In Wade v. Commissioner, T.C. Memo. 2014-169, the Court found that the taxpayers, a husband and wife who owned stock in two S corporations, had materially participated in the activities the corporations, which finding enabled the taxpayers to take a loss deduction in excess of $3 million.

The IRS took the position that the loss deduction should mostly be disallowed because it constituted a passive activity, citing I.R.C. sec. 469 and its regulations. The taxpayers took the position that Mr. Wade participated in the companies’ activities on a regular, continuous, and substantial basis during the year at issue. Treas. Reg. sec. 1.469-5T(a)(7).

The Court agreed with the taxpayers, finding that Mr. Wade had spent more than 100 hours during the year participating in the activities of each corporation. The Court noted that Mr. Wade focused on product development and customer retention, and that while he had taken a step back from his previous participation in the businesses, he nevertheless still played a major role. Further, the court held that Mr. Wade’s participation was sufficient to establish material participation for both he and his wife.

This holding enabled the taxpayers to utilize substantial carryback losses to the two previous tax years.