable year the taxpayer holds a working interest 
in the well directly or through an entity that does not limit the 
taxpayer's liability with respect to the drilling or operation of the 
well pursuant to the working interest (see Sec. 1.469-1T(e)(4)(i)). 
Thus, although B's liability with respect to the drilling and operation 
of the well is limited during December 1989, the result in both 1989 and 
1990 is the same as in example (2). In 1989, however, disqualified 
deductions and a ratable portion of the gross income from the well may 
be treated under Sec. 1.469-1T(e)(4)(ii) as passive activity deductions 
and passive activity gross income, respectively.

    (f) Certain trade or business undertakings treated as part of the 
same activity--(1) Applicability--(i) In general. This paragraph (f) 
applies to a taxpayer's interests in trade or business undertakings 
(within the meaning of paragraph (f)(1)(ii) of this section).
    (ii) Trade or business undertaking. For purposes of this paragraph 
(f), the term ``trade or business undertaking'' means any undertaking in 
which a taxpayer has an interest, other than--
    (A) A rental undertaking (within the meaning of paragraph (d) of 
this section);
    (B) An oil or gas well treated as an undertaking that is separate 
from other undertakings under paragraph (e) of this section; or
    (C) A professional service undertaking (within the meaning of 
paragraph (h) of this section).
    (2) Treatment as part of the same activity. A taxpayer's interests 
in two or more trade or business undertakings that are similar (within 
the meaning of paragraph (f)(4) of this section) and controlled by the 
same interests (within the meaning of paragraph (j) of this section) 
shall be treated as part of the same activity of the taxpayer for any 
taxable year in which the taxpayer--
    (i) Owns interests in each such undertaking through the same 
passthrough entity;
    (ii) Owns a direct or substantial indirect interest (within the 
meaning of paragraph (f)(3) of this section) in each such undertaking; 
or
    (iii) Materially or significantly participates (within the meaning 
of Sec. 1.469-5T) in the activity that would result if such 
undertakings were treated as part of the same activity.
    (3) Substantial indirect interest--(i) In general. For purposes of 
this paragraph (f), a taxpayer owns a substantial indirect interest in 
an undertaking for a taxable year if at any time during such taxable 
year the taxpayer's ownership percentage (determined in accordance with 
paragraph (j)(3) of this section) in a passthrough entity that directly 
owns such undertaking exceeds ten percent.
    (ii) Coordination rule. A taxpayer shall be treated for purposes of 
this paragraph (f) as owning a substantial indirect interest in each of 
two or more undertakings for any taxable year in which--
    (A) Such undertakings are treated as part of the same activity of 
the taxpayer under paragraph (f)(2)(i) of this section; and
    (B) The taxpayer owns a substantial indirect interest (within the 
meaning of paragraph (f)(3)(i) of this section) in any such undertaking.
    (4) Similar undertakings--(i) In general. Except as provided in 
paragraph (f)(4)(iii) of this section, two undertakings are similar for 
purposes of this paragraph (f) if and only if--
    (A) There are predominant operations in each such undertaking; and
    (B) The predominant operations of both undertakings are in the same 
line of business.
    (ii) Predominant operations. For purposes of paragraph (f)(4)(i)(A) 
of this section, there are predominant operations in an undertaking if 
more than

[[Page 457]]

50 percent of the undertaking's gross income is attributable to 
operations in a single line of business.
    (iii) Vertically-integrated undertakings. If an undertaking (the 
``supplier undertaking'') provides property or services to other 
undertakings (the ``recipient undertakings''), the following rules apply 
for purposes of this paragraph (f):
    (A) Supplier undertaking similar to recipient undertaking. If the 
supplier undertaking predominantly involves the provision of property 
and services to a recipient undertaking that is controlled by the same 
interests (within the meaning of paragraph (j) of this section), the 
supplier undertaking shall be treated as similar to the recipient 
undertaking. For purposes of applying the preceding sentence--
    (1) If a supplier undertaking and two or more recipient undertakings 
that are similar (within the meaning of paragraph (f)(4)(i) of this 
section) are controlled by the same interests, such recipient 
undertakings shall be treated as a single undertaking; and
    (2) A supplier undertaking predominantly involves the provision of 
property and services to a recipient undertaking for any taxable year in 
which such recipient undertaking obtains more than 50 percent (by value) 
of all property and services provided by the supplier undertaking.
    (B) Recipient undertaking similar to supplier undertaking. If the 
supplier undertaking is the predominant provider of property and 
services to a recipient undertaking that is controlled by the same 
interests (within the meaning of paragraph (j) of this section), the 
recipient undertaking shall be treated, except as otherwise provided in 
paragraph (f)(4)(iii)(C) of this section, as similar to the supplier 
undertaking. For purposes of the preceding sentence, a supplier 
undertaking is the predominant provider of property and services to a 
recipient undertaking for any taxable year in which the supplier 
undertaking provides more than 50 percent (by value) of all property and 
services obtained by the recipient undertaking.
    (C) Coordination rules. (1) Paragraph (f)(4)(iii)(B) of this section 
does not apply if, under paragraph (f)(4)(iii)(A) of this section--
    (i) The supplier undertaking is treated as an undertaking that is 
similar to any recipient undertaking;
    (ii) The recipient undertaking is treated as a supplier undertaking 
that is similar to another recipient undertaking; or
    (iii) Another supplier undertaking is treated as an undertaking that 
is similar to the recipient undertaking.
    (2) If paragraph (f)(4)(iii)(A) of this section applies to a 
supplier undertaking, the supplier undertaking shall be treated as 
similar to undertakings that are similar to the recipient undertaking 
and shall not otherwise be treated as similar to undertakings to which 
the supplier undertaking would be similar without regard to paragraph 
(f)(4)(iii) of this section.
    (3) If paragraph (f)(4)(iii)(B) of this section applies to a 
recipient undertaking, the recipient undertaking shall be treated as 
similar to undertakings that are similar to the supplier undertaking and 
shall not otherwise be treated as similar to undertakings to which the 
recipient undertaking would be similar without regard to paragraph 
(f)(4)(iii) of this section.
    (iv) Lines of business. The Commissioner shall establish, by revenue 
procedure, lines of business for purposes of this paragraph (f)(4). 
Business and rental operations that are not included in the lines of 
business established by the Commissioner shall nonetheless be included 
in a line of business for purposes of this paragraph (f)(4). Such 
operations shall be included in a single line of business or in multiple 
lines of business on a basis that reasonably reflects--
    (A) Similarities and differences in the property or services 
provided pursuant to such operations and in the markets to which such 
property or services are offered; and
    (B) The treatment within the lines of business established by the 
Commissioner of operations that are comparable in their similarities and 
differences.
    (5) Examples. The following examples illustrate the application of 
this paragraph (f). In each example that does not state otherwise, the 
taxpayer is an individual and the facts, analysis, and

[[Page 458]]

conclusions relate to a single taxable year.

    Example (1). (i) The taxpayer is a partner in partnerships A, B, C, 
and D and owns a five-percent interest in each partnership. Each 
partnership owns a single undertaking (undertakings A, B, C, and D), and 
the undertakings are trade or business undertakings (within the meaning 
of paragraph (f)(1)(ii) of this section) that are controlled by the same 
interests (within the meaning of paragraph (j) of this section). In 
addition, undertakings A, B, and D are similar (within the meaning of 
paragraph (f)(4) of this section). The taxpayer is not related to any of 
the other partners, and does not participate in any of the undertakings.
    (ii) In general, each undertaking in which a taxpayer owns an 
interest is treated as a single activity that is separate from other 
activities of the taxpayer (see paragraph (b)(1) of this section). This 
paragraph (f) provides aggregation rules for trade or business 
undertakings that are similar and controlled by the same interests. 
These aggregation rules do not apply, however, unless the taxpayer owns 
interests in the undertakings through the same passthrough entity, owns 
direct or substantial indirect interests in the undertakings, or 
materially or significantly participates in the undertakings. In this 
case, the taxpayer does not satisfy any of these conditions, and the 
aggregation rules in this paragraph (f) do not apply. Accordingly, 
except as otherwise provided in paragraph (g) of this section (relating 
to an aggregation rule for integrated businesses), undertakings A, B, C, 
and D are treated as separate activities of the taxpayer under paragraph 
(b)(1) of this section.
    Example (2). (i) The facts are the same as in example (1), except 
that the taxpayer owns a 25-percent interest in partnership A, a 15-
percent interest in partnership B, and a 40-percent interest in 
partnership C.
    (ii) Paragraph (f)(2)(ii) of this section provides that trade or 
business undertakings that are similar and controlled by the same 
interests are treated as part of the same activity of the taxpayer if 
the taxpayer owns a direct or substantial indirect interest in each such 
undertaking. In this case, the taxpayer owns more than ten percent of 
partnerships A, B, and C, and these partnerships directly own 
undertakings A, B, and C. Thus, the taxpayer owns a substantial indirect 
interest in undertakings A, B, and C (see paragraph (f)(3)(i) of this 
section). Of these undertakings, only undertakings A and B are both 
similar and controlled by the same interests. Accordingly, the 
taxpayer's interests in undertakings A and B are treated as part of the 
same activity. As in example (1), the aggregation rules in this 
paragraph (f) do not apply to undertakings C and D, and except as 
otherwise provided in paragraph (g) of this section, undertakings C and 
D are treated as separate activities.
    Example (3). (i) The facts are the same as in example (1), except 
that the taxpayer participates (within the meaning of Sec. 1.469-5T(f)) 
for 60 hours in undertaking A and for 60 hours in undertaking B.
    (ii) Paragraph (f)(2)(iii) of this section provides that trade or 
business undertakings that are similar and controlled by the same 
interests are treated as part of the same activity of the taxpayer if 
the taxpayer materially or significantly participates (within the 
meaning of Sec. 1.469-5T) in the activity that would result from the 
treatment of similar, commonly-controlled undertakings as part of the 
same activity. In this case, the activity that would result from 
treating the similar, commonly-controlled undertakings as part of the 
same activity consists of undertakings A, B, and D, and the taxpayer 
participates for 120 hours in the activity that results from this 
treatment. Accordingly, undertakings A, B, and D are treated as part of 
the same activity because the taxpayer significantly participates 
(within the meaning of Sec. 1.469-5T(c)(2)) in the activity that 
results from this treatment. The result is the same whether the taxpayer 
participates in one, two, or all three of the similar, commonly-
controlled undertakings, so long as the taxpayer's aggregate 
participation in undertakings A, B, and D exceeds 100 hours. As in 
example (1), the aggregation rules in this paragraph (f) do not apply to 
undertaking C, and except as otherwise provided in paragraph (g) of this 
section, undertaking C is treated as a separate activity.
    Example (4). (i) The taxpayer owns a 5-percent interest in 
partnership A. Partnership A owns interests in partnerships B and C, 
each of which owns a single undertaking (undertakings B and C). In 
addition, the taxpayer is a partner in partnerships C and D and directly 
owns a 15-percent interest in each partnership. Partnership D also owns 
a single undertaking (undertaking D). Undertakings B, C, and D are trade 
or business undertakings (within the meaning of paragraph (f)(1)(ii) of 
this section) that are similar (within the meaning of paragraph (f)(4) 
of this section) and controlled by the same interests (within the 
meaning of paragraph (j) of this section). The taxpayer does not 
participate in undertaking B, C, or D.
    (ii) Paragraph (f)(2)(i) of this section provides that trade or 
business undertakings that are similar and controlled by the same 
interests are treated as part of the same activity of the taxpayer if 
the taxpayer owns interests in the undertakings through the same 
passthrough entity. In this case, the taxpayer owns interests in 
undertakings B and C through partnership A. Thus, the taxpayer's 
interests in undertakings B and C are treated as part of the same 
activity.

[[Page 459]]

    (iii) Paragraph (f)(2)(ii) of this section provides that trade or 
business undertakings that are similar and controlled by the same 
interests are treated as part of the same activity of the taxpayer if 
the taxpayer owns a direct or substantial indirect interest in each such 
undertaking. In this case, the taxpayer owns more than ten percent of 
partnerships C and D, and these partnerships directly own undertakings C 
and D. Thus, the taxpayer owns a substantial indirect interest in 
undertakings C and D (see paragraph (f)(3)(i) of this section).
    (iv) The coordination rule in paragraph (f)(3)(ii) of this section 
applies to undertakings B and C because they are treated as part of the 
same activity under paragraph (f)(2)(i) of this section, and the 
taxpayer owns a substantial indirect interest in undertaking C. Under 
the coordination rule, the taxpayer is treated as owning a substantial 
indirect interest in undertaking B as well as undertaking C. 
Accordingly, the taxpayer's interests in undertakings B, C, and D are 
treated as part of the same activity.
    Example (5). (i) Undertakings A, B, C, and D are trade or business 
undertakings (within the meaning of paragraph (f)(1)(ii) of this 
section), each of which involves the operation of a department store, 
restaurants, and movie theaters. The following table shows, for each 
undertaking, the percentages of gross income attributable to the various 
operations of the undertaking.

