Tax Court - LLC members aren't by definition (passive) limited partners

[kcjenkins]

A mediocre article today: http://online.wsj.com/article/SB124698320557906557.html

The Actual Tax Court decision:

http://www.ustaxcourt.gov/InOpHistoric/Garnett.TC.WPD.pdf

And the best response I've seen yet, from one of my most highly trusted sources:

"Unfortunately, the only mention of self-employment taxes by the court was the statement that Prop. Reg. 1.1402(a)-2(h) contains a definition of "limited partner" that, by its terms, is "Solely for purposes of section 1402(a)(13)". There was no other discussion of self-employment taxes.

The thrust of the case was whether an LLC member automatically has an "interest in a limited partnership as a limited partner", as that term is used in IRC 469(h)(2). The court concluded that an LLC membership interest was not the same as the interest a limited partner has in a limited partnership, based on the Regs under IRC 469 and the 1986 Committee reports on the adoption of TRA 86 (including IRC 469).

Note that an activity can be passive with regard to a general partner that does not materially participate, but still generate self-employment income.

Ralph H. Weintraub, CPA

Los Angeles, CA"