Passive Activity Losses and Credits Limited, 72875-72878 [2011-30611]
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(6) Benefits: What benefits, if any, will
the new disclosures provide to
consumers? What evidence supports the
asserted benefits? What benefits, if any,
will the new disclosures provide to
industry members? What is the
magnitude of such benefits? What
evidence supports the asserted benefits?
(7) Costs: What costs, if any, would
the potential new disclosures impose on
businesses, and in particular on small
businesses such as installers? What
would be the magnitude of such costs?
What evidence supports the asserted
costs?
(8) Other Federal, State, or Local
Requirements: Would the new
disclosures overlap or conflict with
other federal, state, or local laws or
regulations? If so, how?
VI. Request for Comment
The Commission invites interested
persons to submit written comments on
any issue of fact, law, or policy that may
bear upon the proposals under
consideration. Please include
explanations for any answers provided,
as well as supporting evidence where
appropriate. After examining the
comments, the Commission will
determine whether to issue specific
amendments.
You can file a comment online or on
paper. For the Commission to consider
your comment, we must receive it on or
before January 10, 2012. Write
‘‘Regional Labeling for Heating and
Cooling Equipment, (16 CFR Part 305)
(Project No. P114202)’’ on your
comment. Your comment—including
your name and your state—will be
placed on the public record of this
proceeding, including, to the extent
practicable, on the public Commission
Web site, at https://www.ftc.gov/os/
publiccomments.shtm. As a matter of
discretion, the Commission tries to
remove individuals’ home contact
information from comments before
placing them on the Commission Web
site.
Because your comment will be made
public, you are solely responsible for
making sure that your comment does
not include any sensitive personal
information, such as anyone’s Social
Security number, date of birth, driver’s
license number or other state
identification number or foreign country
equivalent, passport number, financial
account number, or credit or debit card
number. You are also solely responsible
for making sure that your comment does
not include any sensitive health
information, like medical records or
other individually identifiable health
information. In addition, do not include
any ‘‘[t]rade secret or any commercial or
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financial information which is obtained
from any person and which is privileged
or confidential,’’ as provided in Section
6(f) of the FTC Act, 15 U.S.C. 46(f), and
FTC Rule 4.10(a)(2), 16 CFR 4.10(a)(2).
If you want the Commission to give your
comment confidential treatment, you
must file it in paper form, with a request
for confidential treatment, and you have
to follow the procedure explained in
FTC Rule 4.9(c), 16 CFR 4.9(c).26 Your
comment will be kept confidential only
if the FTC General Counsel, in his or her
sole discretion, grants your request in
accordance with the law and the public
interest.
Postal mail addressed to the
Commission is subject to delay due to
heightened security screening. As a
result, we encourage you to submit your
comments online, or to send them to the
Commission by courier or overnight
service. To make sure that the
Commission considers your online
comment, you must file it at https://
public.commentworks.com/ftc/regionaldisclosuresanpr, by following the
instructions on the web-based form. If
this Notice appears at https://www.
regulations.gov/#!home, you also may
file a comment through that Web site.
If you file your comment on paper,
write ‘‘Regional Labeling for Heating
and Cooling Equipment, (16 CFR Part
305) (Project No.114202)’’ on your
comment and on the envelope, and mail
or deliver it to the following address:
Federal Trade Commission, Office of the
Secretary, Room H–113 (Annex H), 600
Pennsylvania Avenue NW., Washington,
DC 20580. If possible, submit your
paper comment to the Commission by
courier or overnight service.
Visit the Commission Web site at
https://www.ftc.gov to read this Notice
and the news release describing it. The
FTC Act and other laws that the
Commission administers permit the
collection of public comments to
consider and use in this proceeding as
appropriate. The Commission will
consider all timely and responsive
public comments that it receives on or
before January 10, 2012. You can find
more information, including routine
uses permitted by the Privacy Act, in
the Commission’s privacy policy, at
https://www.ftc.gov/ftc/privacy.htm.
VII. Public Meeting Information
The Commission and DOE staff have
scheduled a public meeting to give
interested parties an opportunity to
26 In particular, the written request for
confidential treatment that accompanies the
comment must include the factual and legal basis
for the request, and must identify the specific
portions of the comment to be withheld from the
public record. See FTC Rule 4.9(c), 16 CFR 4.9(c).
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provide their views on potential FTC
disclosures and the DOE enforcement
plan related to new regional standards
for furnaces, central air conditioners,
and heat pumps. The public meeting
will be held on December 16, 2011 at
DOE. DOE will provide details regarding
time, location, attendance and
participation at the meeting.
By direction of the Commission.
Donald S. Clark,
Secretary.