------------------------------------------------------------------------
                                       Department                 Movie
                                          store    Restaurants  Theaters
------------------------------------------------------------------------
Undertaking A........................        70%         20%         10%
Undertaking B........................        60%         20%         20%
Undertaking C........................        35%         35%         30%
Undertaking D........................        35%         10%         55%
------------------------------------------------------------------------

    (ii) Paragraph (f)(4)(i) of this section provides that two 
undertakings are similar for purposes of this paragraph (f) if and only 
if there are predominant operations in each undertaking and the 
predominant operations of the two undertakings are in the same line of 
business. (Assume that the applicable revenue procedure provides that 
``general merchandise stores,'' ``eating and drinking places,'' and 
``motion picture services'' are three separate lines of business.)
    (iii) Undertaking A and undertaking B each derives more than 50 
percent of its gross income from department-store operations, which are 
in the general-merchandise-store line of business. Thus, there are 
predominant operations in undertaking A and undertaking B, and the 
predominant operations of the two undertakings are in the same line of 
business. Accordingly, undertakings A and B are similar.
    (iv) Undertaking C does not derive more than 50 percent of its gross 
income from operations in any single line of business. Thus, there are 
no predominant operations in undertaking C, and undertaking C is not 
similar to any of the other undertakings.
    (v) Undertaking D derives more than 50 percent of its gross income 
from movie-theater operations, which are in the motion-picture-services 
line of business. Thus, there are predominant operations in undertaking 
D. The predominant operations of undertaking D, however, are not in the 
same line of business as those of undertakings A and B. Accordingly, 
undertaking D is not similar to undertakings A and B.
    Example (6). (i) Undertakings A and B are trade or business 
undertakings (within the meaning of paragraph (f)(1)(ii) of this 
section) that derive all of their gross income from the sale of 
automobiles. Undertakings C and D derive all of their gross income from 
the rental of automobiles. Undertaking C is not a rental undertaking 
(within the meaning of paragraph (d)(1)(iii) of this section) because 
the average period of customer use (within the meaning of Sec. 1.469-
1T(e)(3)(iii)) for its automobiles does not exceed seven days (see Sec. 
1.469-1T(e)(3)(ii)(A)). Undertaking D, on the other hand, leases 
automobiles for periods of one year or more and is a rental undertaking.
    (ii) Paragraph (f)(4)(i) of this section provides that two 
undertakings are similar for purposes of this paragraph (f) if and only 
if there are predominant operations in each undertaking and the 
predominant operations of the two undertakings are in the same line of 
business. (Assume that the applicable revenue procedure provides that 
(a) ``automotive dealers and service stations'' (automotive retail) and 
(b) ``auto repair, services (including rentals), and parking'' 
(automotive services) are two separate lines of business.)
    (iii) Undertakings A and B both derive more than 50 percent of their 
gross income from operations in the automotive-retail line of business 
(the automobile-sales operations). Similarly, undertakings C and D both 
derive more than 50 percent of their gross income from operations in the 
automotive-services line of business (the automobile-rental operations). 
Thus, there are predominant operations in each undertaking, the 
predominant operations of undertakings A and B are in the same line of 
business, and the predominant operations of undertakings C and D are in 
the same line of business. Accordingly, undertakings A and B are 
similar, undertakings C and D are similar, and undertakings A and B are 
not similar to undertakings C and D.
    (iv) Paragraph (f)(1) of this section provides that this paragraph 
(f) applies only to trade or business undertakings and that a rental 
undertaking is not a trade or business undertaking. Accordingly, this 
paragraph (f) does not apply to undertaking D, and undertakings C and D, 
although similar, are not

[[Page 460]]

treated, under this paragraph (f), as part of the same activity.
    Example (7). (i) Undertakings A, B, and C are trade or business 
undertakings (within the meaning of paragraph (f)(1)(ii) of this 
section) that involve real estate operations. Undertaking A derives all 
of its gross income from the development of real property, undertaking B 
derives all of its gross income from the management of real property and 
the performance of services as a leasing agent with respect to real 
property, and undertaking C derives all of its gross income from buying, 
selling, or arranging purchases and sales of real property. Undertaking 
D derives all of its gross income from the rental of residential 
apartments and is a rental undertaking (within the meaning of paragraph 
(d)(1)(iii) of this section).
    (ii) Paragraph (f)(4)(i) of this section provides that two 
undertakings are similar for purposes of this paragraph (f) if there are 
predominant operations in each undertaking and the predominant 
operations of the two undertakings are in the same line of business. 
(Assume that the applicable revenue procedure provides that real estate 
development and services (including the development and management of 
real property, dealing in real property, and the performance of services 
as a leasing agent with respect to real property) is a single line of 
business (the ``real-estate'' line of business).)
    (iii) Undertakings A, B, and C all derive more than 50 percent of 
their gross income from operations in the real-estate line of business. 
Thus, there are predominant operations in undertakings A, B, and C, and 
the predominant operations of the three undertakings are in the same 
line of business. Accordingly, undertakings A, B, and C are similar.
    (iv) Undertaking D also derives more than 50 percent of its gross 
income from operations in the real-estate line of business. Thus, there 
are predominant operations in undertaking D, and the predominant 
operations of undertaking D are in the same line of business as those of 
undertakings A, B, and C. Paragraph (f)(1) of this section provides, 
however, that this paragraph (f) applies only to trade or business 
undertakings and that a rental undertaking is not a trade or business 
undertaking. Accordingly, this paragraph (f) does not apply to 
undertaking D, and undertaking D, although similar to undertakings A, B, 
and C, is not treated, under this paragraph (f), as part an activity 
that includes undertaking A, B, or C.
    Example (8). (i) Undertakings A and B are trade or business 
undertakings (within the meaning of paragraph (f)(1)(ii) of this 
section), both of which involve the provision of moving services. 
Undertaking A derives its gross income principally from local moves, and 
undertaking B derives its gross income principally from long-distance 
moves.
    (ii) Paragraph (f)(4)(i) of this section provides that two 
undertakings are similar for purposes of this paragraph (f) if there are 
predominant operations in each undertaking and the predominant 
operations of the two undertakings are in the same line of business. 
Under paragraph (f)(4)(iv) of this section, operations that are not in 
the lines of business established by the applicable revenue procedure 
are nonetheless included in a line of business. In addition, such 
operations are included in a single line of business or in multiple 
lines of business on a basis that reasonably reflects (a) similarities 
and differences in the property or services provided pursuant to such 
operations and in the markets to which such property or services are 
offered, and (b) the treatment within the lines of business established 
by the Commissioner of operations that are comparable in their 
similarities and differences. (Assume that the provision of moving 
services is not in any line of business established by the Commissioner 
and that within the lines of business established by the Commissioner 
services that differ only in the distance over which they are performed 
(e.g., local and long-distance telephone services) are generally treated 
as part of the same line of business.)
    (iii) Undertakings A and B provide the same types of services to 
similar customers, and the only significant difference in the services 
provided is the distance over which they are performed. Thus, treating 
local and long-distance moving services as a single line of business 
(the ``moving-services'' line of business) reasonably reflects the 
treatment within the lines of business established by the Commissioner 
of operations that are comparable in their similarities and differences.
    (iv) Each undertaking derives more than 50 percent of its gross 
income from operations in the moving-services line of business. Thus, 
there are predominant operations in each undertaking, and the 
predominant operations of the two undertakings are in the same line of 
business. Accordingly, undertakings A and B are similar.
    Example (9). (i) Undertakings A, B, C, D, and E are trade or 
business undertakings (within the meaning of paragraph (f)(1)(ii) of 
this section) and are controlled by the same interests (within the 
meaning of paragraph (j) of this section). Undertakings A, B, and C 
derive all of their gross income from retail sales of dairy products, 
and undertakings D and E derive all of their gross income from the 
processing of dairy products. Undertakings D and E sell less than ten 
percent of their dairy products to undertakings A, B, and C, and sell 
the remainder to unrelated

[[Page 461]]

undertakings. Undertakings A, B, and C purchase less than ten percent of 
their inventory from undertakings D and E and purchase the remainder 
from unrelated undertakings.
    (ii) Paragraph (f)(4)(i) of this section provides that, except as 
provided in paragraph (f)(4)(iii) of this section, undertakings are 
similar for purposes of this paragraph (f) if and only if there are 
predominant operations in each undertaking and the predominant 
operations of the undertakings are in the same line of business. (Assume 
that the applicable revenue procedure provides that (a) ``food stores'' 
and (b) ``manufacturing--food and kindred products'' are two separate 
lines of business.)
    (iii) Undertakings A, B, and C all derive more than 50 percent of 
their gross income from operations in the food-store line of business 
(the dairy-sales operations). Thus, there are predominant operations in 
undertakings A, B, and C, and the predominant operations of the three 
undertakings are in the same line of business. Accordingly, undertakings 
A, B, and C are similar.
    (iv) Undertakings D and E both derive more than 50 percent of their 
gross income from operations in the food-manufacturing line of business 
(the dairy-processing operations). Thus, there are predominant 
operations in undertakings D and E, and the predominant operations of 
the two undertakings are in the same line of business. Accordingly, 
undertakings D and E are similar. The predominant operations of 
undertakings D and E are not in the same line of business as those of 
undertakings A, B, and C. Accordingly, undertakings D and E are not 
similar to undertakings A, B, and C.
    (v) Paragraph (f)(4)(iii) of this section provides rules under which 
certain undertakings whose operations are not in the same line of 
business nevertheless are similar to one another if one of the 
undertakings (the ``supplier undertaking'') provides property or 
services to the other undertaking (the ``recipient undertaking''), and 
the undertakings are controlled by the same interests. These rules 
apply, however, only if the supplier undertaking predominantly involves 
the provision of property and services to the recipient undertaking (see 
paragraph (f)(4)(iii)(A) of this section), or the supplier undertaking 
is the predominant provider of property and services to the recipient 
undertaking (see paragraph (f)(4)(iii)(B) of this section). In this 
case, undertakings D and E are supplier undertakings, and undertakings 
A, B, and C are recipient undertakings. Undertakings D and E, however, 
sell less than ten percent of their dairy products to undertakings A, B, 
and C and thus do not predominantly involve the provision of property 
and services to recipient undertakings. Similarly, undertakings D and E 
are not the predominant providers of property and services to 
undertakings A, B, and C. Thus, the rules for vertically-integrated 
undertakings in paragraph (f)(4)(iii) of this section do not apply in 
this case.
    Example (10). (i) The facts are the same as in example (9), except 
that undertaking D sells 75 percent of its dairy products to 
undertakings A, B, and C.
    (ii) Paragraph (f)(4)(iii)(A) of this section applies if a supplier 
undertaking predominantly involves the provision of property to a 
recipient undertaking that is controlled by the same interests. 
Paragraph (f)(4)(iii)(A)(2) of this section provides that a supplier 
undertaking predominantly involves the provision of property to a 
recipient undertaking if the supplier undertaking provides more than 50 
percent of its property to such recipient undertaking. In addition, 
paragraph (f)(4)(iii)(A)(1) of this section provides that if a supplier 
undertaking and two or more similar recipient undertakings are 
controlled by the same interests, the recipient undertakings are treated 
as a single undertaking for purposes of applying paragraph 
(f)(4)(iii)(A) of this section. Undertakings D and E both provide dairy 
products to undertakings A, B, and C. Thus, for purposes of paragraph 
(f)(4)(iii) of this section, undertakings D and E are supplier 
undertakings and undertakings A, B, and C are recipient undertakings. 
Undertaking D predominantly involves the provision of property to 
undertakings A, B, and C. Moreover, undertakings A, B, and C are treated 
as a single undertaking under paragraph (f)(4)(iii)(A)(1) of this 
section because undertakings A, B, and C are similar to one another 
under paragraph (f)(4)(i) of this section, and undertakings A, B, C, and 
D are controlled by the same interests. Accordingly, paragraph 
(f)(4)(iii)(A) of this section applies to undertakings A, B, C, and D.
    (iii) If paragraph (f)(4)(iii)(A) of this section applies to 
supplier and recipient undertakings, the supplier undertaking is treated 
under paragraph (f)(4)(iii) (A) and (C)(2) of this section as an 
undertaking that is similar to the recipient undertakings and to 
undertakings to which the recipient undertakings are similar. 
Accordingly, undertaking D is similar, for purposes of this paragraph 
(f), to undertakings A, B, and C.
    (iv) Undertaking E does not predominantly involve the provision of 
property to undertakings A, B, and C, or to any other related 
undertakings. Thus, paragraph (f)(4)(iii)(A) of this section does not 
apply to undertaking E, and undertaking E is not similar to undertakings 
A, B, and C. Moreover, undertakings D and E are not similar because, 
under paragraph (f)(4)(iii)(C)(2) of this section, undertaking D is not 
similar to any undertaking that is not similar to undertakings A, B, and 
C.

