Final answer:
The statement about passive activity loss rules being identical for S corporations and partnerships is false, as the rules differ, especially regarding how losses are deducted and allocated.
Step-by-step explanation:
The statement that the application of passive activity loss rules is identical for S corporations and partnerships is false. While there are similarities in the way passive activity losses are treated by the IRS for both S corporations and partnerships, there are notable differences as well. For instance, the rules about how losses can be deducted and how they are allocated among shareholders or partners differ.
In the case of S corporations, losses are limited to the shareholder’s adjusted basis in the corporation's stock and any debt the corporation owes to that shareholder. Partnerships have a different set of provisions relating to the allocation of losses and the basis limitations, including an additional limitation based on the partner's at-risk amount in the partnership.