132 T.C. No. 19



                UNITED STATES TAX COURT



  PAUL D. GARNETT AND ALICIA GARNETT, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 9898-06.                Filed June 30, 2009.



     Ps owned interests in L.L.P.s, L.L.C.s, and
tenancies in common. On cross-motions for partial
summary judgment, the parties request a ruling as to
whether Ps’ interests are subject to the rule of sec.
469(h)(2), I.R.C., which treats losses from an
“interest in a limited partnership as a limited
partner” as presumptively passive.

     Held: Because Ps did not hold their interests in
the L.L.P.s or L.L.C.s as “limited partners”, these
interests are not subject to the rule of sec.
469(h)(2), I.R.C. Held, further, because Ps’ interests
in the tenancies in common are not interests in limited
partnerships, these interests also are not subject to
the rule of sec. 469(h)(2), I.R.C.
                               - 2 -

     Jeffrey D. Toberer and Donald P. Dworak, for petitioners.*

     J. Anthony Hoefer, for respondent.



                              OPINION


     THORNTON, Judge:   This case is before us on the parties’

cross-motions for partial summary judgment.   Respondent

determined the following deficiencies in and penalties on

petitioners’ Federal income taxes:

                                                  Penalty
     Year                 Deficiency            Sec. 6662(a)

     2000                  $170,268               $34,054
     2001                   110,300                22,060
     2002                    80,900                16,180

Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the years at issue, and Rule

references are to the Tax Court Rules of Practice and Procedure.

     The deficiencies arise largely from respondent’s

disallowance of losses claimed by petitioners and attributable to

their ownership interests in various limited liability

partnerships, limited liability companies, and other business

ventures.   Respondent disallowed the losses under section 469(a)

as passive activity losses on the ground that petitioners did not

materially participate in the activities of the business

entities.   The parties seek summary judgment as to whether


     *
      Brief amicus curiae was filed by Frederick N. Widen of
Ulmer & Berne LLP, Cleveland, Ohio.
                               - 3 -

petitioners’ ownership interests in the business entities are

subject to the rule of section 469(h)(2), which places special

restrictions on losses from an “interest in a limited partnership

as a limited partner”.

     Summary judgment is appropriate as to this issue because

there is no genuine issue of fact and a decision can be made as a

matter of law.   Rule 121(b); Sundstrand Corp. v. Commissioner, 

, 520 (1992), affd. 

 (7th Cir. 1994).   For

purposes of this disposition, we set forth the following

background drawn from the pleadings and affidavits produced by

the parties with accompanying documents, none of which are in

dispute.

                            Background

     Petitioners resided in Nebraska when they filed their

petition.

     During the years at issue petitioners owned interests in

seven limited liability partnerships (L.L.P.s) and two limited

liability companies (L.L.C.s) that were engaged in agribusiness

operations, primarily the production of poultry, eggs, and hogs.1

Petitioners also owned interests in two other business ventures



     1
      Although it appears from the record that the ownership
interests were held primarily if not entirely by petitioner
husband, in their cross-motions for partial summary judgment and
supporting legal memoranda, the parties generally refer to the
various ownership interests without distinction as belonging to
both petitioners. For clarity and convenience, we do the same in
this Opinion.
                               - 4 -

which they characterize as tenancies in common.   As explained in

greater detail below, petitioners owned most of these interests

indirectly through one or another of five separate limited

liability companies (the holding L.L.C.s).2

A.   The L.L.P.s

     Petitioners held an interest in one L.L.P. directly.3   They

held interests in six other L.L.P.s indirectly through one or

another of the holding L.L.C.s.4   The L.L.P.s were all registered

with the State of Iowa.   They reported income and expenses on

Forms 1065, U.S. Return of Partnership Income.    On Schedule K-1,

Partner’s Share of Income, Credits, Deductions, etc., each L.L.P.

identified the relevant holding L.L.C. or petitioner husband (Mr.

Garnett) as a “limited partner”.