[[Page 462]]

    Example (11). (i) The facts are the same as in example (10), except 
that 75 percent of undertaking D's dairy products are sold to 
undertakings A and B, and none are sold to undertaking C.
    (ii) In this case, undertaking D is a supplier undertaking only with 
respect to undertakings A and B. Accordingly, paragraph (f)(4)(iii)(A) 
applies only to undertakings A, B, and D. As in example (10), 
undertaking D is similar to undertakings A and B, and is not similar to 
undertaking E. In addition, if paragraph (f)(4)(iii)(A) of this section 
applies to supplier and recipient undertakings, the supplier undertaking 
is treated under paragraph (f)(4)(iii)(C)(2) of this section as an 
undertaking that is similar to the recipient undertakings and 
undertakings to which the recipient undertakings are similar. 
Accordingly, even though undertaking D does not provide any property or 
services to undertaking C, undertaking D is similar to undertaking C 
because undertaking C is similar to undertakings A and B.
    Example (12). (i) The facts are the same as in example (9), except 
that undertakings A and B purchase 80 percent of their inventory from 
undertaking D.
    (ii) Paragraph (f)(4)(iii)(B) of this section applies, except as 
provided in paragraph (f)(4)(iii)(C) of this section, if a supplier 
undertaking is the predominant provider of property to a recipient 
undertaking that is controlled by the same interests. Undertakings D and 
E both provide dairy products to undertakings A, B, and C. Thus, for 
purposes of paragraph (f)(4)(iii) of this section, undertakings D and E 
are supplier undertakings, and undertakings A, B, and C are recipient 
undertakings. In addition, undertaking D is the predominant provider of 
property and services to undertakings A and B, and undertakings A, B and 
D are controlled by the same interests. Thus, except as provided in 
paragraph (f)(4)(iii)(C) of this section, paragraph (f)(4)(iii)(B) of 
this section applies to undertakings A, B, and D.
    (iii) The coordination rules in paragraph (f)(4)(iii)(C)(1) of this 
section provide that paragraph (f)(4)(iii)(B) of this section does not 
apply in certain cases to which paragraph (f)(4)(iii)(A) of this section 
applies. These coordination rules would apply if undertaking D or E (or 
any other undertaking that is controlled by the interests that control 
undertakings A, B, and C) predominantly involved the provision of 
property and services to undertakings A, B, and C. The coordination 
rules in paragraph (f)(4)(iii)(C)(1) of this section would also apply if 
undertaking A, B, or D predominantly involved the provision of property 
or services to a recipient undertaking that is controlled by the same 
interests. Assume that these coordination rules do not apply in this 
case.
    (iv) If paragraph (f)(4)(iii)(B) of this section applies to supplier 
and recipient undertakings, the recipient undertakings are treated under 
paragraph (f)(4)(iii) (B) and (C)(3) of this section as undertakings 
that are similar to the supplier undertaking and to undertakings to 
which the supplier undertaking is similar. Accordingly, undertakings A 
and B are similar, for purposes of this paragraph (f), to undertaking D 
and, because undertakings D and E are similar, to undertaking E.
    (v) The principal providers of property and services to undertaking 
C are unrelated undertakings. Thus, paragraph (f)(4)(iii)(B) of this 
section does not apply to undertaking C, and undertaking C is not 
similar to undertakings D and E. Moreover, undertaking C is not similar 
to undertakings A and B because, under paragraph (f)(4)(iii)(C)(3) of 
this section, undertakings A and B are not similar to any undertaking 
that is not similar to undertaking D.
    Example (13). (i) Undertakings A through Z are trade or business 
undertakings (within the meaning of paragraph (f)(1)(ii) of this 
section) and are controlled by the same interests (within the meaning of 
paragraph (j) of this section). Undertaking A derives all of its gross 
income from the manufacture and sale of men's and women's clothing, 
undertaking B derives all of its gross income from sales of men's and 
women's clothing to retail stores, and undertakings C through Z derive 
all of their gross income from retail sales of men's and women's 
clothing. Undertaking A sells clothing exclusively to undertaking B. 
Undertaking B sells 75 percent of its clothing to undertakings C through 
Z, and sells the remainder to unrelated retail stores. Undertaking B 
purchases 80 percent of its inventory from undertaking A, and 
undertakings C through Z purchase 60 to 90 percent of their inventory 
from undertaking B.
    (ii) Paragraph (f)(4)(iii)(A) of this section applies if a supplier 
undertaking predominantly involves the provision of property to a 
recipient undertaking that is controlled by the same interests. In 
addition, paragraph (f)(4)(iii)(A)(1) of this section provides that if a 
supplier undertaking and two or more similar recipient undertakings are 
controlled by the same interests, the recipient undertaking are treated 
as a single undertaking for this purpose. Undertaking B provides men's 
and women's clothing to undertaking C through Z. Thus, for purposes of 
paragraph (f)(4)(iii) of this section, undertaking B is a supplier 
undertaking and undertakings C through Z are recipient undertakings. In 
addition, undertaking B predominantly involves the provision of property 
to undertakings C through Z, and undertakings C through Z are treated as 
a single undertaking for purposes of paragraph (f)(4)(iii)(A) of this 
section. Accordingly, paragraph

[[Page 463]]

(f)(4)(iii)(A) of this section applies to undertakings B and C through 
Z.
    (iii) If paragraph (f)(4)(iii)(A) of this section applies to 
supplier and recipient undertakings, the supplier undertaking is treated 
under paragraph (f)(4)(iii)(A) of this section as an undertaking that is 
similar to the recipient undertakings. Accordingly, undertaking B is 
similar, for purposes of this paragraph (f), to undertakings C through 
Z.
    (iv) Undertaking A provides men's and women's clothing to 
undertaking B. Thus, for purposes of paragraph (f)(4)(iii) of this 
section, undertaking A is a supplier undertaking and undertaking B is a 
recipient undertaking. In addition, undertaking A predominantly involves 
the provision of property to undertaking B, and undertakings A and B are 
controlled by the same interests. Accordingly, paragraph (f)(4)(iii)(A) 
of this section applies to undertakings A and B, and undertaking A is 
similar to undertaking B.
    (v) If paragraph (f)(4)(iii)(A) of this section applies to supplier 
and recipient undertakings, the supplier undertaking is treated under 
paragraph (f)(4)(iii)(C)(2) of this section as an undertaking that is 
similar to undertakings to which the recipient undertakings are similar. 
Accordingly, undertaking A is also similar, for purposes of this 
paragraph (f), to undertakings C through Z.
    (vi) The coordination rule in paragraph (f)(4)(iii)(C)(1)(i) of this 
section provides that paragraph (f)(4)(iii)(B) of this section does not 
apply if, as described above, the supplier undertaking predominantly 
involves the provision of property to recipient undertakings and is 
treated under paragraph (f)(4)(iii)(A) of this section as an undertaking 
that is similar to such recipient undertakings. Accordingly, paragraph 
(f)(4)(iii)(B) of this section does not apply to undertakings B through 
Z, even though undertaking B is the predominant provider of property and 
services to undertakings C through Z, and undertakings B through Z are 
controlled by the same interests. For the same reason, paragraph 
(f)(4)(iii)(B) of this section does not apply to undertaking A and B. 
(Paragraph (f)(4)(iii)(B) of this section is also inapplicable to 
undertakings A and B because the coordination rule in paragraph 
(f)(4)(iii)(C)(1)(ii) of this section applies if the recipient 
undertaking (undertaking B) is itself a supplier undertaking that is 
treated under paragraph (f)(4)(iii)(A) of this section as an undertaking 
that is similar to its recipient undertakings (undertakings C through 
Z).)

    (g) Integrated businesses--(1) Applicability--(i) In general. This 
paragraph (g) applies to a taxpayer's interests in trade or business 
activities (within the meaning of paragraph (g)(1)(ii) of this section).
    (ii) Trade or business activity. For purposes of this paragraph (g), 
the term ``trade or business activity'' means any activity (determined 
without regard to this paragraph (g)) that consists of interests in one 
or more trade or business undertakings (within the meaning of paragraph 
(f)(1)(ii) of this section).
    (2) Treatment as a single activity. A taxpayer's interests in two or 
more trade or business activities shall be treated as a single activity 
if and only if--
    (i) The operations of such trade or business activities constitute a 
single integrated business, activities constitute a single integrated 
business; and
    (ii) Such activities are controlled by the same interests (within 
the meaning of paragraph (j) of this section).
    (3) Facts and circumstances test. In determining whether the 
operations of two or more trade or business activities constitute a 
single integrated business for purposes of this paragraph (g), all the 
facts and circumstances are taken into account, and the following 
factors are generally the most significant:
    (i) Whether such operations are conducted at the same location;
    (ii) The extent to which other persons conduct similar operations at 
one location;
    (iii) Whether such operations are treated as a unit in the primary 
accounting records reflecting the results of such operations;
    (iv) The extent to which other persons treat similar operations as a 
unit in the primary accounting records reflecting the results of such 
similar operations;
    (v) Whether such operations are owned by the same person (within the 
meaning of paragraph (c)(2)(v) of this section);
    (vi) The extent to which such operations involve products or 
services that are commonly provided together;
    (vii) The extent to which such operations serve the same customers;
    (viii) The extent to which the same personnel, facilities, or 
equipment are used to conduct such operations;
    (ix) The extent to which such operations are conducted in 
coordination with or reliance upon each other;

[[Page 464]]

    (x) The extent to which the conduct of any such operations is 
incidental to the conduct of the remainder of such operations;
    (xi) The extent to which such operations depend on each other for 
their economic success; and
    (xii) Whether such operations are conducted under the same trade 
name.
    (4) Examples. The following examples illustrate the application of 
this paragraph (g). The facts, analysis, and conclusion in each example 
relate to a single taxable year, and the trade or business activities 
described in each example are controlled by the same interests (within 
the meaning of paragraph (j) of this section).

    Example (1). (i) The taxpayer owns a number of department stores and 
auto-supply stores. Some of the taxpayer's department stores include 
auto-supply departments. In other cases, the taxpayer operates a 
department store and an auto-supply store at the same location (within 
the meaning of paragraph (c)(2)(iii) of this section), or at different 
locations from which the same group of customers can be served. In cases 
in which a department store and an auto-supply store are operated at the 
same location, the department-store operations are the predominant 
operations (within the meaning of paragraph (f)(4)(ii) of this section), 
and the undertaking that includes the stores is treated as a department-
store undertaking for purposes of paragraph (f) of this section. Under 
paragraph (f) of this section, the department-store undertakings are all 
treated as part of the same activity of the taxpayer (the ``department-
store activity''). Similarly, the auto-supply undertakings (i.e., the 
auto-supply stores that are not operated at a department-store location) 
are all treated as part of the same activity (the ``auto-supply 
activity''). (Assume that department-store undertakings and auto-supply 
undertakings are not similar and are not treated as part of the same 
activity under paragraph (f) of this section.)
    (ii) The department stores and auto-supply stores use a common trade 
name and coordinate their marketing activities (e.g., the stores 
advertise in the same catalog and the same newspaper supplements, honor 
the same credit cards (including credit cards issued by the department 
stores), and jointly conduct sales and other promotional activities). 
Although sales personnel generally work only in a particular store or in 
a particular department within a store, other employees (e.g., cashiers, 
janitorial and maintenance workers, and clerical staff) may work in or 
perform services for various stores, including both department and auto-
supply stores. In addition, the management of store operations is 
organized on a geographical basis, and managers above the level of the 
individual store generally supervise operations in both types of store. 
A central office provides payroll, financial, and other support services 
to all stores and establishes pricing and other business policies. Most 
inventory for both types of stores is acquired through a central 
purchasing department and inventory for all stores in an area is stored 
in a common warehouse.
    (iii) Based on the foregoing facts and circumstances, the operations 
of the department-store activity and the auto-supply activity constitute 
an integrated business. Paragraph (g)(3) of this section provides that 
the factors relevant to this determination include the conduct of 
department-store and auto-supply operations at the same location, the 
location of department and auto-supply stores at sites where the same 
group of customers can be served, the treatment of all such operations 
as a unit in the taxpayer's financial statements, the taxpayer's 
ownership and the common management of all such operations, the use of 
the same personnel, facilities, and equipment to conduct and support the 
operations, the use of a common trade name, and the coordination (as 
evidenced by the coordinated marketing activities) of department-store 
and auto-supply operations.
    (iv) Paragraph (g)(2) of this section provides that a taxpayer's 
interests in two or more trade or business activities (within the 
meaning of paragraph (g)(1)(ii) of this section) are treated as a single 
activity of the taxpayer if the operations of such activities constitute 
an integrated business and the activities are controlled by the same 
interests. The department-store activity and the auto-supply activity 
consist of trade or business undertakings and, thus, are trade or 
business activities. In addition, the activities are controlled by the 
same interests (the taxpayer), and the operations of the activities 
constitute an integrated business. Accordingly, the department-store 
activity and the auto-supply activity are treated as a single activity 
of the taxpayer.
    Example (2). (i) The taxpayer owns a number of stores that sell 
stereo equipment and a repair shop that services stereo equipment. Under 
paragraph (f) of this section, the stores are all treated as part of the 
same activity of the taxpayer (the ``store activity''). The repair shop 
does not sell stereo equipment, does not predominantly involve the 
provision of services to the taxpayer's stores, and is treated as a 
separate activity (the ``repair-shop activity''). (Assume that stereo-
sales undertakings and stereo-repair undertakings are not similar and 
are not treated as part of the same activity under paragraph (f) of this 
section.)

