Even though the legislation was enacted 28 years ago, in 1986,1 the rules governing the handling of passive activity gains and losses have remained a bit of a mystery for some tax practitioners when it comes to applying the rules to specific fact situations.2 Moreover, the shift in thinking on the part of the Internal Revenue Service as to how to view limited liability companies (LLCs) and, quite likely, other newly minted entities created in recent years, has contributed to the mystery. This article reviews the basic rules drawn from the 1986 legislation as likely to be applied currently.