[FR Doc. 2011–30436 Filed 11–25–11; 8:45 am]
BILLING CODE 6750–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–109369–10]
RIN 1545–BJ33
Passive Activity Losses and Credits
Limited
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:
This document contains
proposed regulations regarding the
definition of an ‘‘interest in a limited
partnership as a limited partner’’ for
purposes of determining whether a
taxpayer materially participates in an
activity under section 469 of the
Internal Revenue Code (Code). These
proposed regulations affect individuals
who are partners in partnerships.
DATES: Written or electronic comments
and requests for a public hearing must
be received by February 27, 2012.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–109369–10), Room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand-delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to: CC:PA:LPD:PR (REG–109369–
10), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC, or sent electronically,
via the Federal eRulemaking Portal at
https://www.regulations.gov/(IRS REG109369-10).
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
Michala Irons, (202) 622–3050;
concerning submissions of comments
and requests for public hearing,
Oluwafunmilayo Taylor, (202) 622–7180
(not toll free numbers).
SUPPLEMENTARY INFORMATION:
SUMMARY:
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Background
Section 469(a)(1) limits the ability of
certain taxpayers to deduct losses from
passive activities. Section 469(b)
permits passive losses disallowed in one
year to be carried over to the next year.
Section 469(c)(1) provides that a passive
activity means any activity which
involves the conduct of any trade or
business, and in which the taxpayer
does not materially participate. Section
469(h)(1) provides that a taxpayer shall
be treated as materially participating in
an activity only if the taxpayer is
involved in the operations of the
activity on a basis which is regular,
continuous, and substantial. The
Treasury Department and the IRS
promulgated temporary regulations
under section 469 in 1988. See TD 8175,
53 FR 5686 (February 25, 1988). Section
1.469–5T(a) provides that an individual
taxpayer shall be treated as materially
participating in an activity for the
taxable year if and only if:
(1) The individual participates in the
activity for more than 500 hours during
such year;
(2) The individual’s participation in
the activity for the taxable year
constitutes substantially all of the
participation in such activity of all
individuals (including individuals who
are not owners of interests in the
activity) for such year;
(3) The individual participates in the
activity for more than 100 hours during
the taxable year, and such individual’s
participation in the activity for the
taxable year is not less than the
participation in the activity of any other
individual (including individuals who
are not owners of interests in the
activity) for such year;
(4) The activity is a significant
participation activity (within the
meaning of § 1.469–5T(c)) for the
taxable year, and the individual’s
aggregate participation in all significant
participation activities during such year
exceeds 500 hours;
(5) The individual materially
participated in the activity (determined
without regard to § 1.469–5T(a)(5)) for
any five taxable years (whether or not
consecutive) during the ten taxable
years that immediately precede the
taxable year;
(6) The activity is a personal service
activity (within the meaning of § 1.469–
5T(d)), and the individual materially
participated in the activity for any three
taxable years (whether or not
consecutive) preceding the taxable year;
or
(7) Based on all of the facts and
circumstances (taking into account the
rules in § 1.469–5T(b)), the individual
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participates in the activity on a regular,
continuous, and substantial basis during
such year.
Section 469(h)(2) presumptively treats
losses from interests in limited
partnerships as passive. Section
469(h)(2) provides that, except as
provided in regulations, no interest in a
limited partnership as a limited partner
shall be treated as an interest with
respect to which a taxpayer materially
participates. Section 1.469–5T(e)(2)
permits an individual taxpayer to
establish material participation in a
limited partnership but constrains the
individual taxpayer to only three of the
seven regulatory tests in § 1.469–5T(a),
(§ 1.469–5T(a)(1), (a)(5), or (a)(6)).
Section 1.469–5T(e)(3)(i) generally
provides that a partnership interest shall
be treated as a limited partnership
interest if (A) such interest is either
designated as a limited partnership
interest in the limited partnership
agreement or the certificate of limited
partnership, without regard to whether
the liability of the holder of such
interest for obligations of the
partnership is limited under applicable
State law; or (B) the liability of the
holder of such interest for obligations of
the partnership is limited, under the law
of the State in which the partnership is
organized, to a determinable fixed
amount (for example, the sum of the
holder’s capital contributions to the
partnership and contractual obligations
to make additional capital contributions
to the partnership). However, even if the
interest is characterized as a limited
partnership interest under § 1.469–
5T(e)(3)(i), an exception under § 1.469–
5T(e)(3)(ii) applies if the individual is a
general partner in the partnership at all
times during the partnership’s taxable
year ending with or within the
individual’s taxable year (or portion of
the partnership’s taxable year during
which the individual (directly or
indirectly) owns such limited
partnership interest) (the ‘‘general
partner exception’’). If the general
partner exception applies, the limited
partnership interest will not be treated
as such for the year in which the
individual taxpayer is a general partner
in the partnership. This allows the
individual taxpayer to demonstrate
material participation through any of
the seven regulatory tests in § 1.469–
5T(a).
