Passive losses cannot be used to offset income from non-passive activities. The petitioners, a married couple, operated a family business that had its genesis in the husband's father who started a lumber company in the late 1970s. For planning purposes, the business developed into a real estate development business comprised of an S corporation and a partnership. The enterprise incurred losses and the issue was whether the separate entities comprised a single activity under Treas. Reg. Sec. 1.469-4(c) for purposes of the material participation 500-hour test. The court examined the factors under the regulation for determining the presence of an "appropriate economic unit," and determined that the S corporation and the partnership had common control and conducted the same type of business activity. The court also determined that the entities were interdependent, used common employees and combined their financial reporting. The petitioners were able to satisfy the 500-hour test in the combined entities based on witness testimony and phone records of business activity. Lamas v. Comr., T.C. Memo. 2015-59.