[[Page 465]]

    (ii) The stores sell stereo equipment produced by manufacturers for 
which the stores are an authorized distributor. The repair shop's 
operations principally involve the servicing of stereo equipment 
produced by the same manufacturers. These operations include repairs on 
equipment under warranty for which reimbursement is received from the 
manufacturer and reconditioning of equipment taken as trade-ins by the 
taxpayer's stores. The majority of the operations, however, involve 
repairs that are performed for customers and are not covered by a 
warranty. The taxpayer's distribution agreements with manufacturers 
generally require the taxpayer to repair and service equipment produced 
by the manufacturer both during and after the warranty period. In some 
cases, the distribution agreements require that the taxpayer's repair 
facility meet the manufacturer's standards and provide for periodic 
inspections to ensure that these standards are met.
    (iii) The stores and the repair shop use a common trade name. Sales 
personnel generally work only in a particular store and stereo 
technicians work only in the repair shop. The stores and the repair shop 
are, however, managed from a central office, which supervises both store 
and repair-shop operations, provides payroll, financial, and other 
support services to the stores and the repair shop, and establishes 
pricing and other business policies. In addition, inventory for the 
stores and supplies for the repair shop are acquired through a central 
purchasing department and are stored in a single warehouse.
    (iv) Based on the foregoing facts and circumstances, the operations 
of the store activity and the repair-shop activity constitute an 
integrated business. Paragraph (g)(3) of this section provides that the 
factors relevant to this determination include the treatment of all such 
operations as a unit in the taxpayer's financial statements, the 
taxpayer's ownership and the common management of all such operations, 
the use of the same personnel and facilities to support the operations, 
the use of a common trade name, the extent to which the same customers 
patronize both the stores and the repair shop, the similarity of the 
products (i.e., stereo equipment) involved in both store and repair-shop 
operations, and the extent to which the provision of repair services 
contributes to the taxpayer's ability to obtain the stereo equipment 
sold in store operations.
    (v) Paragraph (g)(2) of this section provides that a taxpayer's 
interests in two or more trade or business activities (within the 
meaning of paragraph (g)(1)(ii) of this section) are treated as a single 
activity of the taxpayer if the operations of such activities constitute 
an integrated business and the activities are controlled by the same 
interests. The store activity and repair-shop activity consist of trade 
or business undertakings and thus are trade or business activities. In 
addition, the activities are controlled by the same interests (the 
taxpayer), and the operations of the activities constitute an integrated 
business. Accordingly, the store activity and the repair-shop activity 
are treated as a single activity of the taxpayer.
    Example (3). (i) The taxpayer owns interests in three partnerships. 
One partnership owns a television station, the second owns a 
professional sports franchise, and the third owns a motion-picture 
production company. The operations of the partnerships are treated as 
three separate undertakings. Although other persons own interests in the 
partnerships, all three undertakings are controlled (within the meaning 
of paragraph (j) of this section) by the taxpayer. The operations of the 
partnerships are treated as three separate activities (the ``television 
activity,'' the ``sports activity,'' and the ``motion-picture 
activity''). (Assume that the undertakings are not similar and are not 
treated as part of the same activity under paragraph (f) of this 
section.)
    (ii) Each partnership prepares financial statements that reflect 
only the results of that partnership's operations, and each of the 
activities is conducted under its own trade name. The taxpayer 
participates extensively in the management of each partnership and makes 
the major business decisions for all three partnerships. Each 
partnership, however, employs separate management and other personnel 
who conduct its operations on a day-to-day basis. The taxpayer generally 
arranges the partnerships' financing and often obtains loans for two, or 
all three, partnerships from the same source. Although the assets of one 
partnership are not used as security for loans to another partnership, 
the taxpayer's interest in a partnership may secure loans to the other 
partnerships. The television station broadcasts the sports franchise's 
games, and the motion-picture production company occasionally prepares 
programming for the television station. In addition, support staff of 
one partnership may, during periods of peak activity or in the case of 
emergency, be made available to another partnership on a temporary 
basis. There are no other significant transactions between the 
partnerships. Moreover, all transactions between the partnerships 
involve essentially the same terms as would be provided in transactions 
between unrelated persons.
    (iii) Based on the foregoing facts and circumstances, the television 
activity, the sports activity, and the motion-picture activity 
constitute three separate businesses. Paragraph (g)(3) of this section 
provides that the factors relevant to this determination include the 
treatment of the activities as separate units in the partnerships' 
financial statements, the use of a different trade name for each 
activity, the separate day-to-day

[[Page 466]]

management of the activities, and the limited extent to which the 
activities contribute to or depend on each other (as evidenced by the 
small number of significant transactions between the partnerships and 
the arm's length nature of those transactions). The taxpayer's 
participation in management and financing are taken into account in this 
determination, as are the transactions between the partnerships, but 
these factors do not of themselves support a determination that the 
activities constitute an integrated business.
    (iv) Paragraph (g)(2) of this section provides that a taxpayer's 
interests in two or more trade or business activities (within the 
meaning of paragraph (g)(1)(ii) of this section) are treated as a single 
activity of the taxpayer only if the operations of such activities 
constitute an integrated business and the activities are controlled by 
the same interests. In this case, the taxpayer's activities do not 
constitute an integrated business, and the aggregation rule in paragraph 
(g)(2) of this section does not apply. Accordingly, the television 
activity, the sports activity, and the motion-picture activity are 
treated as three separate activities of the taxpayer.

    (h) Certain professional service undertakings treated as a single 
activity--(1) Applicability--(i) In general. This paragraph (h) applies 
to a taxpayer's interests in professional service undertakings (within 
the meaning of paragraph (h)(1)(ii) of this section).
    (ii) Professional service undertaking. For purposes of this 
paragraph (h), an undertaking is treated as a professional service 
undertaking for any taxable year in which the undertaking derives more 
than 50 percent of its gross income from the provision of services that 
are treated, for purposes of section 448 (d)(2)(A) and the regulations 
thereunder, as services performed in the fields of health, law, 
engineering, architecture, accounting, actuarial science, performing 
arts, or consulting.
    (2) Treatment as a single activity--(i) Undertakings controlled by 
the same interest. A taxpayer's interests in two or more professional 
service undertakings that are controlled by the same interests (within 
the meaning of paragraph (j) of this section) shall be treated as part 
of the same activity of the taxpayer.
    (ii) Undertakings involving significant similar or significant 
related services. A taxpayer's interests in two or more professional 
service undertakings that involve the provision of significant similar 
services or significant related services shall be treated as part of the 
same activity of the taxpayer.
    (iii) Coordination rule. (A) Except as provided in paragraph 
(h)(2)(iii)(B) of this section, a taxpayer's interests in two or more 
undertakings (the ``original undertakings'') that are treated as part of 
the same activity of the taxpayer under the provisions of paragraph 
(h)(2) (i) or (ii) of this section shall be treated as interests in a 
single professional service undertaking (the ``aggregated undertaking'') 
for purposes of reapplying such provisions.
    (B) If any original undertaking included in an aggregated 
undertaking and any other undertaking that is not included in such 
aggregated undertaking involve the provision of significant similar or 
related services, the aggregated undertaking and such other undertaking 
shall be treated as undertakings that involve the provision of 
significant similar or related services for purposes of reapplying the 
provisions of paragraph (h)(2)(ii) of this section.
    (3) Significant similar or significant related services. For 
purposes of this paragraph (h)--
    (i) Services (other than consulting services) in any field described 
in paragraph (h)(1)(ii) of this section are similar to all other 
services in the same field;
    (ii) All the facts and circumstances are taken into account in 
determining whether consulting services are similar;
    (iii) Two professional service undertakings involve the provision of 
significant similar services if and only if--
    (A) Each such undertaking provides significant professional 
services; and
    (B) Significant professional services provided by one such 
undertaking are similar to significant professional services provided by 
the other such undertaking;
    (iv) Services are significant professional services if and only if 
such services are in a field described in paragraph (h)(1)(ii) of this 
section and more than 20 percent of the undertaking's gross income is 
attributable to services in such field (or, in the case of consulting 
services, to similar services in such field); and

[[Page 467]]

    (v) Two professional service undertakings involve the provision of 
significant related services if and only if more than 20 percent of the 
gross income of one such undertaking is derived from customers that are 
also customers of the other such undertaking.
    (4) Examples. The following examples illustrate the application of 
this paragraph (h). In each example that does not state otherwise, the 
taxpayer is an individual, and the facts, analysis, and conclusions 
relate to a single taxable year.

    Example (1). (i) The taxpayer is a partner in a law partnership that 
has offices in various cities. Some of the partnership's offices provide 
a full range of legal services. Other offices, however, specialize in a 
particular area or areas of the law (e.g., litigation, tax law, 
corporate law, etc.). In either case, substantially all of the office's 
gross income is derived from the provision of legal services. Under 
paragraph (c)(1) of this section, each of the law partnership's offices 
is treated as a single undertaking that is separate from other 
undertakings (a ``law-office undertaking'').
    (ii) Each law-office undertaking derives more than 50 percent of its 
gross income from the provision of services in the field law. Thus, each 
such undertaking is treated as a professional service undertaking 
(within the meaning of paragraph (h)(1)(ii) of this section).
    (iii) Each law-office undertaking derives more than 20 percent of 
its gross income from services in the field of law. Thus, each such 
undertaking involves significant professional services (within the 
meaning of paragraph (h)(3)(iv) of this section) in the field of law. In 
addition, all services in the field of law are treated as similar 
services under paragraph (h)(3)(i) of this section. Thus, the law-office 
undertakings involve the provision of significant similar services 
(within the meaning of paragraph (h)(3)(iii) of this section).
    (iv) Paragraph (h)(2)(ii) of this section provides that a taxpayer's 
interest in professional service undertakings that involve the provision 
of significant similar services are treated as part of the same activity 
of the taxpayer. Accordingly, the taxpayer's interests in the law-office 
undertakings are treated as part of the same activity of the taxpayer 
under paragraph (h)(2)(ii) of this section even if the undertakings are 
not controlled by the same interests (within the meaning of paragraph 
(j) of this section).
    Example (2). (i) The taxpayer is a partner in medical partnerships A 
and B. Both partnerships derive all of their gross income from the 
provision of medical services, but partnership A specializes in internal 
medicine and partnership B operates a radiology laboratory. Under 
paragraph (c)(1) of this section, the medical-service business of each 
partnership is treated as a single undertaking that is separate from 
other undertakings (a ``medical-service undertaking''). Partnerships A 
and B are not controlled by the same interests (within the meaning of 
paragraph (j) of this section).
    (ii) Each partnership's medical-service undertaking derives more 
than 50 percent of its gross income from the provision of services in 
the field of health. Thus, each partnership's medical-service 
undertaking is treated as a professional service undertaking (within the 
meaning of paragraph (h)(1)(ii) of this section).
    (iii) Each partnership's medical-service undertaking derives more 
than 20 percent of its gross income from services in the field of 
health. Thus, each such undertaking involves significant professional 
services (within the meaning of paragraph (h)(3)(iv) of this section) in 
the field of health. In addition, all services in the field of health 
are treated as similar services under paragraph (h)(3)(i) of this 
section. Thus, the medical-services undertakings of partnerships A and B 
involve the provision of significant similar services (within the 
meaning of paragraph (h)(3)(iii) of this section).
    (iv) Paragraph (h)(2)(ii) of this section provides that a taxpayer's 
interests in professional service undertakings that involve the 
provision of significant similar services are treated as part of the 
same activity of the taxpayer. Accordingly, the taxpayer's interests in 
the medical-service undertakings of partnerships A and B are treated as 
part of the same activity of the taxpayer under paragraph (h)(2)(ii) of 
this section even though the undertakings are not controlled by the same 
interests.
    Example (3). (i) The facts are the same as in example (2), except 
that the taxpayer withdraws from partnership A in 1989 and becomes a 
partner in partnership B in 1990. In addition, the taxpayer was a full-
time participant in the operations of partnership A from 1970 through 
1989, but does not participate in the operations of partnership B.
    (ii) Paragraph (h)(2)(ii) of this section provides that a taxpayer's 
interests in professional service undertakings that involve the 
provision of significant similar services are treated as part of the 
same activity of the taxpayer. This rule is not limited to cases in 
which the taxpayer holds such interests simultaneously. Thus, as in 
example (2), the taxpayer's interests in the medical-service 
undertakings of partnerships A and B are treated as part of the same 
activity of the taxpayer.