Courts have concluded, in certain
instances, that the holder of a limited
liability company (LLC) interest is not
treated as holding an interest in a
limited partnership as a limited partner
for purposes of applying the section 469
material participation tests. In Gregg v.
U.S., 186 F.Supp.2d 1123 (D. Or. 2000),
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an Oregon district court concluded that,
in the absence of regulations to the
effect that an LLC member should be
treated as a limited partner, the limited
partner exception in section 469(h)(2)
was not applicable to LLC members. In
Garnett v. Comm’r, 132 T.C. 368 (2009),
the Tax Court found that the taxpayers’
ownership interests in limited liability
partnerships and LLCs were not
interests in limited partnerships because
their interests fit within the general
partner exception in § 1.469–5T(e)(3)(ii).
Shortly thereafter, in Thompson v. U.S.,
87 Fed. Cl. 728 (2009), the Court of
Federal Claims concluded that the
regulations under section 469(h)(2)
require the taxpayer’s ownership
interest to be in a partnership under
State law rather than a partnership
under Federal income tax law.
Accordingly, because an LLC member is
not a limited partner under State law,
the court concluded that section
469(h)(2) did not apply to an LLC
member. Most recently, the Tax Court in
Newell v. Comm’r, T.C. Memo. 2010–23,
concluded that section 469(h)(2) did not
apply to the managing member of an
LLC and that the member fell within the
general partner exception in § 1.469–
5T(e)(3)(ii). On April 5, 2010, the IRS
issued an Action on Decision
acquiescing in the result only in
Thompson v. U.S., AOD 2010–02, 2010–
14 I.R.B. 515.
Explanation of Provisions
The proposed regulations provide that
an interest in an entity will be treated
as an interest in a limited partnership
under section 469(h)(2) if (A) the entity
in which such interest is held is
classified as a partnership for Federal
income tax purposes under § 301.7701–
3; and (B) the holder of such interest
does not have rights to manage the
entity at all times during the entity’s
taxable year under the law of the
jurisdiction in which the entity was
organized and under the governing
agreement. Rights to manage include the
power to bind the entity. The proposed
regulations provide rules concerning an
interest in a limited partnership based
on the purposes for which section 469
was enacted, and the manner in which
the provision is structured and operates
within the Code. Accordingly, the rules
concerning an interest in a limited
partnership in the proposed regulations
are provided solely for purposes of
section 469 and no inference is intended
that the same rules would apply for any
other provisions of the Code requiring a
distinction between a general partner
and a limited partner.
In Garnett v. Comm’r, supra, the Tax
Court noted that Congress enacted
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section 469(h)(2) to address the
limitations on a limited partner’s ability
to participate in the control of the
partnership’s business. Under the
Uniform Limited Partnership Act of
1916, limited partners could lose their
limited liability protection if they
participated in the control of the
partnership. The regulations under
section 469(h)(2) were drafted with
these constraints in mind. Today, many
states have adopted a variation of the
Revised Uniform Limited Partnership
Act of 1985 (RULPA). Under RULPA,
limited partners may participate in the
management and control of the
partnership without losing their limited
liability. As a consequence, limited
partners under RULPA are now more
akin to general partners and LLC
members with respect to their rights in
the management of the entity. Under the
Uniform Limited Liability Company Act
of 1996, LLC members of membermanaged LLCs do not lose their limited
liability by participating in the
management and conduct of the
company’s business. In Newell v.
Comm’r, supra, the Tax Court noted that
the managing member of the LLC at
issue managed the day-to-day
operations of the LLC and was the
‘‘substantial equivalent’’ of a general
partner. Recognizing that the original
presumptions regarding the limitations
on a limited partner’s participation in
the activities of the entity are no longer
valid today, and also recognizing the
emergence of LLCs, the proposed
regulations eliminate the current
regulations’ reliance on limited liability
for purposes of determining whether an
interest is an interest in a limited
partnership as a limited partner under
section 469(h)(2) and instead adopt an
approach that relies on the individual
partner’s right to participate in the
management of the entity.
The regulations are proposed to apply
to taxable years beginning on or after the
date of publication of the Treasury
decision adopting these regulations as
final regulations in the Federal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866, as
supplemented by Executive Order
13563. Therefore, a regulatory
assessment is not required. It has also
been determined that section 553(b) of
the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to this
regulation, and because the regulation
does not impose a collection of
information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
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chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, these
regulations will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Comments and Requests Public Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written (a signed original and eight (8)
copies) or electronic comments that are
submitted timely to the IRS. All
comments will be available for public
inspection and copying. A public
hearing will be scheduled if requested
in writing by any person that timely
submits written comments. If a public
hearing is scheduled, notice of the date,
time, and place for the public hearing
will be published in the Federal
Register.
