You've raised the issue that has been bothering me too. The activity is totally passive but the income as treated as nonpassive. But there doesn't seem to be any clear answer as to how the recharacterization to nonpassive per Reg 1.469-2T(F)(4) affects the obligation to report the income NIIT under 1411(c)(2).
1411 cites to Section 469, and 469(h)(2) says "Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates." The reg in question never discusses material participation, only the treatment of the income as nonpassive. There seems to be a disconnect between the 2 concepts, even though they are related. So, I am concerned that if I just check the box for material participation, I am not handling it correctly.
I don't know why TurboTax has a question for Oil and Gas investments which have similar recharacterization but didn't include a Q and A for lending activities.
