In 2018, Tom Taxpayer deducted losses he incurred from an Internet retail business operated by Tom and his sister. Following a recent audit, the Internal Revenue Service determined that Toms losses were passive and were not deductible against non-passive activity income. The agents Revenue Agent Report (RAR) specifically noted that the membership interest fell under section 469(h)(2) of the Internal Revenue Code of 1986.

Toms business is organized as a limited liability company (LLC) in Michigan. Tom and his sister are the only employees and each works about 20 hours a month managing the business operations. The LLC has no other members and employees or members.

Please prepare a memorandum to my attention that provides a strong argument and uses legal authorities that Tom Taxpayer might raise in defense of his deduction of these losses.