Sam Davis is a member in a limited liability company that has historically been profitable but is expecting to generate losses in the near future because of a weak local economy. In addition to the hours she works as an employee of a local business, she currently spends approximately 120 hours per year helping to manage the LLC. Other LLC members each work approximately 140 hours per year in the LLC, and the time Sam and other members spend managing the LLC has remained constant since she joined the company three years ago. Sams tax basis and amount at-risk are large compared to her share of projected losses; however, she is concerned that her ability to deduct her share of the projected losses will be limited by the passive activity loss rules.

a. As an LLC member, will Sams share of losses be presumed to be passive as they are for limited partners? [Hint: See 469(h)(2), Garnett v. Commissioner, 132 T.C. 368 (2009), and Prop. Reg. 1.469-5(e)(3)(i).]

b. Assuming Sams losses are not presumed to be passive, is she devoting sufficient time to the LLC to be considered a material participant?

c. What would you recommend to Sam to help her achieve a more favorable tax outcome?

Your responsibility:

Prepare a US tax research memo addressing each of the issues as outlined in a, b, and c, so there will be three issues that need to be addressed in the memo with a conclusion for each issue.

You will need to support your conclusion using primary sources of US tax law.