LLC Member Participation Rules Proposed

By Bonner, Paul | Journal of Accountancy, March 2012 | Go to article overview

LLC Member Participation Rules Proposed


Bonner, Paul, Journal of Accountancy


The IRS issued proposed regulations (REG-109369-10) that would redefine "interest in a limited partnership as a limited partner" for purposes of determining material participation under the Sec. 469 passive loss rules.

Under Sec. 469(h)(2), losses from an interest in a limited partnership are presumptively treated as passive losses by providing that no limited partner in a limited partnership will be treated as materially participating in that interest. This treatment was originally put into the Code at a time when state laws (following the Uniform Limited Partnership Act of 1916) generally forbade limited partners from participating in the control of the partnership.

The IRS notes in the preamble to the proposed regulations that, under the Revised Uniform Limited Partnership Act of 1985, many states have adopted laws that allow limited partners to participate in the management and control of the partnership without losing their limited liability In addition, under state limited liability company (LLC) laws, LLC members do not lose their limited liability by participating in the management and conduct of the LLC'S business.

Nevertheless, the IRS has treated members of LLCs as limited partners for purposes of this rule. Various courts have disagreed with the IRS and have allowed LLC members to be treated as general partners (and therefore allowed them to prove material participation under the passive loss rules). …

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