[[Page 468]]

    (iii) The activity that includes the taxpayer's interests in the 
medical-service undertakings of partnerships A and B is a personal 
service activity (within the meaning of Sec. 1.469-5T(d)) because it 
involves the performance of personal services in the field of health. In 
addition, the taxpayer materially participated in the activity for three 
or more taxable years preceding 1990 (see Sec. 1.469-5T(j)(1)). Thus, 
even if the taxpayer does not work in the activity after 1989, the 
taxpayer is treated, under Sec. 1.469-5T(a)(6), as materially 
participating in the activity for 1990 and subsequent taxable years.
    Example (4). (i) The taxpayer is a partner in an accounting 
partnership that has offices in various cities (partnership A) and in a 
management-consulting partnership that has a single office (partnership 
B). Each of partnership A's offices derives substantially all of its 
gross income from services in the field of accounting, and partnership B 
derives substantially all of its gross income from services in the field 
of consulting. Under paragraph (c)(1) of this section, partnership B's 
consulting business is treated as a single undertaking that is separate 
from other undertakings (the ``consulting undertaking'') and each of 
partnership A's offices is similarly treated (the ``accounting 
undertakings''). The accounting undertakings are controlled by the same 
interests, but partnerships A and B are not controlled by the same 
interests (within the meaning of paragraph (j) of this section). 
Partnership B's consulting business derives 50 percent of its gross 
income from customers of partnership A's accounting undertakings, but 
does not derive more than 20 percent of its gross income from the 
customers of any single accounting undertaking.
    (ii) Each accounting undertaking derives more than 50 percent of its 
gross income from the provision of services in the field of accounting, 
and the consulting undertaking derives more than 50 percent of its gross 
income from the provision of services in the field of consulting. Thus, 
each accounting undertaking is treated as a professional service 
undertaking (within the meaning of paragraph (h)(1)(ii) of this 
section), and the consulting undertaking is also treated as a 
professional service undertaking.
    (iii) Each accounting undertaking derives more than 20 percent of 
its gross income from services in the field of accounting. Thus, each 
such undertaking involves significant professional services (within the 
meaning of paragraph (h)(3)(iv) of this section) in the field of 
accounting. In addition, all services in the field of accounting are 
treated as similar services under paragraph (h)(3)(i) of this section. 
Thus, the accounting undertakings involve the provision of significant 
similar services (within the meaning of paragraph (h)(3)(iii) of this 
section).
    (iv) Paragraph (h)(2) (i) and (ii) of this section provides that a 
taxpayer's interests in professional service undertakings that are 
controlled by the same interests or that involve the provision of 
significant similar services are treated as part of the same activity of 
the taxpayer. The accounting undertakings are controlled by the same 
interests (see (i) above) and involve the provision of significant 
similar services (see (iii) above). Accordingly, the taxpayer's 
interests in the accounting undertakings are treated as part of the same 
activity under paragraph (h)(2) (i) and (ii) of this section.
    (v) The consulting undertaking derives more than 20 percent of its 
gross income from services in the field of consulting. If, based on all 
the facts and circumstances, these services are determined to be similar 
consulting services under paragraph (h)(3)(ii) of this section, the 
consulting undertaking involves significant professional services 
(within the meaning of paragraph (h)(3)(iv) of this section). In this 
case, however, the consulting undertaking and the accounting 
undertakings do not involve the provision of significant similar 
services (within the meaning of paragraph (h)(3)(iii) of this section) 
because consulting services and accounting services are not treated as 
similar services under paragraph (h)(3)(i) of this section.
    (vi) The consulting undertaking does not derive more than 20 percent 
of its gross income from the customers of any single accounting 
undertaking of partnership A. If, however, partnership A's accounting 
undertakings are aggregated, the consulting undertaking derives more 
than 20 percent of its gross income from customers of the aggregated 
undertakings. Paragraph (h)(3)(v) of this section provides that two 
professional service undertakings involve the provision of significant 
related services if more than 20 percent of the gross income of one 
undertaking is derived from customers of the other undertaking. For 
purposes of applying this rule, partnership A's accounting undertakings 
are treated as a single undertaking under paragraph (h)(2)(iii) of this 
section because the accounting undertakings are treated as part of the 
same activity under paragraph (h)(2)(i) and (ii) of this section. Thus, 
the consulting undertaking and the accounting undertakings involve the 
provision of significant related services.
    (vii) Paragraph (h)(2)(ii) of this section provides that a 
taxpayer's interests in professional service undertakings that involve 
the provision of significant related services are treated as part of the 
same activity of the taxpayer. Accordingly, the taxpayer's interests in 
the consulting undertaking and the accounting undertakings are treated 
as part of the same activity of the taxpayer under paragraph (h)(2)(ii) 
of this section.

[[Page 469]]

    Example (5). (i) The facts are the same as in example (4), except 
that partnership B's consulting business derives only 15 percent of its 
gross income from customers of partnership A's accounting undertakings.
    (ii) As in example (4), the taxpayer's interests in the accounting 
undertakings are treated as part of the same activity under paragraph 
(h)(2)(i) and (ii) of this section and are treated under paragraph 
(h)(2)(iii) of this section as a single undertaking for purposes of 
reapplying those provisions. In this case, however, the consulting 
undertaking does not derive more than 20 percent of its gross income 
from the customers of partnership A's accounting undertakings. Thus, the 
consulting undertaking and the accounting undertakings do not involve 
the provision of significant related services. Accordingly, the 
accounting undertakings and the consulting undertaking are not treated 
as part of the same activity under paragraph (h)(2)(i) or (ii) of this 
section because they are not controlled by the same interests and do not 
involve the provision of significant similar or related services.
    Example (6). (i) The taxpayer is a partner in partnerships A, B, and 
C. Partnership A derives substantially all of its gross income from the 
provision of engineering services, partnership B derives substantially 
all of its gross income from the provision of architectural services, 
and partnership C derives 40 percent of its gross income from the 
provision of engineering services and the remainder from the provision 
of architectural services. Under paragraph (c)(1) of this section, each 
partnership's service business is treated as a single undertaking that 
is separate from other undertakings. Partnerships A, B, and C are not 
controlled by the same interests (within the meaning of paragraph (j) of 
this section).
    (ii) Each partnership's undertaking derives more than 50 percent of 
its gross income from the provision of services in the fields of 
architecture and engineering. Thus, each such undertaking is treated as 
a professional service undertaking (within the meaning of paragraph 
(h)(1)(ii) of this section).
    (iii) Partnership A's undertaking (``undertaking A'') derives more 
than 20 percent of its gross income from services in the field of 
engineering, partnership B's undertaking (``undertaking B'') derives 
more than 20 percent of its gross income from services in the field of 
architecture, and partnership C's undertaking (``undertaking C'') 
derives more than 20 percent of its gross income from services in the 
field of engineering and more than 20 percent of its gross income from 
services in the field of architecture. Thus, undertaking A involves 
significant services in the field of engineering, undertaking B involves 
significant services in the field of architecture, and undertaking C 
involves significant services in both fields. Under paragraph (h)(3)(i) 
of this section, all services within each field are treated as similar 
services, but engineering services and architectural services are not 
treated as similar services. Thus, undertakings A and C, and 
undertakings B and C, involve the provision of significant similar 
services (within the meaning of paragraph (h)(3)(iii) of this section).
    (iv) Paragraph (h)(2)(ii) of this section provides that a taxpayer's 
interests in professional service undertakings that involve the 
provision of significant similar services are treated as part of the 
same activity of the taxpayer. Accordingly, the taxpayer's interests in 
undertakings A and C are treated as part of the same activity of the 
taxpayer.
    (v) Under paragraph (h)(2)(iii)(A) of this section, undertakings A 
and C are also treated as a single undertaking for purposes of 
determining whether undertaking B involves the provision of significant 
similar services. Paragraph (h)(2)(iii)(B) of this section in effect 
provides that treating undertakings A and C as a single undertaking does 
not affect the conclusion that the architectural services provided by 
undertakings B and C are significant similar services. Thus, undertaking 
B and the single undertaking in which undertakings A and C are included 
under paragraph (h)(3)(iii) of this section involve the provision of 
significant similar services, and the taxpayer's interests in 
undertakings A, B, and C are treated as part of the same activity of the 
taxpayer under paragraph (h)(2)(ii) of this section.

    (i) [Reserved]
    (j) Control by the same interests and ownership percentage--(1) In 
general. Except as otherwise provided in paragraph (j)(2) of this 
section, all the facts and circumstances are taken into account in 
determining, for purposes of this section, whether undertakings are 
controlled by the same interests. For this purpose, control includes any 
kind of control, direct or indirect, whether legally enforceable, and 
however exercisable or exercised. It is the reality of control that is 
determinative, and not its form or mode of exercise.
    (2) Presumption--(i) In general. Undertakings are rebuttably 
presumed to be controlled by the same interests if such undertakings are 
part of the same common-ownership group.
    (ii) Common-ownership group. Except as provided in paragraph 
(j)(2)(iii) of this section, two or more undertakings of a taxpayer are 
part of the same common-ownership group for purposes of this paragraph 
(j)(2) if and only if the

[[Page 470]]

sum of the common-ownership percentages of any five or fewer persons 
(within the meaning of section 7701(a)(1), but not including passthrough 
entities) with respect to such undertakings exceeds 50 percent. For this 
purpose, the common-ownership percentage of a person with respect to 
such undertakings is the person's smallest ownership percentage 
(determined in accordance with paragraph (j)(3) of this section) in any 
such undertaking.
    (iii) Special aggregation rule. If, without regard to this paragraph 
(j)(2)(iii), an undertaking of a taxpayer is part of two or more common-
ownership groups, any undertakings of the taxpayer that are part of any 
such common-ownership group shall be treated for purposes of this 
paragraph (j)(2) as part of a single common-ownership group in 
determining the activities of such taxpayer.
    (3) Ownership percentage--(i) In general. For purposes of this 
section, a person's ownership percentage in an undertaking or in a 
passthrough entity shall include any interest in such undertaking or 
passthrough entity that the person holds directly and the person's share 
of any interest in such undertaking or passthrough entity that is held 
through one or more passthrough entities.
    (ii) Passthrough entities. The following rules apply for purposes of 
applying paragraph (j)(3)(i) of this section:
    (A) A partner's interest in a partnership and share of any interest 
in a passthrough entity or undertaking held through a partnership shall 
be determined on the basis of the greater of such partner's percentage 
interest in the capital (by value) of such partnership or such partner's 
largest distributive share of any item of income or gain (disregarding 
guaranteed payments under section 707(c)) of such partnership.
    (B) A shareholder's interest in an S corporation and share of any 
interest in a passthrough entity or undertaking held through an S 
corporation shall be determined on the basis of such shareholder's stock 
ownership.
    (C) A beneficiary's interest in a trust or estate and share of any 
interest in a passthrough entity or undertaking held through a trust or 
estate shall not be taken into account.
    (iii) Attribution rules--(A) In general. Except as otherwise 
provided in paragraph (j)(3)(iii)(B) of this section, a person's 
ownership percentage in a passthrough entity or in an undertaking shall 
be determined by treating such person as the owner of any interest that 
a person related to such person owns (determined without regard to this 
paragraph (j)(3)(iii)) in such passthrough entity or in such 
undertaking.
    (B) Determination of common-ownership percentage. The common-
ownership percentage of five or fewer persons with respect to two or 
more undertakings shall be determined, in any case in which, after the 
application of paragraph (j)(3)(iii)(A) of this section, two or more 
such persons own the same interest in any such undertaking (the 
``related-party owners'') by treating as the only owner of such interest 
(or portion thereof) the related-party owner whose ownership of such 
interest (or a portion thereof) would result in the highest common-
ownership percentage.
    (C) Related person. A person is related to another person for 
purposes of this paragraph (j)(3)(iii) if the relationship of such 
persons is described in section 267(b) or 707(b)(1).
    (4) Special rule for trade or business activities. In determining 
whether two or more trade or business activities are controlled by the 
same interests for purposes of paragraph (g) of this section, each such 
activity shall be treated as a separate undertaking in applying this 
paragraph (j).
    (5) Examples. The following examples illustrate the application of 
this paragraph (j):

