REVENUE RULE 90-56

1990-2 C.B. 102, 1990-28 I.R.B. 6.

Internal Revenue Service
Revenue Ruling

PASSIVE ACTIVITY LOSSES AND CREDITS; ALASKA PERMANENT FUND DIVIDENDS

Published: July 9, 1990

Section 469. - Passive Activity Losses and Credits Limited, 26 CFR 1.469-2T: Passive activity loss (temporary).

(Also Sections 163, 316; 1.316-1.)

Passive activity losses and credits; Alaska Permanent Fund Dividends. Alaska Permanent Fund Dividends do not constitute either investment income under section 163(d)(4)(B) of the Code or passive activity gross under section 1.469- 2T(c) of the temporary regulations. Rev. Rul. 85-39 amplified.

ISSUE

Do Alaska Permanent Fund Dividends constitute either 'investment income' as defined in section 163(d)(4)(B) of the Internal Revenue Code or 'passive activity gross income' as defined in section 1.469-2T(c) of the temporary Income Tax Regulations?

FACTS

Under article IX, section 15, of its constitution, Alaska must deposit at least 25 percent of its annual mineral income into the Alaska Permanent Fund. That section also provides that all income from the Alaska Permanent Fund must be deposited in the State's general fund unless otherwise provided by law. The Fund's manager may purchase only certain income-producing assets for the Fund, including government and corporate obligations, preferred and common stock of U.S. corporations, and equity interests in partnerships and other entities that invest in real estate. Alaska Stat. section 37.13.120(g) (Supp. 1989). Each year, the Alaska Commissioner of Revenue must transfer a portion of the Fund's income to a 'dividend fund,' from which the State of Alaska, through the Department of Revenue, pays a 'dividend' to eligible Alaska residents. See Alaska Stat. section 43.23.

LAW AND ANALYSIS

Article IX, Section 15, of the Alaska Constitution establishes that income of the Permanent Fund is income of the State of Alaska to be either deposited in the general fund or used in such other manner as may be provided by statute. Although the amount of the 'dividend' residents receive from the State of Alaska is measured by the Permanent Fund's income, the payments are not a distribution of that income. Instead, the payments are a distribution of State funds pursuant to section 43.23 of the Alaska Statutes for the purpose of encouraging individuals to establish and maintain residence in the State.

In Rev. Rul. 85-39, 1985-1 C.B. 21, the Internal Revenue Service ruled that 'dividends' paid by the State of Alaska pursuant to section 43.23 of the Alaska Statutes are includible in gross income under section 61 of the Code.

Section 163(d) of the Code generally prevents non-corporate taxpayers from deducting the amount of investment interest expense that exceeds net investment income. Section l63(d)(4)(B) defines 'investment income' as the sum of gross income from property held for investment (other than gross income attributable to the disposition of that property) plus net gain attributable to the disposition of property held for investment.

Under section l63(d)(5)(A) of the Code, 'property held for investment' includes any property that produces income of a type described in section 469(e)(1) (that is, gross income from interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business).

Alaska residents own no interest in the Fund's assets, because these assets belong to the State. See Alaska Const. art. IX, section 15; Alaska Stat. section 37.13.010. Therefore, payments the residents receive from the State of Alaska are not income from property they hold for investment and are not investment income. The residents may not include the payments in their net investment income to determine the investment interest deduction allowed under section 163(d)(1).

The fact that the distributions are labeled 'dividends' is not determinative of their character for purposes of the Internal Revenue Code. Section 316(a) of the Code defines 'dividend' as any distribution of property made by a corporation to its shareholders out of earnings and profits. Fund distributions the State of Alaska pays to its residents are not dividends as so defined. Thus, the State's payments are not 'dividends' for purposes of section 163(d).

Section 469 of the Code generally prevents certain taxpayers from deducting expenses from passive activities that exceed gross income from passive activities. Under section 1.469-2T(c) of the temporary regulations, 'passive activity gross income' includes an item of gross income only if that income is from a passive activity. Section 469(c) defines 'passive activity' as a trade or business activity in which the taxpayer does not materially participate, or a rental activity.

Alaska residents do not own an interest in the Fund's assets, and carry on no trade or business activity or rental activity through the Fund. The right to payments from the Alaska Permanent Fund is established, and can only be established, by maintaining residence in the State. Maintaining such residence is neither a trade or business activity nor a rental activity. Therefore, payments the residents receive from the State of Alaska are not passive activity gross income. The residents may not take the payments into account in computing their income or loss from any passive activity or item of property used in a passive activity.

HOLDING

Alaska Permanent Fund Dividends constitute neither 'investment income' as defined in section 163(d)(4)(B) of the Code nor 'passive activity gross income' as defined in section 1.469-2T(c) of the temporary regulations.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 85-39 is amplified.

DRAFTING INFORMATION

The principal author of this revenue ruling is Robert C. Stoddart, formerly of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information about this revenue ruling contact Margaret M. O'Connor on (202) 566-4751 (not a toll-free call).

Rev. Rul. 90-56, 1990-2 C.B. 102, 1990-28 I.R.B. 6.