Courts Rule that Active Member of Limited Liability Company Not Subject to Passive Loss Limitations
On June 30, 2009, the U.S. Tax Court ruled that membership interests in limited liability companies ("LLCs") and Limited Liability Partnerships ("LLPs") will be treated as general partnership interests, and not limited partnership interests, under the passive loss rules of Section 469. See Garnett v. Commissioner, 132 T.C. 19 (2009). This decision will allow LLC and LLP members to more easily avoid the Section 469 passive activity loss rules limiting the deductibility of losses flowing through to members from an LLC or LLP against other sources of income. On July 20, 2009, the U.S. Court of Federal Claims, citing to Garnett, also held that LLC members should be treated as general partners and not as limited partners for purposes of determining such member's active involvement in the LLC's business. See Thompson v. United States, No. 06-211 (Fed. Cl. Jul. 20, 2009).