Other LLC Member / Limited Partner

[RitaB]

LLC has two members personally responsible for all debts and contributing 100% of capital to a trail riding venture. Five other members have not contributed anything to the business, nor are they responsible for any debts, but they have been paid for working at the stables. (They should be employees, not members, but the two "real" owners want to avoid paying for Workers Comp Insurance!) If these five members who are the equivalent of limited partners have guaranteed payments of $800 and their share of ordinary loss is $1000, they will still pay SE on the $800 guaranteed payments, right? (They cannot offset the guaranteed payments with the ordinary loss, correct?) Line 14 of K-1 needs to show "Code A = $800", I think, but since ATX leaves line 14 blank and I have to override the software to show $800 subject to SE, I have started thinking maybe I'm missing something.

[kcjenkins]

Both the GPs and the share of ordinary income from the LLC are subject to SE tax. So the loss should net with the GP, IF [big IF] they had 'basis' in the LLC. But since they have no basis, the loss is 'suspended', and the GP is all that will go to the SE.

[RitaB]

Both the GPs and the share of ordinary income from the LLC are subject to SE tax. So the loss should net with the GP, IF [big IF] they had 'basis' in the LLC. But since they have no basis, the loss is 'suspended', and the GP is all that will go to the SE.

Thanks for the response, KC. So we would both be overriding the software and entering A = $800 on line 14 of the K-1 in this example for the limited partners (other members).

However, from your first sentence: "Both the GPs and the share of ordinary income from the LLC are subject to SE tax," I take it that if the distributive share was a $1000 gain, you would figure SE on that as well for a limited partner (other member)? They would pay SE on $1800? From everything I've read (and it's a lot and somewhat frustrating, "not heard from IRS since 1997, 1998, no rules, section

1402(a)(13), blah, blah, blah") I would not figure SE on the distributive share (either gain or loss) for a limited partner.

Heck, there are some that would be so aggressive as to not figure SE on anybody's distributive share. I might go along with not figuring SE on the distributive share on a member-manager (general partner) if he had sufficient guaranteed payments on line 4 and the distributive share was truely a return of investment, but when there's no capital contributions, just earnings from conducting the business, I make it all subject to SE for a member-manager (general partner).

In the original post, I just could not figure out why the program left line 14 on the K-1 blank for a limited partner with guaranteed payments for labor contributed. I would think line 14 for a limited partner would have to equal the guaranteed payment regardless of the distributive share.

Did I mention that I really hate LLC's?

[kcjenkins]

The Tax Court has held in a series of cases that close isn't good enough here--see Norwood v. Commissioner (TC Memo 2000-84) where the court held that a "limited partnership must be created in the form prescribed by State law" in order for the partner to fall under §1402 (a)(13). Similar holdings are found in Cokes v. Commissioner 91 TC No. 19 and Anderson v. Commissioner, TC Memo 1990-461. Norwood also shoots down any §469 theory as well.

Since an LLC is not even a partnership, just 'taxed as' one, and being a limited member in an LLC is NOT a "limited partnership created in the form prescribed by State law", I do not believe the rules you refer to apply to the LLC member. In an LLC, when is a member's interest "general" and subject to SE tax vs. "limited, and therefore

exempt from SE tax?

I think I found the best answer in a Proposed Regulation §1.1402(a)-2. Yes it's proposed, but it's all we got right now. It lays out three tests - the 500 hour requirement, personal liability, and the ability to contract on behalf of the partnership.

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§1.1402(a)-2 Computation of net earnings from self-employment.

* * * * *

(d) * * * Except as otherwise provided in section 1402(a) and

paragraph (g) of this section, an individual's net earnings from

self-employment include the individual's distributive share (whether

or not distributed) of income or loss described in section 702(a)(8)

from any trade or business carried on by each partnership of which the

individual is a partner.

* * * * * * * *

(f) (skipped)

(g) Distributive share of limited partner.

An individual's net earnings from self-employment do not include the

individual's distributive share of income or loss as a limited partner

described in paragraph (h) of this section. However, guaranteed

payments described in section 707© made to the individual for

services actually rendered to or on behalf of the partnership engaged

in a trade or business are included in the individual's net earnings

from self-employment.

(h) Definition of limited partner--

(1) In general.

Solely for purposes of section 1402(a)(13) and paragraph (g) of this

section, an individual is considered to be a limited partner to the

extent provided in paragraphs (h)(2), (h)(3), (h)(4), and (h)(5) of

this section.

(2) Limited partner.

An individual is treated as a limited partner under this paragraph

(h)(2) unless the individual--

(i) Has personal liability (as defined in Section

301.7701-3((2)(ii) of this chapter for the debts of or claims

against the partnership by reason of being a partner;

(ii) Has authority (under the law of the jurisdiction in which the

partnership is formed) to contract on behalf of the partnership; or

(iii) Participates in the partnership's trade or business for more

than 500 hours during the partnership's taxable year.

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[RitaB]

I think I found the best answer in a Proposed Regulation §1.1402(a)-2. Yes it's proposed, but it's all we got right now. It lays out three tests - the 500 hour requirement, personal liability, and the ability to contract on behalf of the partnership.

An individual is treated as a limited partner under this paragraph

(h)(2) unless the individual--

(i) Has personal liability (as defined in Section

301.7701-3((2)(ii) of this chapter for the debts of or claims

against the partnership by reason of being a partner;

(ii) Has authority (under the law of the jurisdiction in which the

partnership is formed) to contract on behalf of the partnership; or

(iii) Participates in the partnership's trade or business for more

than 500 hours during the partnership's taxable year.

----------------------------

If at least one of the three tests is met (doesn't have to be all three), the member is not limited. My five meet none of the three tests. (The business started 11/08/06). I'm good! Thanks!

(Edit: I have no idea why that smiley thing showed up in the quote of your post; I didn't do it.)