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Claims Court agrees with Tax Court: LLC losses not automatically passive

July 22, 2009

Last month the Tax Court shot down an IRS argument that limited liability company losses are automatically "passive" under rules drafted for old-fashioned limited partnerships. Yesterday the Court of Claims agreed with the Tax Court. Ruling for the taxpayer on summary judgement, the Claims Court explicitly followed the Tax Court, explaining:

Finally and most importantly, an LLC is not "substantially equivalent" to a limited partnership. As discussed above, unlike a limited partnership, an LLC allows all members to participate in the business while retaining limited liability.

I'm surprised the IRS even pursued this line of argument. If they had won, they would have undermined their own regulations that keep taxpayers from forming "passive income generators" to enable them to deduct passive losses.

Cites:

Claims Court: Thompson, NO. 06-211 T (Fed Cl)

Tax Court: Garnett, 132 T.C. No. 19

Tags: passive losses.