Drafting Information
The principal author of these
proposed regulations is Michala Irons,
Office of the Associate Chief Counsel
(Passthroughs and Special Industries).
However, other personnel from the
Treasury Department and the IRS
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.469–0 is amended
by:
1. Revising the entries for § 1.469–
5(a), (b), (c), (d), and (e).
2. Removing the entries for § 1.469–
5T(e)(1), (e)(2), and (e)(3).
The revisions read as follows:
§ 1.469–0
Table of contents.
*
*
*
§ 1.469–5
*
*
Material participation.
(a) through (d) [Reserved].
(e) Treatment of an interest in a
limited partnership as a limited partner.
(1) In general.
(2) Exceptions.
(3) Interest in a limited partnership as
a limited partner.
(i) In general.
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(ii) Individual holding an interest
other than an interest in a limited
partnership as a limited partner.
(4) Effective/applicability date.
*
*
*
*
*
Par. 3. In § 1.469–5, paragraphs (a),
(b), (c), (d), and (e) are revised to read
as follows:
§ 1.469–5
Material participation.
(a) through (d) [Reserved].
(e) Treatment of an interest in a
limited partnership as a limited
partner—(1) In general. Except as
otherwise provided in this paragraph
(e), an individual shall not be treated as
materially participating in any activity
in which the individual owns an
interest in a limited partnership as a
limited partner (as defined in paragraph
(e)(3)(i) of this section) for purposes of
applying section 469 and the regulations
thereunder to—
(i) The individual’s share of any
income, gain, loss, deduction, or credit
from such activity that is attributable to
an interest in a limited partnership as a
limited partner; and
(ii) Any gain or loss from such activity
recognized upon a sale or exchange of
such an interest.
(2) Exceptions. Paragraph (e)(1) of this
section shall not apply to an
individual’s share of income, gain, loss,
deduction, and credit for a taxable year
from any activity in which the
individual would be treated as
materially participating for the taxable
year under paragraphs (a)(1), (a)(5), or
(a)(6) of § 1.469–5T if the individual did
not own an interest in a limited
partnership as a limited partner (as
defined in paragraph (e)(3)(i) of this
section) for such taxable year.
(3) Interest in a limited partnership as
a limited partner—(i) In general. Except
as provided in paragraph (e)(3)(ii) of this
section, for purposes of section
469(h)(2) and this paragraph (e), an
interest in an entity shall be treated as
an interest in a limited partnership as a
limited partner if—
(A) The entity in which such interest
is held is classified as a partnership for
Federal income tax purposes under
§ 301.7701–3; and
(B) The holder of such interest does
not have rights to manage the entity at
all times during the entity’s taxable year
under the law of the jurisdiction in
which the entity is organized and under
the governing agreement.
(ii) Individual holding an interest
other than an interest in a limited
partnership as a limited partner. An
individual shall not be treated as
holding an interest in a limited
partnership as a limited partner for the
individual’s taxable year if such
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individual also holds an interest in the
partnership that is not an interest in a
limited partnership as a limited partner
(as defined in paragraph (e)(3)(i) of this
section), such as a state-law general
partnership interest, at all times during
the entity’s taxable year ending with or
within the individual’s taxable year (or
the portion of the entity’s taxable year
during which the individual (directly or
indirectly) owns such interest in a
limited partnership as a limited
partner).
(4) Effective/applicability date. This
section applies to taxable years
beginning on or after the date of
publication of the Treasury decision
adopting these rules as a final regulation
in the Federal Register.
*
*
*
*
*
Par. 4. Section 1.469–5T paragraph (e)
is revised to read as follows:
§ 1.469–5T Material participation
(temporary).
*
*
*
*
*
(e) Treatment of Limited Partners.
[Reserved]. See § 1.469–5(e) for rules
relating to this paragraph (e).
*
*
*
*
*
Par. 5. Section 1.469–9 paragraph
(f)(1) is revised to read as follows:
§ 1.469–9 Rules for certain rental real
estate activities.
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*
*
*
*
*
(f) Limited partnership interests in
rental real estate activities—(1) In
general. If a taxpayer elects under
paragraph (g) of this section to treat all
interests in rental real estate as a single
rental real estate activity, and at least
one interest in rental real estate is held
by the taxpayer as an interest in a
limited partnership as a limited partner
(within the meaning of § 1.469–5(e)(3)),
the combined rental real estate activity
of the taxpayer will be treated as an
interest in a limited partnership as a
limited partner for purposes of
determining material participation.
