? for Bees Knees on Ptnshp LLC and SE

[Kram BergGold]

In a Nov 2007 post you said that a limited partner of an LLC can use all 7 tests for material participation. Do you still believe this to be true? I ask because publications I read recently still say you can only use 3 of them and I have a client who this affects.
If all 7 can be used my client gets to deduct his line 1 loss. If only 3 he does not. So the next question is, if all 7 are usable, do I offset his Schedule C positive income for SE purposes. I would think so as he is materially participating. What do you think?

[Gretel]

Not Bees, but you might want to check the link in my post (Thread about LLC members limited partners, 4 posts below) where Bees were nicely explains what he believes to be true now.

[Bees Knees]

TheTaxBook updates cite two court cases:

http://www.thetaxbook.com/updates/thetaxauthority_update_service/pdf/bulletin/7-10-2009-2_update.pdf

In both cases, the courts said an LLC member could use any of the 7 tests to establish that they materially participated in the activity, and thus were not subject to the passive loss rules.

I don't know whether IRS has accepted these defeats, or whether they are still trying to argue their case.

As to why other publications still say you can only use 3 of the 7, that is because that is what the regulations say. Each court case cited in TTB updates ruled against what the regulations say. Either these publications did not see the court cases, or they think IRS is still fighting the issue. Court cases can get overturned at the appeals level.

My opinion is we should try to stay current with what the latest court decisions say. If you have a client in this situation, print out the cited court cases and stick them in your client’s file so that you have substantial authority if IRS ever challenges your position.

As for the SE tax issue, see my posts that Gretel linked.

http://www.thetaxbook.com/forums/showthread.php?t=13979&highlight=member

SE taxes and passive loss rules are two different animals.

[Kram BergGold]

My case

So where the loss is on line 1 of the K-1 and my client meets one of the tests for material participation, I am going to deduct the loss. However as the loss is not a guarenteed payment I do not offset his Schedule C profit by the partnership loss. Doing this then matches the K-1 which has nothing for SE income or loss. I hope I have this right.

[Bees Knees]

That is the way I do it. You take the bad with the good. If you take the position that line 1, K-1 profits do not increase SE tax for an LLC member, then line 1, K-1 losses do not decrease SE tax for an LLC member.