     2
      The holding L.L.C.s were Garnett Family Farms L.C. (GFF);
Garnett Family Farms I, L.C. (GFF I); Garnett Family Farms II,
L.L.C. (GFF II); Garnett Family Farms III, L.L.C. (GFF III); and
Garnett Family Farms IV, L.L.C. (GFF IV). (Under Iowa law, a
limited liability company may be denoted by either L.C. or L.L.C.
at the end of its name. See Iowa Code Ann. sec. 490A.401(1)
(West 1999).)
     3
      Petitioners owned directly an 11.11-percent interest in
Quality Poultry & Eggs, L.L.P. (QPE).
     4
      Petitioners owned interests in L.L.P.s indirectly through
their ownership interests in the holding L.L.C.s as follows: GFF
owned an 11.11-percent interest in Elite Pork Partnership,
L.L.P.; GFF I owned a 12.5-percent interest in Center Fresh Egg
Farm, L.L.P.; GFF II owned a 10-percent interest in Cedar Valley
Egg Farm, L.L.P.; GFF III owned 7.5-percent interests in both
Fremont Farms of Iowa, L.L.P., and Poweshiek County Pullets,
L.L.P.; and GFF IV owned a 10-percent interest in Iowa Quality
Pullets, L.L.P.
                               - 5 -

     The L.L.P. agreements generally provided that each partner

would actively participate in the control, management, and

direction of the partnership’s business.    The L.L.P. agreements

also generally provided that no partner would be liable for the

partnership’s debts or obligations unless otherwise required by

Iowa law.

B.   The L.L.C.s

     Petitioners held, in addition to their interests in the

holding L.L.C.s, a 16.66-percent interest in one L.L.C. directly

and a 10.12-percent interest in another L.L.C. through one of the

holding L.L.C.s.5   These two L.L.C.s, like the holding L.L.C.s,

were organized and operated under Iowa law.   They reported income

and expenses on Forms 1065.6   On Schedule K-1, each L.L.C.

identified the relevant holding L.L.C. or Mr. Garnett as a

“limited liability company member”.

     The L.L.C. operating agreements generally provided that

business was to be conducted by a manager with exclusive

authority to act for the company.   The manager was to be selected

by majority vote of the L.L.C.’s members and had the

responsibility, among others, to “effectuate * * * the

regulations and decision of the Members”.   Petitioners were not


     5
      Petitioners owned directly an interest in Fremont Farms
L.C. Petitioners owned an interest in Single Poultry Source,
L.L.C., indirectly through GFF IV.
     6
      The record does not reflect the manner of the holding
L.L.C.s’ tax reporting.
                                - 6 -

managing members of the two L.L.C.s that were not holding

L.L.C.s.7

C.   Other Business Ventures

     Petitioners also owned indirectly, through one of the

holding L.L.C.s, interests in two other business entities, GRD I

and GRD II.8   Petitioners represent, and respondent has not

disputed, that GRD I and GRD II were “de facto” partnerships in

Iowa, “holding title as tenants-in-common among three partners”

(hereinafter the tenancies in common).    On their respective Forms

1065 for GRD I and GRD II, the type of entity is listed as

“TENANTS IN COMMON”; the principal business activity is listed

identically as “RENTAL REAL ESTATE”.    On Schedules K-1, GFF I is

shown as holding a one-third share in both GRD I and GRD II; GFF

I is identified as a “general partner” of GRD I and as a “limited

partner” of GRD II.

D.   Petitioners’ Tax Returns and the Notice of Deficiency

     On their joint Federal income tax returns for 2000, 2001,

and 2002, petitioners reported income and losses from their

interests in the L.L.C.s, including the holding L.L.C.s, and the

L.L.P.s.    In the notice of deficiency respondent disallowed



     7
      The record indicates that petitioner husband was the
manager of GFF I and GFF II but does not indicate the manager of
the three other holding L.L.C.s.
     8
      Petitioners held these interests indirectly through GFF I.
Insofar as the record reveals, GRD I and GRD II are the actual
names rather than mere acronyms.
                                  - 7 -

certain of these claimed losses on the ground that petitioners

had failed to meet the material participation requirements of

section 469.9

                             Discussion

A.   Passive Activity Losses

     1.   In General

     Section 469(a)(1) limits the deductibility of losses from

certain passive activities of individual taxpayers.     Passive

losses disallowed in one year generally may be carried over to

the next year.    Sec. 469(b).    Generally, a passive activity is a

trade or business in which the taxpayer does not materially

participate.    Sec. 469(c)(1).   Material participation is defined

generally as regular, continuous, and substantial involvement in

the business operations.    Sec. 469(h)(1).   The regulations

provide seven exclusive tests for material participation in an




     9
      Respondent also disallowed some claimed losses on the
additional ground that they were from rental activities
determined to be per se passive activities under sec. 469(c)(2).
                               - 8 -

activity.10   Sec. 1.469-5T(a), Temporary Income Tax Regs., 53



     10
      The regulations provide that an individual generally will
be treated as materially participating in an activity during a
year if and only if:

          (1) The individual participates in the activity
     for more than 500 hours during such year;

          (2) The individual’s participation in the activity
     for the taxable year constitutes substantially all of
     the participation in such activity of all individuals
     (including individuals who are not owners of interests
     in the activity) for such year;