Accordingly, the taxpayer will not be
treated under this section as materially
participating in the combined rental real
estate activity unless the taxpayer
materially participates in the activity
under the tests listed in § 1.469–5(e)(2)
(dealing with the tests for determining
the material participation of a limited
partner).
*
*
*
*
*
Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2011–30611 Filed 11–25–11; 8:45 am]
BILLING CODE 4830–01–P
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DEPARTMENT OF THE TREASURY
SUPPLEMENTARY INFORMATION:
31 CFR Chapter X
I. Background
RIN 1506–AB16
A. Statutory Provisions
On October 26, 2001, the President
signed into law the Uniting and
Strengthening America by Providing
Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001 (the
‘‘USA PATRIOT Act’’), Public Law 107–
56. Title III of the USA PATRIOT Act
amends the anti-money laundering
provisions of the Bank Secrecy Act
(‘‘BSA’’), codified at 12 U.S.C. 1829b
and 1951–1959, and 31 U.S.C. 5311–
5314, and 5316–5332, to promote the
prevention, detection, and prosecution
of international money laundering and
the financing of terrorism. Regulations
implementing the BSA appear at 31 CFR
Chapter X. The authority of the
Secretary of the Treasury (the
‘‘Secretary’’) to administer the BSA and
its implementing regulations has been
delegated to the Director of FinCEN.1
Section 311 of the USA PATRIOT Act
(‘‘section 311’’) added section 5318A to
the BSA, granting the Secretary the
authority, upon finding that reasonable
grounds exist for concluding that a
foreign jurisdiction, institution, class of
transaction, or type of account is of
‘‘primary money laundering concern,’’
to require domestic financial
institutions and financial agencies to
take certain ‘‘special measures’’ against
the primary money laundering concern.
Section 311 identifies factors for the
Secretary to consider and Federal
agencies to consult before the Secretary
may conclude that a jurisdiction,
institution, class of transaction, or type
of account is of primary money
laundering concern. The statute also
provides similar procedures, i.e., factors
and consultation requirements, for
selecting the specific special measures
to be imposed against the primary
money laundering concern.
Taken as a whole, section 311
provides the Secretary with a range of
options that can be adapted to target
specific money laundering and terrorist
financing concerns most effectively.
These options give the Secretary the
authority to bring additional pressure on
those jurisdictions and institutions that
pose money laundering threats. Through
the imposition of various special
measures, the Secretary can gain more
information about the jurisdictions,
institutions, transactions, or accounts of
concern; can more effectively monitor
the respective jurisdictions, institutions,
Financial Crimes Enforcement
Network; Amendment to the Bank
Secrecy Act Regulations—Imposition
of Special Measure Against the Islamic
Republic of Iran as a Jurisdiction of
Primary Money Laundering Concern
Financial Crimes Enforcement
Network, Treasury (‘‘FinCEN’’),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:
In a notice of finding
published elsewhere in this issue of the
Federal Register, the Secretary of the
Treasury, through his delegate, the
Director of FinCEN, found that
reasonable grounds exist for concluding
that the Islamic Republic of Iran (‘‘Iran’’)
is a jurisdiction of primary money
laundering concern pursuant to 31
U.S.C. 5318A. FinCEN is issuing this
notice of proposed rulemaking to
impose a special measure against Iran.
DATES: Written comments on the notice
of proposed rulemaking must be
submitted on or before January 27, 2012.
ADDRESSES: You may submit comments,
identified by RIN 1506–AB16, by any of
the following methods:
• Federal E-rulemaking Portal:
http:/www.regulations.gov. Follow the
instructions for submitting comments.
Include 1506–AB16 in the submission.
Refer to Docket Number FINCEN–2011–
0008.
• Mail: The Financial Crimes
Enforcement Network, P.O. Box 39,
Vienna, VA 22183. Include RIN 1506–
AB16 in the body of the text. Please
submit comments by one method only.
Comments submitted in response to this
NPRM will become a matter of public
record. Therefore, you should submit
only information that you wish to make
publicly available.
Inspection of comments: Public
comments received electronically or
through the U. S. Postal Service sent in
response to a notice and request for
comment will be made available for
public review as soon as possible on
https://www.regulations.gov. Comments
received may be physically inspected in
the FinCEN reading room located in
Vienna, Virginia. Reading room
appointments are available weekdays
(excluding holidays) between 10 a.m.
and 3 p.m., by calling the Disclosure
Officer at (703) 905–5034 (not a toll-free
call).
FOR FUTHER INFORMATION CONTACT: The
FinCEN regulatory helpline at (800)
949–2732 and select Option 6.
SUMMARY:
PO 00000
Frm 00026
Fmt 4702
Sfmt 4702
1 Therefore, references to the authority of the
Secretary of the Treasury under section 311 of the
USA PATRIOT Act apply equally to the Director of
FinCEN.
