Taxpayers Handed Another Victory on the Issue of Materially Participating LLC Members and the Passive Loss Rules

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The Tax Court held this week that the passive loss limitations under IRC 469 do not suspend losses from an LLC member who materially participated in the management of an LLC.

In the case (Newell, TC Memo 2010-23) The IRS disallowed losses of a taxpayer ruling that the losses were suspended under the passive activity loss rules of IRC 469.  The IRS conceded that the taxpayers materially participated in the business, but argued that the taxpayer’s interest in the LLC must be treated as a limited partner interest, which under IRC 469(h)(2) cannot be treated as an interest in which the taxpayer materially participates.

The Tax Court held that 469(h)(2) did not apply.

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