          (3) The individual participates in the activity for
     more than 100 hours during the taxable year, and such
     individual’s participation in the activity for the taxable
     year is not less than the participation in the activity of
     any other individual (including individuals who are not
     owners of interests in the activity) for such year;

          (4) The activity is a significant participation
     activity (within the meaning of paragraph (c) of this
     section) for the taxable year, and the individual’s
     aggregate participation in all significant participation
     activities during such year exceeds 500 hours;

          (5) The individual materially participated in the
     activity (determined without regard to this paragraph
     (a)(5)) for any five taxable years (whether or not
     consecutive) during the ten taxable years that immediately
     precede the taxable year;

          (6) The activity is a personal service activity (within
     the meaning of paragraph (d) of this section), and the
     individual materially participated in the activity for any
     three taxable years (whether or not consecutive) preceding
     the taxable year; or

          (7) Based on all of the facts and circumstances (taking
     into account the rules in paragraph (b) of this section),
     the individual participates in the activity on a regular,
     continuous, and substantial basis during such year.

     [Sec. 1.469-5T(a), Temporary Income Tax Regs., 53 Fed. Reg.
     5725-5726 (Feb. 25, 1988).]
                               - 9 -

Fed. Reg. 5725-5726 (Feb. 25, 1988).

     2.   Special Rule for Certain Limited Partnership Interests

     The heart of the controversy before us is section 469(h)(2),

which presumptively treats losses from certain limited

partnership interests as passive.    Section 469(h)(2) provides:

“Interests in limited partnerships.    Except as provided in

regulations, no interest in a limited partnership as a limited

partner shall be treated as an interest with respect to which a

taxpayer materially participates.”     Temporary regulations were

promulgated in 1988 but have never been made final.11    The

temporary regulations permit a taxpayer to establish material

participation in a limited partnership but constrain the taxpayer

to only three of the seven regulatory tests that ordinarily are

available.12   Sec. 1.469-5T(e)(1) and (2), Temporary Income Tax

Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988).    The temporary

regulations provide:




     11
      Sec. 7805(e)(2) provides: “Any temporary regulation shall
expire within 3 years after the date of issuance of such
regulation.” This provision, which was enacted in 1988, applies
to any temporary regulation issued after Nov. 20, 1988.
Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647,
Sec. 6232(b), 102 Stat. 3735. The temporary regulations involved
herein were issued Feb. 19, 1988, before the effective date of
sec. 7805(e).
     12
      For the holder of an interest in a limited partnership
subject to sec. 469(h)(2), the exclusive tests for establishing
material participation are the first, fifth, and sixth tests
described supra note 10. See sec. 1.469-5T(e)(2), Temporary
Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988).
                        - 10 -


(e) Treatment of limited partners--(1) General rule.--
Except as otherwise provided in this paragraph (e), an
individual shall not be treated as materially
participating in any activity of a limited partnership
for purposes of applying section 469 and the
regulations thereunder to--

     (i) The individual’s share of any income, gain, loss,
deduction, or credit from such activity that is attributable
to a limited partnership interest in the partnership; and

     (ii) Any gain or loss from such activity recognized
upon a sale or exchange of such an interest.

     (2) Exceptions.--Paragraph (e)(1) of this section shall
not apply to an individual’s share of income, gain, loss
deduction, and credit for a taxable year from any activity
in which the individual would be treated as materially
participating for the taxable year under paragraph (a)(1),
(5) or (6) of this section if the individual were not a
limited partner for such taxable year.

     (3) Limited partnership interest--(i)   In general.--
Except as provided in paragraph (e)(3)(ii)   of this section,
for purposes of section 469(h)(2) and this   paragraph (e), a
partnership interest shall be treated as a   limited
partnership interest if--

     (A) Such interest is designated a limited partnership
interest in the limited partnership agreement or the
certificate of limited partnership, without regard to
whether the liability of the holder of such interest for
obligations of the partnership is limited under the
applicable State law; or

     (B) The liability of the holder of such interest for
obligations of the partnership is limited, under the law of
the State in which the partnership is organized, to a
determinable fixed amount (for example, the sum of the
holder’s capital contributions to the partnership and
contractual obligations to make additional capital
contributions to the partnership).

     (ii) Limited partner holding general partner
interest.--A partnership interest of an individual shall not
be treated as a limited partnership interest for the
individual’s taxable year if the individual is a general
                                - 11 -

     partner in the partnership at all times during the
     partnership’s taxable year ending with or within the
     individual’s taxable year (or portion of the partnership’s
     taxable year during which the individual (directly or
     indirectly) owns such limited partnership interest). [Sec.
     1.469-5T(e), Temporary Income Tax Regs., 53 Fed. Reg. 5726
     (Feb. 25, 1988).]