E:\FR\FM\28NOP1.SGM
28NOP1
]]>Agencies
[Federal Register Volume 76, Number 228 (Monday, November 28, 2011)]
[Proposed Rules]
[Pages 72875-72878]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-30611]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-109369-10]
RIN 1545-BJ33
Passive Activity Losses and Credits Limited
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations regarding the
definition of an ``interest in a limited partnership as a limited
partner'' for purposes of determining whether a taxpayer materially
participates in an activity under section 469 of the Internal Revenue
Code (Code). These proposed regulations affect individuals who are
partners in partnerships.
DATES: Written or electronic comments and requests for a public hearing
must be received by February 27, 2012.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-109369-10), Room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
109369-10), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC, or sent electronically, via the Federal
eRulemaking Portal at https://www.regulations.gov/(IRS REG-109369-10).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Michala Irons, (202) 622-3050; concerning submissions of comments and
requests for public hearing, Oluwafunmilayo Taylor, (202) 622-7180 (not
toll free numbers).
SUPPLEMENTARY INFORMATION:
[[Page 72876]]
Background
Section 469(a)(1) limits the ability of certain taxpayers to deduct
losses from passive activities. Section 469(b) permits passive losses
disallowed in one year to be carried over to the next year. Section
469(c)(1) provides that a passive activity means any activity which
involves the conduct of any trade or business, and in which the
taxpayer does not materially participate. Section 469(h)(1) provides
that a taxpayer shall be treated as materially participating in an
activity only if the taxpayer is involved in the operations of the
activity on a basis which is regular, continuous, and substantial. The
Treasury Department and the IRS promulgated temporary regulations under
section 469 in 1988. See TD 8175, 53 FR 5686 (February 25, 1988).
Section 1.469-5T(a) provides that an individual taxpayer shall be
treated as materially participating in an activity for the taxable year
if and only if:
(1) The individual participates in the activity for more than 500
hours during such year;
(2) The individual's participation in the activity for the taxable
year constitutes substantially all of the participation in such
activity of all individuals (including individuals who are not owners
of interests in the activity) for such year;
(3) The individual participates in the activity for more than 100
hours during the taxable year, and such individual's participation in
the activity for the taxable year is not less than the participation in
the activity of any other individual (including individuals who are not
owners of interests in the activity) for such year;
(4) The activity is a significant participation activity (within
the meaning of Sec. 1.469-5T(c)) for the taxable year, and the
individual's aggregate participation in all significant participation
activities during such year exceeds 500 hours;
(5) The individual materially participated in the activity
(determined without regard to Sec. 1.469-5T(a)(5)) for any five
taxable years (whether or not consecutive) during the ten taxable years
that immediately precede the taxable year;
(6) The activity is a personal service activity (within the meaning
of Sec. 1.469-5T(d)), and the individual materially participated in
the activity for any three taxable years (whether or not consecutive)
preceding the taxable year; or
(7) Based on all of the facts and circumstances (taking into
account the rules in Sec. 1.469-5T(b)), the individual participates in
the activity on a regular, continuous, and substantial basis during
such year.
Section 469(h)(2) presumptively treats losses from interests in
limited partnerships as passive. Section 469(h)(2) provides that,
except as provided in regulations, no interest in a limited partnership
as a limited partner shall be treated as an interest with respect to
which a taxpayer materially participates. Section 1.469-5T(e)(2)
permits an individual taxpayer to establish material participation in a
limited partnership but constrains the individual taxpayer to only
three of the seven regulatory tests in Sec. 1.469-5T(a), (Sec. 1.469-
5T(a)(1), (a)(5), or (a)(6)).
Section 1.469-5T(e)(3)(i) generally provides that a partnership
interest shall be treated as a limited partnership interest if (A) such
interest is either designated as a limited partnership interest in the
limited partnership agreement or the certificate of limited
partnership, without regard to whether the liability of the holder of
such interest for obligations of the partnership is limited under
applicable State law; or (B) the liability of the holder of such
interest for obligations of the partnership is limited, under the law
of the State in which the partnership is organized, to a determinable
fixed amount (for example, the sum of the holder's capital
contributions to the partnership and contractual obligations to make
additional capital contributions to the partnership). However, even if
the interest is characterized as a limited partnership interest under
Sec. 1.469-5T(e)(3)(i), an exception under Sec. 1.469-5T(e)(3)(ii)
applies if the individual is a general partner in the partnership at
all times during the partnership's taxable year ending with or within
the individual's taxable year (or portion of the partnership's taxable
year during which the individual (directly or indirectly) owns such
limited partnership interest) (the ``general partner exception''). If
the general partner exception applies, the limited partnership interest
will not be treated as such for the year in which the individual
taxpayer is a general partner in the partnership. This allows the
individual taxpayer to demonstrate material participation through any
of the seven regulatory tests in Sec. 1.469-5T(a).
