Tax News

CCH (cch.taxgroup.com) reports:

  A husband and wife who owned, directly or through other entities, interests in seven limited liability partnerships (LLPs), two limited liability companies (LLCs), and two tenancies in common (TICs) were not limited partners in limited partnerships with respect to such interests; accordingly, the couple was not subject to Code Sec. 469(h)(2) and companion temporary regulations, which presumptively treat losses from certain limited partnerships as passive.

  CCH Comment.
Code Sec. 469(h)(2), enacted in 1986, and Temporary Reg. §1.469-5T(e)(1) and (2), adopted in 1988, predate the existence of LLPs, and the widespread availability of LLCs. Thus, they only contemplate limited or general partnership interests in a limited partnership entity, the nature of which is dependent on an identity between the management rights and liability exposure of the entity's owners. Limited partners of a limited partnership do not participate in the management of the business and do not have personal liability for the debts of the partnership. Entities such as LLPs and LLCs, however, offer owners the ability to materially participate in the management of the business, while at the same time enjoying limited liability for its obligations.

  Although the couple may have had limited liability with respect to all of the LLC and LLP investments, this did not preclude them under state law, as limited partners in a limited partnership would have been, from materially participating in the entities' businesses. Accordingly, in applying the material participation tests under the passive loss rules, the taxpayers were considered to be general partners, not limited partners. Similarly, the TIC properties were not limited partnerships, and the couple's interests in the TIC properties were not limited partnership interests.

  While the couple was identified on certain Schedules K-1, Partner's Share of Income, Deductions, Credits, etc, for the LLPs and one of the TIC properties as being a "limited partner" with respect to such investments, and the couple might have thereby potentially avoided self-employment tax because limited partner distributive shares are not considered self-employment income, this did not require that the couple be regarded as limited partners for purposes of the passive loss rules. The Schedule K-1 form did not provide the option of identifying their interests in the LLPs as that of a "limited liability partner," and the description on the K-1s did not conclusively establish the nature of their interests.

P.D. Garnett, 132 TC No. 19, Dec. 57,875

Other References:

 
Code Sec. 469

  CCH Reference - 2009FED ¶21,966.028

  CCH Reference - 2009FED ¶21,966.53

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 33,160
CCH Reference - TRC BUSEXP: 33,160.10