Laura Davis is a member in a limited liability company that has historically bee
ID: 2372188 • Letter: L
Question
Laura Davis is a member in a limited liability company that has historically been profitable but is expecting to generate losses in the near future because of a weak local economy. In addition to the hours she works as an employee of a local business, she currently spends approximately 150 hours per year helping to manage the LLC. Other LLC members each work approximately 175 hours per year in the LLC, and the time Laura and other members spend managing the LLC has remained constant since she joined the company three years ago. Laura's tax basis and amount at-risk are large compared to her share of projected losses; however, she is concerned that her ability to deduct her share of the projected losses will be limited by the passive activity loss rules.
As an LLC member, will Laura's share of losses be presumed to be passive as they are for limited partners? Why or why not? {Hint: See §469(h)(2), Garnett v. Commissioner,132 T.C. 368 (2009), and Prop. Reg. § 1.469-5(e)(3)(i).}
Explanation / Answer
The Tax Court held on Tuesday that an LLC member who materially participated in the management of an LLC is not treated as a limited partner and is therefore not subject to the passive loss limitations under IRC § 469 (Newell, TC Memo 2010-23).
The taxpayer owned one-third of a California LLC that owned and operated a country club, golf course and restaurant. The taxpayer was the managing member of the LLC and actively participated in running the business (under the material participation rules of Temp. Treas. Reg. § 1.469-5T(a)(4)). The taxpayer’s distributive share of the business’s losses amounted to $6,020,519 in the years 2001–2003; the taxpayer deducted those losses on his federal tax returns.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.