B.   The Issue Presented

     The issue presented by the cross-motions for partial summary

judgment is whether petitioners’ interests in the L.L.P.s,

L.L.C.s (other than the holding L.L.C.s), and tenancies in common

(hereinafter collectively “the companies”) should be considered

interests in limited partnerships “as a limited partner” so as to

be treated as presumptively passive under the special rule of

section 469(h)(2).13

C.   The Parties’ Contentions

     In their motion for partial summary judgment, petitioners

contend that section 469(h)(2) is inapplicable because none of

the companies was a limited partnership and because petitioners

are considered to be general partners rather than limited

partners in the companies.   Petitioners rely upon Gregg v. United


     13
      The parties seek a ruling only with respect to the
companies other than the holding L.L.C.s. Respondent asserts,
and petitioners do not dispute, that for purposes of applying
sec. 469(h)(2) in this case, the intervening interests of the
holding L.L.C.s are to be disregarded. Respondent states: “That
petitioners mostly held their interests indirectly (through
Garnett Family Farm entities) is of no consequence”. In the
light of the parties’ seeming agreement on this point, we need
not and do not consider further the extent to which the nature of
an ownership interest in an intervening entity might be material
in applying sec. 469(h)(2).
                                 - 12 -

States, 

 (D. Or. 2000), which held that the

special rule of section 469(h)(2) did not apply to a member of an

L.L.C. formed under Oregon law.

     In his cross-motion for partial summary judgment respondent

contends primarily that section 469(h)(2) applies to petitioners’

interests in the companies because they meet the definition of a

“limited partnership interest” set forth in the temporary

regulations.   Respondent further contends that petitioners’

interests were not “‘general partner’ interests as that term is

commonly used.”   Respondent contends that Gregg v. United States,

supra, was decided incorrectly.

D.   The L.L.P.s and L.L.C.s14

     We can be certain that when it enacted section 469(h)(2) in

1986, Congress did not have L.L.P.s specifically in mind, since

L.L.P.s did not come into existence until 1991.    See 1 Bromberg &

Ribstein, Partnership, sec. 1.01(b)(5) (1998).     Similarly, it is

doubtful that Congress had L.L.C.s specifically in mind, since

only one State, Wyoming, had an L.L.C. statute in 1986.     Id. sec.

1.01(b)(4).    The temporary regulations, promulgated in 1988, make

no explicit reference to L.L.P.s or L.L.C.s.     The question is

whether section 469(h)(2) nevertheless applies to them.    Because




     14
      Because the treatment of petitioners’ interests in the
tenancies in common raises special considerations, we consider
them separately infra.
                                - 13 -

our analysis is informed by differences among limited

partnerships, L.L.P.s, and L.L.C.s, we start there.

     1.   Background:   Limited Partnerships, L.L.P.s, and L.L.C.s

     Limited partnerships have two classes of partners, general

and limited.15   See Iowa Code Ann. sec. 488.102(10), (12) (West

1999); 1 Bromberg & Ribstein, supra sec. 1.01(b)(3).     “General

partners typically have management power and personal liability

while limited partners lack management powers and enjoy immunity

from liability for debts of the partnership.”    1 Bromberg &

Ribstein, supra sec. 1.01(b)(3).    Limited partners are typically

“passive investors”.    Id.   A fundamental concept of limited

partnerships is that a limited partner may lose limited liability

by taking part in control of the partnership.    See 3 Bromberg &

Ribstein, supra sec. 11.02(c).16

     An L.L.P. is a general partnership that by making a filing

or registration has obtained a form of limited liability for its


     15
      In Iowa, limited partnerships are formed under the Iowa
Uniform Limited Partnership Act or Revised Uniform Limited
Partnership Act. See Iowa Code Ann. sec. 487.101 (West 1999).
Under Iowa law, the term “limited partner” is generally used only
for limited partners in a limited partnership formed under these
statutes. Id.
     16
      The Iowa Uniform Limited Partnership Act, as enacted in
1916, provided that a limited partner who takes part in control
loses limited liability. 3 Bromberg & Ribstein, Partnership,
sec. 11.02(b) (1998). The Iowa Revised Uniform Limited
Partnership Act, in its 1976 enactment and again in its 1985
amendments, softened this rule by reducing the scope of a limited
partner’s liability for taking part in control. See id. sec.
11.02(c) and (d).
                                - 14 -

general partners.17    1 Bromberg & Ribstein, supra sec.