Courts have concluded, in certain instances, that the holder of a
limited liability company (LLC) interest is not treated as holding an
interest in a limited partnership as a limited partner for purposes of
applying the section 469 material participation tests. In Gregg v.
U.S., 186 F.Supp.2d 1123 (D. Or. 2000), an Oregon district court
concluded that, in the absence of regulations to the effect that an LLC
member should be treated as a limited partner, the limited partner
exception in section 469(h)(2) was not applicable to LLC members. In
Garnett v. Comm'r, 132 T.C. 368 (2009), the Tax Court found that the
taxpayers' ownership interests in limited liability partnerships and
LLCs were not interests in limited partnerships because their interests
fit within the general partner exception in Sec. 1.469-5T(e)(3)(ii).
Shortly thereafter, in Thompson v. U.S., 87 Fed. Cl. 728 (2009), the
Court of Federal Claims concluded that the regulations under section
469(h)(2) require the taxpayer's ownership interest to be in a
partnership under State law rather than a partnership under Federal
income tax law. Accordingly, because an LLC member is not a limited
partner under State law, the court concluded that section 469(h)(2) did
not apply to an LLC member. Most recently, the Tax Court in Newell v.
Comm'r, T.C. Memo. 2010-23, concluded that section 469(h)(2) did not
apply to the managing member of an LLC and that the member fell within
the general partner exception in Sec. 1.469-5T(e)(3)(ii). On April 5,
2010, the IRS issued an Action on Decision acquiescing in the result
only in Thompson v. U.S., AOD 2010-02, 2010-14 I.R.B. 515.
Explanation of Provisions
The proposed regulations provide that an interest in an entity will
be treated as an interest in a limited partnership under section
469(h)(2) if (A) the entity in which such interest is held is
classified as a partnership for Federal income tax purposes under Sec.
301.7701-3; and (B) the holder of such interest does not have rights to
manage the entity at all times during the entity's taxable year under
the law of the jurisdiction in which the entity was organized and under
the governing agreement. Rights to manage include the power to bind the
entity. The proposed regulations provide rules concerning an interest
in a limited partnership based on the purposes for which section 469
was enacted, and the manner in which the provision is structured and
operates within the Code. Accordingly, the rules concerning an interest
in a limited partnership in the proposed regulations are provided
solely for purposes of section 469 and no inference is intended that
the same rules would apply for any other provisions of the Code
requiring a distinction between a general partner and a limited
partner.
In Garnett v. Comm'r, supra, the Tax Court noted that Congress
enacted
[[Page 72877]]
section 469(h)(2) to address the limitations on a limited partner's
ability to participate in the control of the partnership's business.
Under the Uniform Limited Partnership Act of 1916, limited partners
could lose their limited liability protection if they participated in
the control of the partnership. The regulations under section 469(h)(2)
were drafted with these constraints in mind. Today, many states have
adopted a variation of the Revised Uniform Limited Partnership Act of
1985 (RULPA). Under RULPA, limited partners may participate in the
management and control of the partnership without losing their limited
liability. As a consequence, limited partners under RULPA are now more
akin to general partners and LLC members with respect to their rights
in the management of the entity. Under the Uniform Limited Liability
Company Act of 1996, LLC members of member-managed LLCs do not lose
their limited liability by participating in the management and conduct
of the company's business. In Newell v. Comm'r, supra, the Tax Court
noted that the managing member of the LLC at issue managed the day-to-
day operations of the LLC and was the ``substantial equivalent'' of a
general partner. Recognizing that the original presumptions regarding
the limitations on a limited partner's participation in the activities
of the entity are no longer valid today, and also recognizing the
emergence of LLCs, the proposed regulations eliminate the current
regulations' reliance on limited liability for purposes of determining
whether an interest is an interest in a limited partnership as a
limited partner under section 469(h)(2) and instead adopt an approach
that relies on the individual partner's right to participate in the
management of the entity.
The regulations are proposed to apply to taxable years beginning on
or after the date of publication of the Treasury decision adopting
these regulations as final regulations in the Federal Register.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866, as supplemented by Executive Order 13563. Therefore, a
regulatory assessment is not required. It has also been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to this regulation, and because the regulation does not
impose a collection of information on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, these regulations will be submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Comments and Requests Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are submitted timely to the
IRS. All comments will be available for public inspection and copying.
A public hearing will be scheduled if requested in writing by any
person that timely submits written comments. If a public hearing is
scheduled, notice of the date, time, and place for the public hearing
will be published in the Federal Register.
