The Tax Court and the U.S. Court of Federal Claims Agree: Members of LLCs and LLPs Are Not to be Treated as Limited Partners

Abstract

<p>In a decision in late June, 2009, the United States Tax Court<strong>1 </strong>held that ownership interests in a limited liability company (LLC) or limited liability partnership (LLP) should not be treated as limited partners in a limited partnership.<strong>2 </strong>About a month later, the U.S. Court of Federal Claims decided a case<strong>3 </strong>that went a notch beyond the holding in the earlier Tax Court case. That provides major support for the view that the statute which states “. . . [e]xcept as provided in regulations, <em>no interest in a limited partnership as a limited partner</em> <em>shall be treated as an interest with respect to which a taxpayer materially participates”</em><strong>4</strong> does not require members of LLCs and LLPs to be limited in how the material participation test<strong>5 </strong>can be met.<strong>6 </strong>That at least expands the opportunities to meet the material participation test to the seven tests that are ordinarily available to taxpayers<strong>7 </strong>rather than the three tests specified in the temporary regulations for limited partners,<strong>8 </strong>thus increasing the chances for meeting the required standard of material participation on a regular, continuous and substantial basis.<strong>9 </strong>As noted below, the decision by the U.S. Court of Federal Claims goes a step further in favoring the taxpayer.</p>