Passive Activity Losses and Credits Limited, 72875-72878 [2011-30611]

Download as PDF Federal Register / Vol. 76, No. 228 / Monday, November 28, 2011 / Proposed Rules pmangrum on DSK3VPTVN1PROD with PROPOSALS-1 (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 http://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 VerDate Mar<15>2010 15:28 Nov 25, 2011 Jkt 226001 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 http://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 http://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 http://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). PO 00000 Frm 00023 Fmt 4702 Sfmt 4702 72875 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 http://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: E:\FR\FM\28NOP1.SGM 28NOP1 72876 Federal Register / Vol. 76, No. 228 / Monday, November 28, 2011 / Proposed Rules pmangrum on DSK3VPTVN1PROD with PROPOSALS-1 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 VerDate Mar<15>2010 15:28 Nov 25, 2011 Jkt 226001 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), PO 00000 Frm 00024 Fmt 4702 Sfmt 4702 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 E:\FR\FM\28NOP1.SGM 28NOP1 Federal Register / Vol. 76, No. 228 / Monday, November 28, 2011 / Proposed Rules pmangrum on DSK3VPTVN1PROD with PROPOSALS-1 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. VerDate Mar<15>2010 15:28 Nov 25, 2011 Jkt 226001 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. PO 00000 Frm 00025 Fmt 4702 Sfmt 4702 72877 (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 E:\FR\FM\28NOP1.SGM 28NOP1 72878 Federal Register / Vol. 76, No. 228 / Monday, November 28, 2011 / Proposed Rules 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. pmangrum on DSK3VPTVN1PROD with PROPOSALS-1 * * * * * (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 VerDate Mar<15>2010 15:28 Nov 25, 2011 Jkt 226001 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 http://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 http://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