Drafting Information
The principal author of these proposed regulations is Michala
Irons, Office of the Associate Chief Counsel (Passthroughs and Special
Industries). However, other personnel from the Treasury Department and
the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.469-0 is amended by:
1. Revising the entries for Sec. 1.469-5(a), (b), (c), (d), and
(e).
2. Removing the entries for Sec. 1.469-5T(e)(1), (e)(2), and
(e)(3).
The revisions read as follows:
Sec. 1.469-0 Table of contents.
* * * * *
Sec. 1.469-5 Material participation.
(a) through (d) [Reserved].
(e) Treatment of an interest in a limited partnership as a limited
partner.
(1) In general.
(2) Exceptions.
(3) Interest in a limited partnership as a limited partner.
(i) In general.
(ii) Individual holding an interest other than an interest in a
limited partnership as a limited partner.
(4) Effective/applicability date.
* * * * *
Par. 3. In Sec. 1.469-5, paragraphs (a), (b), (c), (d), and (e)
are revised to read as follows:
Sec. 1.469-5 Material participation.
(a) through (d) [Reserved].
(e) Treatment of an interest in a limited partnership as a limited
partner--(1) In general. Except as otherwise provided in this paragraph
(e), an individual shall not be treated as materially participating in
any activity in which the individual owns an interest in a limited
partnership as a limited partner (as defined in paragraph (e)(3)(i) of
this section) for purposes of applying section 469 and the regulations
thereunder to--
(i) The individual's share of any income, gain, loss, deduction, or
credit from such activity that is attributable to an interest in a
limited partnership as a limited partner; and
(ii) Any gain or loss from such activity recognized upon a sale or
exchange of such an interest.
(2) Exceptions. Paragraph (e)(1) of this section shall not apply to
an individual's share of income, gain, loss, deduction, and credit for
a taxable year from any activity in which the individual would be
treated as materially participating for the taxable year under
paragraphs (a)(1), (a)(5), or (a)(6) of Sec. 1.469-5T if the
individual did not own an interest in a limited partnership as a
limited partner (as defined in paragraph (e)(3)(i) of this section) for
such taxable year.
(3) Interest in a limited partnership as a limited partner--(i) In
general. Except as provided in paragraph (e)(3)(ii) of this section,
for purposes of section 469(h)(2) and this paragraph (e), an interest
in an entity shall be treated as an interest in a limited partnership
as a limited partner if--
(A) The entity in which such interest is held is classified as a
partnership for Federal income tax purposes under Sec. 301.7701-3; and
(B) The holder of such interest does not have rights to manage the
entity at all times during the entity's taxable year under the law of
the jurisdiction in which the entity is organized and under the
governing agreement.
(ii) Individual holding an interest other than an interest in a
limited partnership as a limited partner. An individual shall not be
treated as holding an interest in a limited partnership as a limited
partner for the individual's taxable year if such
[[Page 72878]]
individual also holds an interest in the partnership that is not an
interest in a limited partnership as a limited partner (as defined in
paragraph (e)(3)(i) of this section), such as a state-law general
partnership interest, at all times during the entity's taxable year
ending with or within the individual's taxable year (or the portion of
the entity's taxable year during which the individual (directly or
indirectly) owns such interest in a limited partnership as a limited
partner).
(4) Effective/applicability date. This section applies to taxable
years beginning on or after the date of publication of the Treasury
decision adopting these rules as a final regulation in the Federal
Register.
* * * * *
Par. 4. Section 1.469-5T paragraph (e) is revised to read as
follows:
Sec. 1.469-5T Material participation (temporary).
* * * * *
(e) Treatment of Limited Partners. [Reserved]. See Sec. 1.469-5(e)
for rules relating to this paragraph (e).
* * * * *
Par. 5. Section 1.469-9 paragraph (f)(1) is revised to read as
follows:
Sec. 1.469-9 Rules for certain rental real estate activities.
* * * * *
(f) Limited partnership interests in rental real estate
activities--(1) In general. If a taxpayer elects under paragraph (g) of
this section to treat all interests in rental real estate as a single
rental real estate activity, and at least one interest in rental real
estate is held by the taxpayer as an interest in a limited partnership
as a limited partner (within the meaning of Sec. 1.469-5(e)(3)), the
combined rental real estate activity of the taxpayer will be treated as
an interest in a limited partnership as a limited partner for purposes
of determining material participation. Accordingly, the taxpayer will
not be treated under this section as materially participating in the
combined rental real estate activity unless the taxpayer materially
participates in the activity under the tests listed in Sec. 1.469-
5(e)(2) (dealing with the tests for determining the material
participation of a limited partner).
* * * * *
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2011-30611 Filed 11-25-11; 8:45 am]
BILLING CODE 4830-01-P
