The IRS is close to releasing new rules aimed at narrowing the differences in how LLCs and limited partners are treated under tax code Section 469(h)(2), according to Dianna Miosi, special counsel to the IRS associate chief counsel for passthroughs and special industries. Speaking at the American Bar Association Section of Taxation May meeting, Miosi did not provide any guidance about what the changes would be, but said the different treatment allowed under the tax code is a concern for the administration.
Miosi said IRS has lost five separate cases in which it has challenged LLC members' filings claiming that their passive activity losses are not limited under current law and that changes to the regulations are needed. The courts have ruled in all the cases that members of the LLCs could qualify as materially participating in an activity under any of the seven tests available under the regulations to individuals other than limited partners.
Under the current regulations, limited partners are only considered to be “materially participating” if they meet the tougher standard of passing three of the seven tests.