LLC member not limited partner sec. 469 purposes.

• Author: Madden, David

In Gregg, 11/29/00, an Oregon district court treated the taxpayer, the founding member of a limited liability company (LLC), as materially participating in its business for Sec. 469 purposes. The taxpayer claimed ordinary losses originating from the LLC'S activities. The IRS recharacterized the losses as passive and argued that, because the taxpayer's business entity ,afforded him limited liability, his LLC interest was analogous to a limited partnership interest. The court ruled in favor of the taxpayer based on the absence of any regulation asserting that an LLC member should be treated as a limited partner.

Sec. 469

Generally, Sec. 469 imposes a limit on the losses and credits a taxpayer can take for a passive activity. Sec. 469(c) specifies that a passive activity is any activity that involves the conduct of any trade or business and in which the taxpayer does not materially participate. Further, under Sec. 469(h), a taxpayer participates in an activity materially only if he has involvement in the activity's operations on a regular, continuous and substantial basis.

Temp. Regs. Sec. 1.469-5T(a) sets out seven tests for material participation in a particular activity. Generally, a taxpayer must meet one of the seven tests to satisfy the material participation requirement:

1. The individual participates in the activity, for more than 500 hours during such year;

2. The individual's participation in the activity for the tax year is substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year;

3. The individual participates in the activity for more than 100 hours during the tax year, and such individual's participation in the activity for the tax year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year;

4. The activity is a significant participation activity for the tax year, and the individual's aggregate participation in all significant participation activities during such year exceeds 500 hours;

5. The individual materially participated in the activity for any five tax years during the 10 tax years that immediately precede the tax year;

6. The activity is a personal service activity, and the individual materially participated in the activity for any three tax years preceding the tax year; or

7. Based on all facts and circumstances, the...