1.01(b)(5).    In other respects, an L.L.P. is generally subject to

the provisions of the applicable general partnership statute.

Id.; see Iowa Code Ann. sec. 486A.201 (West 1999) (“A limited

liability partnership continues to be the same entity that

existed before the filing of a statement of qualification”).

Consequently, members of an L.L.P. are not statutorily restricted

from participating in management.    See Iowa Code Ann. secs.

486A.101, 486A.1001 (West 1999).

     An L.L.C. is “essentially a hybrid of the corporate and

partnership forms of business.”    1 Bromberg & Ribstein, supra

sec. 1.01(b)(4).18    L.L.C. members can participate directly in

management but have limited liability for the company’s debts and

liabilities.   See generally Iowa Code Ann. ch. 490A (West 1999);

1 Bromberg & Ribstein, supra sec 1.01(b)(4).

     Notwithstanding these differences among limited

partnerships, L.L.P.s, and L.L.C.s, they are all generally

treated for Federal income tax purposes as partnerships.     See

sec. 761(a).    See generally McNamee v. Dept. of the Treasury, 

 (2d Cir. 2007); Littriello v. United States, 

 (6th Cir. 2007); Med. Practice Solutions, LLC v.



     17
      In Iowa, an L.L.P. is formed under the Iowa Uniform
Partnership Act. See Iowa Code Ann. sec. 486A.101 (West 1999).
     18
       Iowa Code Ann. sec. 490A.102 (West 1999) defines an
L.L.C. as an “unincorporated association having one or more
members, and organized under or subject to this chapter.”
                               - 15 -

Commissioner, 132 T.C.      (2009); sec. 1.761-1, Income Tax Regs.;

sec. 301.7701-2(c)(1) Proced. & Admin. Regs.    Under the so-called

check-the-box regulations, certain eligible business entities,

including many domestic L.L.C.s and L.L.P.s, can elect to be

treated as corporations.    Sec. 301.7701-3(b)(1)(i), Proced. &

Admin. Regs.    Such an election is effective for Federal tax

purposes, including application of the rules in sec. 469.    Sec.

301.7701-3(a), Proced. & Admin. Regs.    Insofar as the record

reveals, none of the companies involved herein elected to be

treated as a corporation pursuant to these regulations.

     2.   L.L.P. and L.L.C. Interests as “Limited Partnership
          Interests” Under the Temporary Regulations

     Acknowledging that differences exist among limited

partnerships, L.L.P.s, and L.L.C.s, respondent contends that

under the temporary regulations the differences are “irrelevant”.

Respondent contends that the “sole relevant consideration” is

that petitioners enjoyed limited liability with respect to their

ownership interests.    Because of this limited liability,

respondent contends, each L.L.P. and L.L.C. interest in question

is a “limited partnership interest” under the temporary

regulations.    See sec. 1.469-5T(e)(3)(i), Temporary Income Tax

Regs., supra.    According to respondent, this ends the matter.

Respondent’s contentions, however, overlook the fact that the

operative condition for applying section 469(h)(2) is not simply

that there be an “interest in a limited partnership” but an
                               - 16 -

“interest in a limited partnership as a limited partner”.     Sec.

469(h)(2) (emphasis added).

     The Code and regulations provide no general definition of

“limited partner”.19   Petitioners suggest we should interpret the

term literally to mean nothing more nor less than a limited

partner in an entity that is classified as a limited partnership

under applicable State law.    Under such a literal reading, they

suggest, a member of an L.L.P. or an L.L.C. could not be a

“limited partner” because neither an L.L.P. nor an L.L.C. is,

strictly speaking, a limited partnership.

     We are not convinced, however, that such a narrow

construction is appropriate.   Although not free of ambiguity, the

legislative history suggests that Congress contemplated that the

Secretary would have regulatory authority to treat “substantially

equivalent entities” as limited partnerships for purposes of

section 469(h)(2).20   S. Rept. 99-313, at 732 (1986), 1986-3 C.B.


     19
      Certain proposed regulations define “limited partner”
“Solely for purposes of section 1402(a)(13)” and the regulations
thereunder, dealing with self-employment tax. Sec. 1.1402(a)-
2(h), Proposed Income Tax Regs., 62 Fed. Reg. 1704 (Jan. 13,
1997). These proposed regulations do not expressly address the
treatment of an L.L.P. or L.L.C. member.
     20
      As petitioners point out, this quoted Senate report phrase
occurs in explaining the introductory language of sec. 469(h)(2)
(“Except as provided in regulations”) which authorizes regulatory
exceptions to the general rule of sec. 469(h)(2) that treat
certain interests in limited partnerships as presumptively
passive. Petitioners suggest that Congress never intended the
Secretary’s authority to be used to expand the reach of sec.
469(h)(2) to entities other than limited partnerships. The
                                                   (continued...)
                              - 17 -

(Vol. 3) 1, 732.   As a corollary, it would appear that Congress

also contemplated that at least some ownership interests in such

“substantially equivalent entities” might be treated as interests

held by limited partners.

