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In two recent cases, the United States Tax Court and the United States Court of Federal Claims each ruled in favor of the taxpayer that certain interests in limited liability companies (“LLCs”) would not constitute limited partnership interests for purposes of applying the passive activity loss limitation rules of Internal Revenue Code section 469. Generally, where an investor holds an interest in an activity through a limited partnership interest, the investor’s involvement is presumed to be passive and losses from that activity may only be used to offset income from other passive sources. An investor may rebut this presumption only by satisfying one of three regulatory tests. By ruling that an investment through an LLC should not be treated as presumptively passive, the decisions effectively allow LLC members to establish their active involvement in the activity by meeting one of seven regulatory tests.

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