The petitioners claimed additional flow-through losses from an LLC that was taxed as a partnership for tax purposes. To be able to do so, the LLC could not be subject to the procedural rules of the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982. The petitioners argued that the LLC was not a partnership subject to TEFRA because it had 10 or fewer partners and, therefore, qualified for the "small partnership exception" of I.R.C. Sec. 6231(a)(1)(B)(i). The LLC was owned 99.98 percent by two individuals and .02 percent by a partnership. In addition, the LLC had previously filed a partnership return. The petitioners knew that the LLC could not qualify as a "small partnership" and use the "small partnership exception" because the LLC had a partnership as a partner, so they argued that they qualified for the "small partnership exception" because the partnership member held such a small ownership interest that it should be disregarded. The court disregarded that argument and denied qualification for the "small partnership exception" on the basis that the LLC had a partner as a member. The petitioners were not entitled to additional flow-through losses. The court's opinion also stands for the proposition that simply having 10 or fewer partners does not mean that the entity is not a partnership for tax purposes. Brumbaugh, et al. v. Comr., T.C. Memo. 2015-65.
Just Because A Partnership Has 10 or Fewer Partners Does Not Mean It Is Not a Partnership.
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