     At first glance, it might seem the temporary regulations

accomplish this result with respect to an ownership interest in

an L.L.P. or an L.L.C., insofar as section 1.469-5T(e)(3)(i),

Temporary Income Tax Regs., supra, would appear to treat such an



     20
      (...continued)
Senate report states in relevant part:

           Under the bill, the Secretary of the Treasury is
     empowered to provide through regulations that limited
     partnership interests in certain circumstances will not
     be treated (other than through the application of the
     general facts and circumstances test regarding material
     participation) as interests in passive activities.
     * * *

     * * * The exercise of such authority might also be
     appropriate where taxpayers sought to avoid limited
     partnership status with respect to substantially equivalent
     entities.

     [S. Rept. 99-313, at 731-732 (1986), 1986-3 C.B. (Vol. 3) 1,
     731-732; emphasis added.]

     It is unclear whether the Senate report, as drafted, makes
the point for which it was intended. Suspicions are heightened
by the fact that in the General Explanation of the Tax Reform Act
of 1986 at 236 (J. Comm. Print 1987) (published several months
after the enactment of the 1986 Tax Reform Act), the staff of the
Joint Committee on Taxation reproduced the quoted sentences
almost verbatim but changed the words “such authority” to the
arguably less restrictive “regulatory authority”. More
pertinently, the context of the sentences in question, addressing
concerns about abusive efforts to “avoid” limited partnership
status, seems to support a broader reading than petitioners
favor.
                               - 18 -

interest as a “limited partnership interest”.    If the general

partner exception applies, however, then the ownership interest

“shall not be treated as a limited partnership interest”.    Sec.

1.469-5T(e)(3)(ii), Temporary Income Tax Regs., supra (the

general partner exception).    The question, then, is whether the

general partner exception applies.

     3.    The General Partner Exception

     As indicated by its caption, “Limited partner holding

general partner interest”, the general partner exception clearly

applies to situations where a partner in a State law limited

partnership possesses dual limited and general partnership

interests.    Sec. 1.469-5T(e)(3)(ii), Temporary Income Tax Regs.,

supra.    By its terms, however, the general partner exception is

not expressly confined to such a situation, and respondent makes

no argument that it should be so confined.21    In particular,

respondent does not contend that the general partner exception is



     21
      As a practical matter, it would not appear that the
general partner exception would be of much consequence as applied
to a State law limited partnership in which the general partner
does not also hold a limited partner interest. Because a general
partner interest would appear unlikely to be characterized as a
“limited partnership interest” under sec. 1.469-5T(e)(3)(i),
Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988),
the general partner exception would appear generally unnecessary
if the general partner did not also possess a limited partner
interest. If we seek, however, to apply the temporary
regulations to an entity like an L.L.P. or an L.L.C. which has a
single type of ownership interest that does not correspond
squarely to either a limited partner interest or a general
partner interest but instead reflects aspects of each, the
general partner exception takes on heightened significance.
                              - 19 -

categorically unavailable to members of L.L.P.s or L.L.C.s.

Rather, respondent appears to suggest that the availability of

the general partner exception depends upon the extent of

authority and control that the L.L.P. or L.L.C. member enjoys.

     The temporary regulations do not define the term “general

partner”.   Nor is a general definition of “general partner” found

in the Code or elsewhere in the regulations.22   Citing Giles v.

Vette, 

, 560 (1924), respondent contends that in

common usage the term general partner means one who has

“authority, actual or apparent, to act for and bind the

copartnership.”23


     22
      The term “general partner” is used multiple times in the
Code and the regulations but without a general definition. In
certain contexts the term refers specifically to a general
partner in a limited partnership. See, e.g., sec.
2701(b)(2)(B)(ii); sec. 1.280G-1, Q&A-7(e), Example (3), Proposed
Income Tax Regs.; sec. 1.368-2(m)(5), Example (8), Proposed
Income Tax Regs., 69 Fed. Reg. 49840 (Aug. 12, 2004). More
commonly, however, “general partner” seems to refer more broadly
to any partner (whether or not in a limited partnership) other
than a limited partner. See, e.g., secs. 465(c)(7)(D)(ii)(I),
736(b)(3)(B), 988(c)(1)(E)(v), 6231(a)(7); secs. 1.42-2(d)(3)(i),
1.904-4(e)(3)(iv), Example (4), Income Tax Regs.; secs. 1.367(a)-
1T(c)(3)(i)(A), 1.367(a)-2T(c)(2)(ii), Temporary Income Tax
Regs., 51 Fed. Reg. 17940, 17943 (May 15, 1986).
     23
      We are not persuaded that Giles v. Vette, 

