Rick, a part-time computer programmer, bought an interest in a coffee shop that is located near his house at the very end of the prior year. The coffee shop has one part-time employee, but Rick is actively engaged in the coffee shop operations. Rick does not have any other investments outside of a brokerage account that holds publicly traded stock and bonds. Which of the following statements is true?

Question

BlackTom AI · Accepted Answer

The question asks which statement about Rick’s status as a material participant under section 469 is true, given Rick is actively involved in the coffee shop’s operations and there is one part-time employee.
Option A states: Rick 400 hours and the employee 620 hours. Since the material participation rule generally requires 500 hours of participation in the activity by the taxpayer, Rick’s 400 hours do not meet the threshold, so this option is incorrect even though the employee’s hours are high.
Option B states: Rick 550 hours and the employee 1,200 hours. Here, Rick’s 550 hours exceed the 500-hour threshold for material participation, which makes him a material participant regardless of the other participant’s hours. This aligns with the 500-hour test for material participation.
Option C states: Rick 120 hours and the employee 120 hours. Neither person meets the 500-hour threshold, and the scenario does not fit the other tests (such as 100 hours with more time than any other participant). Therefore, Rick does not qualify as a material participant under 469 in this case, making this option incorrect.
Option D states: Rick 95 hours and the employee 85 hours. Both totals are well below any material participation thresholds, so Rick would not be a material participant here either. This option is incorrect for that reason.
Option E says: None of the above are true. Since Option B is true, this choice is false.
In summary, the only statement that correctly applies the material participation rule is Option B, because Rick’s 550 hours meet and exceed the 500-hour requirement to be considered a material participant under section 469, regardless of the employee’s higher hours. The other options fail to meet the 500-hour threshold or misinterpret the applicability of the rules, such as relying on comparisons that do not determine material participation when 500 hours is satisfied.

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