    Example (1). (i) Partnership X is the sole owner of an undertaking 
(undertaking X), and partnership Y is the sole owner of another 
undertaking (undertaking Y). Individuals A, B, C, D, and E are the only 
partners in partnerships X and Y, and the partnership agreements of both 
X and Y provide that no action may be taken or decision made on behalf 
of the partnership without the unanimous consent of the partners. 
Moreover, each partner actually participates in, and agrees to, all 
major decisions that affect the operations of either partnership. The 
ownership percentages (within the meaning of paragraph (j)(3) of this 
section) of A, B, C, D,

[[Page 471]]

and E in each partnership (and in the undertaking owned by the 
partnership) are as follows:

------------------------------------------------------------------------
                                                 Partnership/Undertaking
                    Partner                    -------------------------
                                                X (percent)  Y (percent)
------------------------------------------------------------------------
A.............................................           15            5
B.............................................           10           60
C.............................................           10           20
D.............................................           77           12
E.............................................            8           20
                                               --------------
                                                        120          117
------------------------------------------------------------------------

    The sum of the ownership percentages exceeds 100 percent for both X 
and Y because, under paragraph (j)(3)(ii)(A) of this section, each 
partner's ownership percentage is determined on the basis of the greater 
of the partner's percentage interest in the capital of the partnership 
or the partner's largest distributive share of any item of income or 
gain of the partnership.
    (ii) Paragraph (j)(2)(ii) of this section provides that a person's 
common-ownership percentage with respect to any two or more undertakings 
is the person's smallest ownership percentage in any such undertaking. 
Thus, the common-ownership percentages of A, B, C, D, and E with respect 
to undertakings X and Y are as follows:

------------------------------------------------------------------------
                                                       Common-ownership
                      Partner                             percentage
------------------------------------------------------------------------
A..................................................                    5
B..................................................                   10
C..................................................                   10
D..................................................                   12
E..................................................                    8
                                                    --------------------
                                                                      45
------------------------------------------------------------------------

    (iii) Paragraph (j)(2)(i) of this section provides that undertakings 
are rebuttably presumed to be controlled by the same interests if the 
undertakings are part of the same common-ownership group. In general, 
undertakings are part of a common-ownership group only if the sum of the 
common-ownership percentages of any five or fewer persons with respect 
to such undertakings exceeds 50 percent. In this case, the sum of the 
partners' common-ownership percentages with respect to undertakings X 
and Y is only 45 percent. Thus, undertakings X and Y are not part of the 
same common-ownership group.
    (iv) If the presumption in paragraph (j)(2)(i) of this section does 
not apply, all the facts and circumstances are taken into account in 
determining whether undertakings are controlled by the same interests 
(see paragraph (j)(1) of this section). In this case, all actions and 
decisions in both undertakings require the unanimous consent of the same 
persons and each of those persons actually participates in, and agrees 
to, all major decisions. Accordingly, undertakings X and Y are 
controlled by the same interests (i.e., A, B, C, D, and E).
    Example (2). (i) Partnerships W, X, Y, and Z are each the sole owner 
of an undertaking (undertakings W, X, Y, and Z). Individuals A, B, and C 
are partners in each of the four partnerships, and the remaining 
interests in each partnership are owned by a number of unrelated 
individuals, none of whom owns more than a one-percent interest in any 
of the partnerships. The ownership percentages (within the meaning of 
paragraph (j)(3) of this section) of A, B, and C in each partnership 
(and in the undertaking owned by the partnership) are as follows:

------------------------------------------------------------------------
                                                        Partner
           Partnership/Undertaking            --------------------------
                                                 A      B         C
------------------------------------------------------------------------
W............................................    23%    21%          40%
X............................................    19%    30%          22%
Y............................................    25%    25%          20%
Z............................................     8%     4%           2%
------------------------------------------------------------------------

    (ii) Paragraph (j)(2)(ii) of this section provides that a person's 
common-ownership percentage with respect to any two or more undertakings 
is the person's smallest ownership percentage in any such undertaking. 
Thus, the common-ownership percentages of A, B, and C in undertakings W, 
X, Y, and Z are as follows:

------------------------------------------------------------------------
                                                       Common-ownership
                      Partner                             percentage
------------------------------------------------------------------------
A..................................................                    8
B..................................................                    4
C..................................................                    2
                                                    --------------------
                                                                      14
------------------------------------------------------------------------

    (iii) The sum of the common-ownership percentages of A, B, and C 
with respect to undertakings W, X, Y, and Z is 14 percent, and no other 
person owns more than a one-percent interest in any of the undertakings. 
Thus, the sum of the common-ownership percentages of any five or fewer 
persons with respect to all four undertakings cannot exceed 50 percent. 
Accordingly, undertakings W, X, Y, and Z are not part of the same 
common-ownership group (see paragraph (j)(2)(ii) of this section) and 
are not rebuttably presumed to be controlled by the same interests (see 
paragraph (j)(2)(i) of this section).
    (iv) The common-ownership percentages of A, B, and C in undertakings 
W, X, and Y are as follows:

------------------------------------------------------------------------
                                                       Common ownership
                      Partner                             percentage
------------------------------------------------------------------------
A..................................................                   19
B..................................................                   21
C..................................................                   20
                                                    --------------------
                                                                      60
------------------------------------------------------------------------


[[Page 472]]

    (v) The sum of the common-ownership percentages of A, B, and C, 
taking into account only undertakings W, X, and Y, is 60 percent. 
Because the sum of the common-ownership percentages exceeds 50 percent, 
undertakings W, X, and Y are part of the same common-ownership group 
(see paragraph (j)(2)(ii) of this section and are rebuttably presumed to 
be controlled by the same interests (see paragraph (j)(2)(i) of this 
section).
    Example (3). (i) Corporation X, an S corporation, is the sole owner 
of an undertaking (undertaking X), and corporation Y, another S 
corporation, is the sole owner of another undertaking (undertaking Y). 
Individuals A, B, and C are shareholders in corporations X and Y. Both A 
and B are related (within the meaning of paragraph (j)(3)(iii)(C) of 
this section) to C, but not to each other. A, B, and C are not related 
to any other person that owns an interest in either corporation X or 
corporation Y. The ownership percentages (determined without regard to 
the attribution rules of paragraph (j)(3)(iii) of this section) of A, B, 
and C in each corporation (and in the undertaking owned by the 
corporation) are as follows:

                         Corporation/Undertaking
------------------------------------------------------------------------
                  Shareholder                   X (percent)  Y (percent)
------------------------------------------------------------------------
A.............................................           20  ...........
B.............................................  ...........           20
C.............................................            5            5
------------------------------------------------------------------------

    (ii) In general, a person's ownership percentage is determined by 
treating the person as the owner of interests that are actually owned by 
related persons (see paragraph (j)(3)(iii)(A) of this section). If A, B, 
and C are treated as owning interests that are actually owned by related 
persons, their ownership percentages are as follows:

                         Corporation/Undertaking
------------------------------------------------------------------------
                  Shareholder                   X (percent)  Y (percent)
------------------------------------------------------------------------
A.............................................           25            5
B.............................................            5           25
C.............................................           25           25
------------------------------------------------------------------------

    (iii) Paragraph (j)(3)(iii)(B) of this section provides that, in 
determining the sum of the common-ownership percentages of any five or 
fewer persons with respect to any undertakings, each interest in such 
undertakings is counted only once. If two or more persons are treated as 
owners of the same interest under paragraph (j)(3)(iii)(A) of this 
section, the person whose ownership would result in the highest sum is 
treated as the only owner of the interest. In this case, C's common-
ownership percentage with respect to undertakings X and Y, determined by 
treating C as the owner of the interests actually owned by A and B, is 
25 percent. If, however, A and B are treated as the owners of the 
interests actually owned by C, each has a common-ownership percentage of 
only five percent. Thus, in determining the sum of common-ownership 
percentages with respect to undertakings X and Y, C is treated as the 
owner of the interests actually owned by A and B because this treatment 
results in the highest sum of common-ownership percentages with respect 
to such undertakings.
    Example (4). (i) The ownership percentages of individuals A, B, and 
C in undertakings X, Y, and Z are as follows:

                               Undertaking
------------------------------------------------------------------------
            Individual                  X            Y            Z
------------------------------------------------------------------------
A................................          30%          30%          30%
B................................          30%          30%          30%
C................................  ...........          30%          30%
------------------------------------------------------------------------


No other person owns an interest in more than one of the undertakings.
    (ii) Paragraph (j)(2)(ii) of this section provides that a person's 
common ownership percentage with respect to any two or more undertakings 
is the person's smallest ownership percentage in any such undertaking. 
Thus, A's common-ownership percentage with respect to undertakings X, Y, 
and Z is 30 percent, and the common-ownership percentages of B and C 
(and all other persons owning interests in such undertakings) with 
respect to such undertakings is zero. Accordingly, the sum of the common 
ownership percentages with respect to undertakings X, Y, and Z is only 
30 percent, and undertakings X, Y, and Z are not treated as part of the 
same common-ownership group under paragraph (j)(2)(ii) of this section.
    (iii) B's common-ownership percentage with respect to undertakings X 
and Y is 30 percent, and the sum of A's and B's common-ownership 
percentages with respect to such undertakings is 60 percent. Thus, 
undertakings X and Y are treated as part of the same common-ownership 
group under paragraph (j)(2)(ii) of this section. Similarly, C's common-
ownership percentage with respect to undertakings Y and Z is 30 percent, 
and the sum of A's and C's common-ownership percentages with respect to 
such undertakings is 60 percent. Thus, undertakings Y and Z are also 
treated as part of the same common-ownership group under paragraph 
(j)(2)(ii) of this section.
    (iv) Paragraph (j)(2)(iii) of this section requires the aggregation 
of common-ownership groups that include the same undertaking. In this 
case, undertaking Y is treated as part of the common-ownership group XY 
and as part of the common-ownership group YZ. Accordingly, undertakings 
X, Y, and Z are treated as part of a single common-ownership group and 
are rebuttably presumed to be controlled by the same interests (see

[[Page 473]]

paragraph (j)(2)(i) of this section) even though B does not own an 
interest in undertaking Z and C does not own an interest in undertaking 
X. The fact that B and C are not common owners with respect to 
undertakings X and Z is taken into account, however, in determining 
whether this presumption is rebutted.

    (k) Identification of rental real estate activities--(1) 
Applicability--(i) In general. Except as otherwise provided in paragraph 
(k)(6) of this section, this paragraph (k) applies to a taxpayer's 
interests in rental real estate undertakings (within the meaning of 
paragraph (k)(1)(ii) of this section).
    (ii) Rental real estate undertaking. For purposes of this paragraph 
(k), a rental real estate undertaking is a rental undertaking (within 
the meaning of paragraph (d) of this section) in which at least 85 
percent of the unadjusted basis (within the meaning of Sec. 1.469-
2T(f)(3)) of the property made available for use by customers is real 
property. For this purpose the term ``real property'' means any tangible 
property other than tangible personal property (within the meaning of 
Sec. 1.48-1(c)).
    (2) Identification of activities--(i) Multiple undertakings treated 
as a single activity or multiple activities by taxpayer. Except as 
otherwise provided in this paragraph (k), a taxpayer may treat two or 
more rental real estate undertakings (determined after the application 
of paragraph (k)(2) (ii) and (iii) of this section) as a single activity 
or may treat such undertakings as separate activities.
    (ii) Multiple undertakings treated as a single activity by 
passthrough entity. A taxpayer must treat two or more rental real estate 
undertakings as a single rental real estate undertaking for a taxable 
year if any passthrough entity through which the taxpayer holds such 
undertakings treats such undertakings as a single activity on the 
applicable return of the passthrough entity for the taxable year of the 
taxpayer.
    (iii) Single undertaking treated as multiple undertakings. 
Notwithstanding that a taxpayer's interest in leased property would, but 
for the application of this paragraph (k)(2)(iii), be treated as used in 
a single rental real estate undertaking, the taxpayer may, except as 
otherwise provided in paragraph (k)(3) of this section, treat a portion 
of the leased property (including a ratable portion of any common areas 
or facilities) as a rental real estate undertaking that is separate from 
the undertaking or undertakings in which the remaining portion of the 
property is treated as used. This paragraph (k)(2)(iii) shall apply for 
a taxable year if and only if--
    (A) Such portion of the leased property can be separately conveyed 
under applicable State and local law (taking into account the 
limitations, if any, imposed by any special rules or procedures, such as 
condominium conversion laws, restricting the separate conveyance of 
parts of the same structure); and
    (B) The taxpayer holds such leased property directly or through one 
or more passthrough entities, each of which treats such portion of the 
leased property as a separate activity on the applicable return of the 
passthrough entity for the taxable year of the taxpayer.
    (3) Treatment in succeeding taxable years. All rental real estate 
undertakings or portions of such undertakings that are treated, under 
this paragraph (k), as part of the same activity for a taxable year 
ending after August 9, 1989 must be treated as part of the same activity 
in each succeeding taxable year.
    (4) Applicable return of passthrough entity. For purposes of this 
paragraph (k), the applicable return of a passthrough entity for a 
taxable year of a taxpayer is the return reporting the passthrough 
entity's income, gain, loss, deductions, and credits taken into account 
by the taxpayer for such taxable year.
    (5) Evidence of treatment required. For purposes of this paragraph 
(k), a person (including a passthrough entity) does not treat a rental 
real estate undertaking as multiple undertakings for a taxable year or, 
except as otherwise provided in paragraph (k) (2)(ii) or (3) of this 
section, treat multiple rental real estate undertakings as a single 
undertaking for a taxable year unless such treatment is reflected on a 
schedule attached to the person's return for the taxable year.
    (6) Coordination rule for rental of nondepreciable property. This 
paragraph (k) shall not apply to a rental real estate

[[Page 474]]

undertaking if less than 30 percent of the unadjusted basis (within the 
meaning of Sec. 1.469-2T(f)(3)) of property used or held for use by 
customers in such undertaking during the taxable year is subject to the 
allowance for depreciation under section 167.
    (7) Coordination rule for rental of dwelling unit. For any taxable 
year in which section 280A(c)(5) applies to a taxpayer's use of a 
dwelling unit--
    (i) Paragraph (k) (2) and (3) of this section shall not apply to the 
taxpayer's interest in such dwelling unit; and
    (ii) The taxpayer's interest in such dwelling unit shall be treated 
as a separate activity of the taxpayer.
    (8) Examples. The following examples illustrate the application of 
this paragraph (k). In each example, the taxpayer is an individual whose 
taxable year is the calendar year.

