²¹See Temp. Regs. Sec. 1.469-2T(d)(6).

²²Partners do not necessarily increase basis by an equal portion of partnership debt. Partnership debt may be allocated to one or more partners in differing amounts, depending on each partner’s status (as general or limited) and the debt’s nature (e.g., recourse or nonrecourse); see Regs. Sec. 1.752-1.

²³LLC members are not liable for the entity’s debts; thus, absent some exceptions, all LLC debt should be deemed nonrecourse when allocating to members’ bases. See Starr, Schmalz, Baucum and Crnkovich, Limited Liability Companies, 725 T.M., pp. A31–A34.

²⁴Sec. 465(a)(1) states that the at-risk rules apply to individuals (including partners, LLC members and S shareholders) and closely held C corporations. For individuals, the rules are applied on an owner-by-owner basis.

²⁵According to Sec. 465(b)(4), a partner’s at-risk amount does not include recourse partnership debt to the extent the partner is protected via a stop-loss agreement or other loss-limiting arrangement. Thus, a partner’s share of an amount at-risk is the amount remaining after considering his or her right of contribution from the other partners under state law; see, e.g., Marcus W. Melvin, 894 F2d 1072 (9th Cir. 1990).

²⁶Even if a general partner were primarily liable for a partnership debt, the limited partners could increase their at-risk amounts for the debt if the general partner had a right to require future additional cash contributions from the limited partners if the partnership defaults. See Melvin, id. and Jerry E. Pritchett, 827 F2d 644 (9th Cir. 1987). This may be difficult to duplicate in an LLC setting, because there is no general partner who is personally liable. In an LLC, an agreement requiring future additional cash contributions might be ineffective to create at-risk amounts if the members control the right to enforce the agreement.

²⁷LLC members who guarantee LLC debt should be able to increase their amount at-risk similar to that of limited partners. LLC members do not have a right of indemnification (such as from a general partner) and, thus, should be ultimately responsible for a personal guarantee of debt to a lender.

²⁸Rental activities are automatically passive unless a taxpayer qualifies under Sec. 469(c)(2) and (7) to make rental real estate active. A working interest in oil and gas property is usually active (under Sec. 469(c)(4)), as is portfolio income (under Sec. 469(e)(1)).

²⁹A SPA is defined by Temp. Regs. Sec. 1.469-5T(c) as a trade or business in which a member does not materially participate (under any of the other material participation tests), but participates for more than 100 hours during the tax year.

³⁰Temp. Regs. Sec. 1.469-5T(d) defines a personal service activity as one that involves the performance of personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts or consulting, or any other trade or business in which capital is not a material income-producing factor.

³¹According to Temp. Regs. Sec. 1.469-2T(e), while passthrough entities (e.g., partnerships, LLCs and S corporations) are not subject to the PAL rules, their partners, members and shareholders who are individuals are.

³²Stephen A. Gregg, DC OR, 12/4/00.

³³If Y were involved in another business activity, she might be able to group the other business and the LLC as one activity. If Y’s combined participation in both businesses exceeded 500 hours, she would be a material participant with an active LLC loss. Y could also be a current-year material participant based on tests 5 and 6, which require material participation in the same activity in prior years.

³⁴A loss must be allowed for income tax purposes under the Sec. 469 rules for it to be allowed as a deduction for SE tax purposes; see Regs. Sec. 1.469-1T(d)(3).

³⁵M (who has one class of interest) is not “switched” to limited partner status by R’s 50% identical class of interest. R is treated as a general partner (due to his contract authority) and, thus, his interest cannot be used to “switch” M to a limited partner; see Prop. Regs. Sec. 1.1402(a)-2(h)(4)(i).

³⁶If an individual LLC member has combined FICA and SE taxable income in excess of $84,900 (the 2002 limit), the SE tax rate on an LLC distributive share drops to 2.9%.

³⁷See Sec. 1402(a)(13). A limited partner’s distributive share has no SE tax consequences, but a Sec. 707(c) guaranteed payment to a limited partner is SE taxable.

³⁸See Regs. Sec. 301.7701-3 et seq.; see also Form 8832, Entity Classification Election. The “switch” from a taxable partnership to an S corporation should not create income tax consequences for the owners. See Rev. Rul. 84-111, 1984-2 CB 88.

³⁹See Paul B. Ding, 200 F3d 587 (9th Cir. 1999).