,
560 (1924), provides the all-purpose definition of “general
partner” which respondent claims to discover there. The holding
in Giles was that would-be limited partners in a failed limited
partnership were not liable as general partners under the Uniform
(General) Partnership Act then in effect in Illinois because the
facts and circumstances indicated they did not intend to become
general partners. The Court in Giles was less concerned with the
definition of a general partner than with the existence of a
partnership. That is not the concern presented here. To the
                                                   (continued...)
                              - 20 -

     Petitioners contend and respondent does not dispute that

under Iowa law they were not precluded from actively

participating in the management and operations of the L.L.P.s and

L.L.C.s.   Nor does respondent dispute that petitioners were given

at least some role to play in the management of the L.L.P.s and

L.L.C.s.   Respondent contends, however, that these circumstances

do not suffice to classify petitioners as general partners

because:   “The partnership agreements here did not give

petitioners the authority to take action on behalf of the

partnerships as a general partner would (nor did petitioners

function like they were general partners).”24

     Consequently, in determining the applicability of section

469(h)(2), respondent suggests that we should make threshold

factual inquiries into the nature and extent of petitioners’

authority to act on behalf of the L.L.P.s and the L.L.C.s.   These

threshold factual inquiries, however, seem closely akin to

factual inquiries appropriately made under the general tests for

material participation.   To import them into the per se rule of



     23
      (...continued)
contrary, respondent’s arguments for applying sec. 469(h)(2)
presuppose that the L.L.P.s and the L.L.C.s are to be treated as
partnerships and that petitioners are to be treated as partners
for Federal income tax purposes.
     24
      If we were to agree with respondent’s test for applying
the general partner exception, which we do not, we would conclude
that there are genuine issues of material fact as to the nature
and extent of petitioners’ authority and involvement with the
L.L.P.s and the L.L.C.s.
                               - 21 -

section 469(h)(2) would tend, we believe, to blur that special

rule and the general rules for material participation in a manner

that is at odds with the statutory framework and legislative

intent.

     The legislative history sets forth “special considerations”

that pertained in treating limited partnership interests as

presumptively passive under section 469(h)(2):   “since a limited

partner generally is precluded from participating in the

partnership’s business if he is to retain his limited liability

status, the committee believes it should not be necessary to

examine general facts and circumstances regarding material

participation in this context.”   S. Rept. 99-313, supra at 720,

1986-3 C.B. (Vol. 3) at 720.   Similarly, the legislative history

states:   “In general, under relevant State laws, a limited

partnership interest is characterized by limited liability, and

in order to maintain limited liability status, a limited partner,

as such, cannot be active in the partnership’s business.”     Id. at

731, 1986-3 C.B. (Vol. 3) at 731.

     Thus, while limited liability was one characteristic of

limited partners that Congress considered in the enactment of

section 469(h)(2), it clearly was not, as respondent suggests,

the sole or even determinative consideration.    To the contrary,

the more direct and germane consideration was the legislative

belief that statutory constraints on a limited partner’s ability
                              - 22 -

to participate in the partnership’s business justified a

presumption that a limited partner generally does not materially

participate and made further factual inquiry into the matter

unnecessary.

     We do not believe that this rationale properly extends to

interests in L.L.P.s and L.L.C.s.   As previously discussed,

members of L.L.P.s and L.L.C.s, unlike limited partners in State

law limited partnerships, are not barred by State law from

materially participating in the entities’ business.   Accordingly,

it cannot be presumed that they do not materially participate.

Rather, it is necessary to examine the facts and circumstances to

ascertain the nature and extent of their participation.     That

factual inquiry is appropriately made, we believe, pursuant to

the general tests for material participation under section 469

and the regulations thereunder.   We anticipate that this

examination will occur in subsequent phases of this proceeding.