    Example (1). (i) In 1989, the taxpayer directly owns five 
condominium units (units A, B, C, D, and E) in three different 
buildings. Units A, B, and C are in one of the buildings and constitute 
a single rental real estate undertaking (within the meaning of paragraph 
(k)(1)(ii) of this section). Units D and E are in the other two 
buildings, and each of these units constitutes a separate rental real 
estate undertaking. Each of the units can be separately conveyed under 
applicable State and local law.
    (ii) Paragraph (k)(2)(iii) of this section permits a taxpayer to 
treat a portion of the property included in a rental real estate 
undertaking as a separate rental real estate undertaking if the property 
can be separately conveyed under applicable State and local law and the 
taxpayer owns the property directly. Thus, the taxpayer can treat units 
A, B, and C as three separate undertakings. Alternatively, the taxpayer 
could treat two of those units (e.g., units A and C) as an undertaking 
and the remaining unit as a separate undertaking, or could treat units 
A, B, and C as a single undertaking.
    (iii) Paragraph (k)(2)(i) of this section permits a taxpayer to 
treat two or more rental real estate undertakings as a single activity, 
or to treat such undertakings as separate activities. Thus, the 
taxpayer, by combining undertakings, can treat all five units as a 
single activity. Alternatively, the taxpayer could treat each 
undertaking as a separate activity, or could combine some, but not all, 
undertakings. Thus, for example, the taxpayer could treat units A, B, C, 
and D as an activity and unit E as a separate activity.
    (iv) For purposes of paragraph (k)(2)(i) of this section, a 
taxpayer's rental real estate undertakings are determined after the 
application of paragraph (k)(2)(iii) of this section. Thus, the 
taxpayer, by treating units as separate undertakings under paragraph 
(k)(2)(iii) of this section and combining them with other units under 
paragraph (k)(2)(i) of this section, can treat any combination of units 
as a single activity. For example, the taxpayer could treat units A and 
B as a separate rental real estate undertaking, and then treat units A, 
B, and D as a single activity. In that case, the taxpayer could treat 
units C and E either as a single activity or as two separate activities.
    Example (2). (i) The facts are the same as in example (1). In 
addition, the taxpayer treats all five units as a single activity for 
1989 and sells unit E in 1990. (See paragraph (k)(5) of this section for 
a rule providing that the units are treated as a single activity only if 
such treatment is reflected on a schedule attached to the taxpayer's 
return.)
    (ii) Under paragraph (k)(3) of this section, rental real estate 
undertakings that are treated as part of the same activity for a taxable 
year must be treated as part of the same activity in each succeeding 
year. In this case, all five units were treated as part of the same 
activity for 1989 and must therefore be treated as part of the same 
activity for 1990. Accordingly, the taxpayer's sale of unit E in 1990 
cannot be treated as a disposition of the taxpayer's entire interest in 
an activity for purposes of section 469(g) and the rules to be contained 
in Sec. 1.469-6T (relating to the treatment of losses upon certain 
dispositions of passive and former passive activities).
    Example (3). (i) The facts are the same as in example (1), except 
that the taxpayer is a partner in a partnership that is the direct owner 
of the five condominium units. In its return for its taxable year ending 
on November 30, 1989, the partnership treats the five units as a single 
activity. (See paragraph (k)(5) of this section for a rule providing 
that the units are treated as a single activity only if such treatment 
is reflected on a schedule attached to the partnership's return.) The 
partnership sells unit E on November 1, 1990.
    (ii) Paragraph (k)(2)(ii) of this section provides that a taxpayer 
who holds rental real estate undertakings through a passthrough entity 
must treat those undertakings as a single rental real estate undertaking 
if they are treated as a single activity on the applicable return of the 
passthrough entity. Under paragraph (k)(4) of this section, the 
applicable return of the partnership for the taxpayer's 1989 taxable 
year is the partnership's return for its taxable year ending on November 
30, 1989. Accordingly, the taxpayer must treat the five condominium 
units as a single rental real estate undertaking (and thus as part of 
the same activity) for 1989 because they are treated as a single 
activity on

[[Page 475]]

the partnership's return for its taxable year ending in 1989.
    (iii) Under paragraph (k)(3) of this section, the taxpayer must 
continue treating the condominium units as part of the same activity for 
taxable years after 1989. Accordingly, as in example (2), the five 
condominium units are treated as part of the same activity for 1990, and 
the sale of unit E in 1990 cannot be treated as a disposition of the 
taxpayer's interest in an activity for purposes of section 469(g) and 
the rules to be contained in Sec. 1.469-6T.
    Example (4). (i) The taxpayer owns a shopping center and a vacant 
lot that are separate rental real estate undertakings (within the 
meaning of paragraph (k)(1)(ii) of this section). The taxpayer rents 
space in the shopping center to various tenants and rents the vacant lot 
to a parking lot operator. Most of the unadjusted basis of the property 
used in the shopping-center undertaking (taking into account the land on 
which the shopping center is built) is subject to the allowance for 
depreciation, but no depreciable property is used in the parking-lot 
undertaking.
    (ii) This paragraph (k) provides rules for identifying rental real 
estate activities (including the rule in paragraph (k)(2)(i) of this 
section that permits a taxpayer to treat two or more rental real estate 
undertakings as a single activity). Paragraph (k)(6) of this section 
provides, however, that these rules do not apply to a rental real estate 
undertaking if less than 30 percent of the unadjusted basis of the 
property used in the undertaking is subject to the allowance for 
depreciation. Thus, the taxpayer may not combine the parking-lot 
undertaking, which includes no depreciable property, with the shopping-
center undertaking or any other rental real estate undertaking under 
paragraph (k)(2)(i) of this section. Accordingly, the parking lot 
undertaking is treated as a separate activity under paragraph (b)(1) of 
this section.
    Example (5). (i) The facts are the same as in example (4), except 
that the shopping center and the vacant lot are at the same location 
(within the meaning of paragraph (c)(2)(iii) of this section) and are 
part of the same rental real estate undertaking (within the meaning of 
paragraph (k)(1)(ii) of this section). Taking into account the property 
used in the shopping center operations (including the land on which the 
shopping center is built) and the vacant lot, 50 percent of the 
unadjusted basis of the property used in the undertaking is subject to 
the allowance for depreciation.
    (ii) In this case, the vacant lot is used in a rental real estate 
undertaking in which depreciable property is also used. Moreover, the 
exception in paragraph (k)(6) of this section does not apply to the 
undertaking consisting of the shopping center and the parking lot 
because at least 30 percent of unadjusted basis of the property used in 
the undertaking is subject to the allowance for depreciation. 
Accordingly, the taxpayer may combine the undertaking with other rental 
real estate undertakings and treat the combined undertakings as a single 
activity under paragraph (k)(2)(i) of this section.

    (l) [Reserved]
    (m) Consolidated groups--(1) In general. The activities of a 
consolidated group (within the meaning of Sec. 1.469-1T(h)(2)(ii)) and 
of each member of such group shall be determined under this section as 
if the consolidated group were one taxpayer.
    (2) Examples. The following examples illustrate the application of 
this paragraph (m). In each example, the facts, analysis, and 
conclusions relate to a single taxable year.

    Example (1)  (i) Corporations M, N, and O are the members of a 
consolidated group (within the meaning of Sec. 1.469-1T(h)(2)(ii)). 
Under Sec. 1.469-1T(h)(4)(i)(A) and (ii), the consolidated group and 
its members are treated as closely held corporations (within the meaning 
of Sec. 1.469-1T(g)(2)(ii)). Each member of the consolidated group owns 
a two-percent interest in partnership X and a two-percent interest in 
partnership Y, and owns interests in a number of trade or business 
undertakings (within the meaning of paragraph (f)(1)(ii) of this 
section) through the partnerships. Each of these undertakings is 
directly owned by partnership X or Y, and all the undertakings of 
partnerships X and Y are controlled by the same interests (within the 
meaning of paragraph (j) of this section) and are similar (within the 
meaning of paragraph (f)(4) of this section). The employees of the 
consolidated group and the shareholders of its common parent do not 
participate in the undertakings that the member corporations own through 
the partnerships.
    (ii) Paragraph (f)(2)(i) of this section provides that trade or 
business undertakings that are similar and controlled by the same 
interests are treated as part of the same activity of the taxpayer if 
the taxpayer owns interests in the undertakings through the same 
passthrough entity. In this case, the member corporations own interests 
in similar, commonly-controlled undertakings through both partnerships, 
and such interests are treated under this paragraph (m) as interests 
owned by one taxpayer (the consolidated group). Accordingly, the member 
corporations' interests in the undertakings owned through partnership X 
are treated as part of the same activity of the consolidated group, and 
their interests in the undertakings owned through partnership Y are 
treated similarly.

[[Page 476]]

    Example (2) . (i) The facts are the same as in example (1), except 
that each member of the consolidated group owns a five-percent interest 
in partnership X and a five-percent interest in partnership Y.
    (ii) Paragraph (f)(2)(ii) of this section provides that trade or 
business undertakings that are similar and controlled by the same 
interests are treated as part of the same activity of the taxpayer if 
the taxpayer owns a direct or substantial indirect interest in each such 
undertaking. In this case, the member corporations own, in the 
aggregate, a 15-percent interest in partnership X and a 15-percent 
interest in partnership Y, and such interests are treated under this 
paragraph (m) as interests owned by one taxpayer (the consolidated 
group). Thus, the consolidated group owns a substantial indirect 
interest in the similar, commonly-controlled undertakings owned by 
partnerships X and Y (see paragraph (f)(3)(i) of this section). 
Accordingly, the member corporations' interests in the undertakings 
owned through partnerships X and Y are treated as part of the same 
activity of the consolidated group.

