SECTION 4. REPORTING AND

EFFECT ON PARTNERS AND SHAREHOLDERS

.01 In general . If an eligible entity calculates QPAI and W–2 wages at the entity level, then each partner (except for a partner that is not a qualifying partner with respect to an eligible § 861 partnership) or shareholder is allocated (in accordance with section 3.06 of this revenue procedure) its share of QPAI (which may be less than zero) and W–2 wages from the eligible entity, and the partner or shareholder then must combine those amounts with the partner’s or shareholder’s QPAI and W–2 wages from other sources, if any. See § 1.199–5T(b)(1)(ii) and (c)(1)(ii). If an eligible entity computes QPAI and W–2 wages at the entity level, no partner or shareholder receiving an allocation of the entity’s QPAI and W–2 wages may recalculate its share of QPAI or W–2 wages from the entity using another cost allocation method (although the partner or shareholder must adjust its share of QPAI from the entity to account for certain disallowed losses or deductions, and for the allowance of suspended losses or deductions). In addition, no partner or shareholder of such an eligible entity that receives an allocation of the entity’s QPAI and W–2 wages may take into account any of the items from that entity that go into the computation of the partner’s or shareholder’s share of QPAI and W–2 wages from that entity in calculating its QPAI and W–2 wages from any other source (for example, in allocating and apportioning deductions from another source or in determining whether a threshold or de minimis rule applies). If a partnership or S corporation, whether by ineligibility or choice, does not compute QPAI and W–2 wages at the entity level, then each partner or shareholder is allocated (in accordance with §§ 702 and 704, or § 1366, respectively) its share of the entity’s items (including items of income, gain, loss, and deduction, CGS allocated to such items of income, gross receipts in

2007–23 I.R.B. 1347 June 4, 2007

(b) does not materially participate in the activities of the partnership as determined in section 5.05 of this revenue procedure,

(c) does not hold a profits or capital interest in the partnership of 5 percent or greater (determined after aggregating the partner’s interests with those of any related persons as defined in section 5.06 of this revenue procedure), or

(d) is not an ineligible entity under section 3.02 of this revenue procedure.

.05 Material participation . (a) Indi- vidual partners . For purposes of section 5.04(b) of this revenue procedure, whether an individual partner materially participates in the activities of the partnership (treating all the partnership’s activities as a single activity) is determined under § 1.469–5(f)(1); § 1.469–5T(a)(1) through (3) and (7), (b)(2)(ii) and (iii), (f)(2) through (4), and (k) Examples 1 through 3, 7 and 8 ; and section 5.05(b) of this revenue procedure.

(b) Partners that are not individuals . For purposes of section 5.04(b) of this revenue procedure, a partner that is not an individual is treated as materially participating in the activities of the partnership if the partner’s owners, directors, officers, employees, or fiduciaries are treated collectively as materially participating in the activities of the partnership under the rules described in section 5.05(a) of this revenue procedure. The activities of the partner’s owners, directors, officers, employees, and fiduciaries must be combined and treated as the activities of the partner for this purpose. For example, assume that X, a corporation, is a limited partner in a partnership. A, an employee of X, and B, an officer of X, participate in the activities of the partnership for 300 hours and 201 hours, respectively, during the partnership’s taxable year. Under these facts, X is treated as materially participating in the partnership for the taxable year.

.06 Related persons . For purposes of this revenue procedure, persons are related if they bear a relationship to each other that is described in § 267(b) or § 707(b), disregarding § 267(e)(1) and (f)(1)(A).