Thanks Rick. The income on line 1 is the only box filled it.
I follow all that you say and had read the example you cited. But I have since read Regs § 1.1411-4 and 1.1411-5. They lead me to the conclusion that I owe the NIIT pursuant to section 1411 because the activity is passive even though the income is recharacterized as nonpassive by 1.469-2T(f)(4). The way I read the situation is that 1.1411-5(b)(2)(i) specifically identifies several recharacterizations that cause the trade or business to "not constitute a passive activity". Since (f)(4) is excluded from that list, I have to assume that is intentional and the reg does not intend the recharacterization of the income to result in a similar recharacterization of the activity.
If I check the box for materially participate, the program will exclude the income from the NIIT calculation on form 8960. That would likely raise a red flag to the IRS. From fiddling around, I see that if I answer yes to the question about the income being from oil and gas, the program puts the income in the nonpassive column but still counts it as NIIT on 8960. This seems to be the proper way to deal with it and comply with both sections 469 and 1411.
