Alice owns 100% of Medical Data, a C corporation, and 100% of Your Realtors, an S corporation. She worked full time for Medical Data (i.e., she materially participated in the entity), but Alice did not materially participate in Your Realtors. During the tax years 2015 through 2017, Your Realtors leased real estate to Medical Data.
Alice reported these rental amounts as passive activity income on her Schedule E, and she offset that income against passive activity losses from other entities. The IRS reclassified this rental income as non-passive income under Reg. § 1.469-2(f)(6). Who is right? Does § 469 apply to S corporations? Elaborate.