Tax Lawyer's Blog

Joe Kristan provides a terrific brief of a summary judgment opinion issued this week by the Tax Court.

The issue involved Sec. 469(h)(2) which states,

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  IRS’s motion for Summary Judgment, in which it contended that Sec. 469(h)(2) operates to create an irrebuttable presumption that losses incurred by LLCs and LLLPs are passive losses regardless of the extent of the participation of  a stakeholder, was denied:

We do not believe that this rationale properly extends to interests in L.L.P.s and L.L.C.s. As previously discussed, members of L.L.P.s and L.L.C.s, unlike limited partners in State law limited partnerships, are not barred by State law from materially participating in the entities’ business.

Accordingly, it cannot be presumed that they do not materially participate.

For the full opinion see Garnett, 132 T.C. No. 19.

Joe thinks, and I agree, that the IRS wasn’t the sharpest shed in the knife on this one:

This is a stupid argument for the IRS to make. When Sec. 469(h) was written, LLCs and LLLPs barely existed.

The differences between these new entities and the old limited partnerships are profound, and it is common for LLC and LLLP members to work full time in roles analogous to general partners in limited partnerships.

The new entities just aren’t comparable to limited partnerships.

Read Joe’s post in it’s entirety.

In addition to his strong analysis of the Court’s ruling, he provides at the end of the post a nice and concise summary of the passive loss/material participation rules.

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