    (n) Publicly traded partnerships. The rules of this section shall 
apply to a taxpayer's interest in business and rental operations held 
through a publicly traded partnership (within the meaning of section 
469(k)(2)) as if the taxpayer had no interest in any other business and 
rental operations. The following example illustrates the application of 
this paragraph (n):

    Example. (i) The taxpayer, an individual, owns a 20-percent interest 
in partnership X and a 15-percent interest in partnership Y. Partnership 
X directly owns a hotel (``hotel 1'') and a commercial office building 
(``building 1''). Partnership Y directly owns two hotels (``hotels 2 and 
3'') and two commercial office buildings (``buildings 2 and 3''). Each 
of the three hotels is a separate trade or business undertaking (within 
the meaning of paragraph (f)(1)(ii) of this section), and each of the 
three office buildings is a separate rental real estate undertaking 
(within the meaning of paragraph (k)(1)(ii) of this section). The three 
hotel undertakings are similar (within the meaning of paragraph (f)(4) 
of this section) and are controlled by the same interests (within the 
meaning of paragraph (j) of this section). Partnership X is not a 
publicly traded partnership (within the meaning of section 469(k)(2)). 
Partnership Y, however, is a publicly traded partnership and is not 
treated as a corporation under section 7704.
    (ii) This paragraph (n) provides that the rules of this section 
apply to a taxpayer's interest in business and rental operations held 
through a publicly traded partnership as if the taxpayer had no interest 
in any other business and rental operations. Thus, undertakings owned 
through partnership Y may be treated as part of the same activity under 
the rules of this section, but an undertaking owned through partnership 
Y and an undertaking that is not owned through partnership Y may not be 
treated as part of the same activity.
    (iii) Paragraph (f)(2)(i) of this section provides that a taxpayer's 
interests in two or more trade or business undertakings that are similar 
and controlled by the same interests are treated as part of the same 
activity if the taxpayer owns interests in each undertaking through the 
same passthrough entity. Partnership Y's hotel undertakings (i.e., 
hotels 2 and 3) are similar and are controlled by the same interests. In 
addition, the taxpayer owns interests in both undertakings through the 
same partnership. Accordingly, the taxpayer's interests in partnership 
Y's hotel undertakings are treated as part of the same activity.
    (iv) The hotel undertaking owned through partnership X (i.e., hotel 
1) and the hotel undertakings owned through partnership Y are similar 
and controlled by the same interests, and the taxpayer owns a 
substantial indirect interest in each of the undertakings (see paragraph 
(f)(3)(i) of this section). Thus, the three undertakings would 
ordinarily be treated as part of the same activity under paragraph 
(f)(2)(ii) of this section. Under this paragraph (n), however, 
undertakings that are owned through a publicly traded partnership cannot 
be treated as part of the same activity as any undertaking not owned 
through that partnership. Accordingly, the hotel undertaking that the 
taxpayer owns through partnership X and the hotel undertakings that the 
taxpayer owns through partnership Y are treated as two separate 
activities.
    (v) Paragraph (k)(2)(i) of this section provides that, with certain 
exceptions, a taxpayer may treat two or more rental real estate 
undertakings as a single activity or as separate activities. Thus, the 
taxpayer's interests in the rental real estate undertakings owned 
through partnership Y (i.e., buildings 2 and 3) may be treated as a 
single activity or as separate activities. Under this paragraph (n), 
however, undertakings that are owned through a publicly traded 
partnership cannot be treated as part of the same activity as any 
undertaking not owned through that partnership. Accordingly, the 
taxpayer's interest in the rental real estate undertaking owned through 
partnership X (building 1) cannot be treated as part of an activity that 
includes any rental real estate undertaking owned through partnership Y.

    (o) Elective treatment of undertakings as separate activities--(1) 
Applicability.

[[Page 477]]

This paragraph applies to a taxpayer's interest in any undertaking 
(other than a rental real estate undertaking (within the meaning of 
paragraph (k)(1)(ii) of this section)) that would otherwise be treated 
under this section as part of an activity that includes the taxpayer's 
interest in any other undertaking.
    (2) Undertakings treated as separate activities. Except as otherwise 
provided in this paragraph (o), a person (including a passthrough 
entity) shall treat an undertaking to which this paragraph (o) applies 
as an activity separate from the remainder of the activity in which such 
undertaking would otherwise be included for a taxable year if and only 
if, for such taxable year or any preceding taxable year, such person 
made an election with respect to such undertaking under this paragraph 
(o).
    (3) Multiple undertakings treated as a single activity by 
passthrough entity. A person (including a passthrough entity) must treat 
interests in two or more undertakings as part of the same activity for a 
taxable year if any passthrough entity through which the person holds 
such undertakings treats such undertakings as part of the same activity 
on the applicable return of the passthrough entity for the taxable year 
of such person.
    (4) Multiple undertakings treated as a single activity for a 
preceding taxable year. If a person (including a passthrough entity) 
treats undertakings as part of the same activity on such person's return 
for a taxable year ending after August 9, 1989, such person may not 
treat such undertakings as part of different activities under this 
paragraph (o) for any subsequent taxable year.
    (5) Applicable return of passthrough entity. For purposes of this 
paragraph (o), the applicable return of a passthrough entity for a 
taxable year of a taxpayer is the return reporting the passthrough 
entity's income, gain, loss, deductions, and credits taken into account 
by the taxpayer for such taxable year.
    (6) Participation. The following rules apply to multiple activities 
(the ``separate activities'') that would be treated as a single activity 
(the ``original activity'') if the taxpayer's activities were determined 
without regard to this paragraph (o):
    (i) The taxpayer shall be treated as materially participating 
(within the meaning of Sec. 1.469-5T) for the taxable year in the 
separate activities if and only if the taxpayer would, but for the 
application of this paragraph (o), be treated as materially 
participating for the taxable year in the original activity.
    (ii) The taxpayer shall be treated as significantly participating 
(within the meaning of Sec. 1.469-5T(c)(2)) for the taxable year in the 
separate activities if and only if the taxpayer would, but for the 
application of this paragraph (o), be treated as significantly 
participating for the taxable year in the original activity.
    (7) Election--(i) In general. A person makes an election with 
respect to an undertaking under this paragraph (o) by attaching the 
written statement described in paragraph (o)(7)(ii) of this section to 
such person's return for the taxable year for which the election is made 
(see paragraph (o)(2) of this section).
    (ii) Written statement. The written statement required by paragraph 
(o)(7)(i) of this section must--
    (A) State the name, address, and taxpayer identification number of 
the person making the election;
    (B) Contain a declaration that an election is being made under Sec. 
1.469-4T(o);
    (C) Identify the undertaking with respect to which such election is 
being made; and
    (D) Identify the remainder of the activity in which such undertaking 
would otherwise be included.
    (8) Examples. The following examples illustrate the application of 
this paragraph (o):

    Example (1). (i) During 1989, the taxpayer, an individual whose 
taxable year is the calendar year, acquires and is the direct owner of 
ten grocery stores. The operations of each grocery store are treated 
under paragraph (c)(1) of this section as a single undertaking that is 
separate from other undertakings (a ``grocery-store undertaking''), and 
the taxpayer's interests in the grocery-store undertakings would be 
treated as part of the same activity of the taxpayer under paragraph 
(f)(2) of this section.

[[Page 478]]

    (ii) Paragraph (o)(2) of this section provides that, with certain 
exceptions, undertakings that would be treated as part of the same 
activity under other rules in this section may, at the election of the 
taxpayer, be treated as separate activities. Thus, the taxpayer may 
elect to treat each grocery-store undertaking as a separate activity for 
1989. Alternatively, the taxpayer may combine grocery-store undertakings 
in any manner and treat each combination of undertakings (and each 
uncombined undertaking) as a separate activity for 1989. In either case, 
the election must be made by attaching the written statement described 
in paragraph (o)(7)(ii) of this section to the taxpayer's 1989 return.
    Example (2). (i) The facts are the same as in example (1). In 
addition, the taxpayer, in 1989, elects to treat each grocery-store 
undertaking as a separate activity and participates for 15 hours in each 
of the grocery-store undertakings.
    (ii) The taxpayer's interest in each grocery-store undertaking is 
treated, under paragraph (o)(2) of this section, as a separate activity 
of the taxpayer for 1989 (a ``grocery-store activity''). In 1989, 
however, the taxpayer participates for more than 100 hours in the 
activity in which the undertakings would be included (but for the 
election to treat the grocery-store undertakings as separate activities) 
and would be treated under Sec. 1.469-5T(c)(2) as significantly 
participating in such activity. Accordingly, the taxpayer is treated 
under paragraph (o)(6)(ii) of this section as significantly 
participating in each of the grocery-store activities for 1989.
    Example (3). (i) The facts are the same as in example (1). In 
addition, the taxpayer, in 1989, elects to treat each grocery-store 
undertaking as a separate activity. The taxpayer does not participate in 
any of the grocery-store undertakings in 1989 or 1990, and sells one of 
the grocery stores in 1990.
    (ii) As in example (2), the taxpayer's interests in each grocery-
store undertaking is treated, under paragraph (o)(2) of this section, as 
a separate activity of the taxpayer for 1989. Because the taxpayer 
elected to treat the undertakings as separate activities for a preceding 
taxable year (1989), each grocery-store undertaking is also treated, 
under paragraph (o)(2) of this section, as a separate activity of the 
taxpayer for 1990. In addition, each of the taxpayer's grocery-store 
activities is a passive activity for 1989 and 1990 because the taxpayer 
does not participate in any of the grocery store undertakings for 1989 
and 1990. Accordingly, the taxpayer's sale of the grocery store will 
generally be treated as a disposition of the taxpayer's entire interest 
in a passive activity for purposes of section 469(g) and the rules to be 
contained in Sec. 1.469-6T (relating to the treatment of losses upon 
certain dispositions of passive and former passive activities).
    Example (4). (i) The facts are the same as in example (3), except 
that the taxpayer elects to treat the grocery-store undertakings as two 
separate activities. One of the activities includes three grocery-store 
undertakings, and the store sold in 1990 is part of this activity. The 
other activity includes the seven remaining grocery-store undertakings.
    (ii) Paragraph (o)(4) of this section provides that a person who 
treats undertakings as part of the same activity for a taxable year 
ending after August 9, 1989, may not elect to treat those undertakings 
as separate activities for a subsequent taxable year. The grocery store 
sold in 1990 was treated for 1989 as part of an activity that includes 
two other grocery stores. Thus, those three stores must be treated as 
part of the same activity for 1990. Accordingly, the taxpayer's sale of 
the grocery store cannot be treated as a disposition of the taxpayer's 
entire interest in a passive activity for purposes of section 469(g) and 
the rules to be contained in Sec. 1.469-6T.
    Example (5). (i) The facts are the same as in example (1), except 
that the taxpayer is a partner in a partnership that acquires and is the 
direct owner of the ten grocery stores. The taxable year of the 
partnership ends on November 30, and the partnership acquires the 
grocery stores in its taxable year ending on November 30, 1989. In its 
return for that taxable year, the partnership treats the grocery-store 
undertakings as a single activity.
    (ii) Paragraph (o)(3) of this section provides that a person who 
holds undertakings through a passthrough entity may not elect to treat 
those undertakings as separate activities if they are treated as part of 
the same activity on the applicable return of the passthrough entity. 
Under paragraph (o)(5) of this section, the applicable return of the 
partnership for the taxpayer's 1989 taxable year is the partnership's 
return for its taxable year ending on November 30, 1989. Accordingly, 
the taxpayer must treat the grocery-store undertakings as a single 
activity for 1989 because those undertakings are treated as a single 
activity on the partnership's return for its taxable year ending in 
1989.
    (iii) Under paragraph (o)(4) of this section, the taxpayer must 
continue treating the grocery-store undertakings as part of the same 
activity for taxable years after 1989. This rule applies even if the 
partnership subsequently distributes its interest in the grocery stores 
to the taxpayer, and the taxpayer becomes the direct owner of the 
grocery-store undertakings.

    (p) Special rule for taxable years ending before August 10, 1989--
(1) In general. For purposes of applying section 469 and the regulations 
thereunder for a taxable year ending before August 10, 1989, a 
taxpayer's business and rental

[[Page 479]]

operations may be organized into activities under the rules or 
paragraphs (b) through (n) of this section or under any other reasonable 
method. For example, for such taxable years a taxpayer may treat each of 
the taxpayer's undertakings as a separate activity, or a taxpayer may 
treat undertakings that involve the provision of similar goods or 
services as a single activity.
    (2) Unreasonable methods. A method of organizing business and rental 
operations into activities is not reasonable if such method--
    (i) Treats rental operations (within the meaning of paragraph (d)(3) 
of this section) that are not ancillary to a trade or business activity 
(within the meaning of Sec. 1.469-1T(e)(2)) as part of a trade or 
business activity;
    (ii) Treats operations that are not rental operations and are not 
ancillary to a rental activity (within the meaning of Sec. 1.469-
1T(e)(3)) as part of a rental activity;
    (iii) Includes in a passive activity of a taxpayer any oil or gas 
well that would be treated, under paragraph (e)(1) of this section, as a 
separate undertaking in determining the taxpayer's activities;
    (iv) Includes in a passive activity of a taxpayer any interest in a 
dwelling unit that would be treated, under paragraph (K)(7) of this 
section, as a separate activity of the taxpayer; or
    (v) Is inconsistent with the taxpayer's method of organizing 
business and rental operations into activities for the taxpayer's first 
taxable year beginning after December 31, 1986.
    (3) Allocation of dissallowed deductions in succeeding taxable year. 
If any of the taxpayer's passive activity deductions or the taxpayer's 
credits from passive activities are disallowed under Sec. 1.469-1T for 
the last taxable year of the taxpayer ending before August 10, 1989, 
such disallowed deductions or credits shall be allocated among the 
taxpayer's activities for the first taxable year of the taxpayer ending 
after August 9, 1989, using any reasonable method. See Sec. 1.469-
1T(f)(4).

[T.D. 8253, 54 FR 20542, May 12, 1989]