     Accordingly, with appropriate regard for the legislative

purpose of section 469(h)(2), we conclude that petitioners held

their ownership interests in the L.L.P.s and the L.L.C.s as

“general partners” within the meaning of the temporary

regulations.   In doing so, we recognize that petitioners’ status

in these entities differs significantly from the status of

general partners in State law limited partnerships, but we also

recognize that their status differs significantly from that of
                              - 23 -

limited partners in State law limited partnerships.   The need to

pigeonhole the ownership interests as either general partner

interests or limited partner interests arises in the first

instance from the fiction of treating an L.L.P. or an L.L.C. as a

“limited partnership” under section 1.469-5T(e)(3)(i), Temporary

Income Tax Regs., supra.   Inasmuch as classifying an L.L.P. or

L.L.C. interest as a limited partnership interest entails a

departure from conventional concepts of limited partnerships, it

similarly entails, we believe, a departure from conventional

concepts of general partners and limited partners.    In the final

analysis, and absent explicit regulatory provision, we conclude

that the legislative purposes of the special rule of section

469(h)(2) are more nearly served by treating L.L.P. and L.L.C.

members as general partners for this purpose.   See Gregg v.

United States, 

 (D. Or. 2000) (holding that

section 469(h)(2) did not apply to Oregon L.L.C. members).

     4.   Conclusion

     We conclude and hold that petitioners’ ownership interests

in the L.L.P.s and the L.L.C.s are excepted from classification

as “limited partnership interests” under the temporary

regulations by operation of the general partner exception.

Accordingly, petitioners’ ownership interests in the L.L.P.s and

the L.L.C.s are not subject to the special rule of section

469(h)(2).   In reaching this result, we emphasize that we do not
                               - 24 -

invalidate the temporary regulations in any respect but simply

decline to fill any gap therein to reflect respondent’s

litigating position in this case.   See Gen. Dynamics Corp. &

Subs. v. Commissioner, 

, 120-121 (1997)

(“Respondent’s litigating position is not afforded any more

deference than that of petitioners.     * * *   That is especially so

here, where respondent did not publish her position prior to this

controversy.”).

E.   The Tenancies in Common

     As previously indicated, respondent has not disputed

petitioners’ assertion that GRD I and GRD II were tenancies in

common, as characterized on their Forms 1065.     Nor does

respondent expressly argue for any other characterization of

these entities.   We treat respondent as having conceded that GRD

I and GRD II were tenancies in common.25

     In his cross-motion for partial summary judgment, respondent

makes no express argument (apart from his arguments regarding

L.L.P.s and L.L.C.s) for treating an interest in a tenancy in

common as an interest in a limited partnership pursuant to



     25
      The parties apparently agree that the tenancies in common
should be recognized as separate business entities. Cf. sec.
301.7701-1(a)(2), Proced. & Admin. Regs. (“mere co-ownership of
property that is maintained, kept in repair, and rented or leased
does not constitute a separate entity for federal tax purposes”;
by contrast, a joint venture may create a separate entity where
the co-owners “carry on a trade, business, financial operation,
or venture and divide the profits therefrom.”)
                               - 25 -

section 469(h)(2) and the regulations thereunder.26   In

particular, respondent has not asserted and the record does not

suggest that these interests were designated limited partnership

interests, as provided in section 1.469-5T(e)(3)(i)(A), Temporary

Income Tax Regs., supra.   Nor has respondent expressly argued

that petitioners’ liability with respect to either of these

interests was limited to a determinable, fixed amount within the

meaning of section 1.469-5T(e)(3)(i)(B), Temporary Income Tax

Regs., supra.27   We conclude and hold that petitioners’ interests

in GRD I and GRD II are not interests in limited partnerships

within the meaning of section 469(h)(2).   Perforce it follows

that petitioners did not hold their interests in the joint

tenancies as “limited partners”.

F.   Alleged Reporting Inconsistencies

     Respondent observes that with one exception, the Schedules

K-1 that the companies issued to petitioners or the relevant



     26
      In his cross-motion for partial summary judgment,
respondent reserves as an additional basis for disallowing
petitioners’ losses from GRD I and GRD II, and possibly other
entities, that their activities were per se passive rental
activities pursuant to sec. 469(c)(2). With regard to this
issue, there are genuine issues of material fact. This issue is
not within the scope of the parties’ cross-motions for partial
summary judgment, and we do not consider it further herein.
     27
      Respondent has not argued that petitioners enjoyed limited
liability with respect to their interests in the tenancies in
common by virtue of the fact that they held the interests
indirectly through a holding L.L.C.. To the contrary, as
previously noted, respondent contends that it is of “no
consequence” that petitioners held interests indirectly through
the holding L.L.C.s.
                                 - 26 -

holding L.L.C. described the interests as something other than

that of a “general partner”.28    In particular, the Schedules K-1

for the subject L.L.P.s and for one of the tenancies in common

(GFF II) described each interest as that of a “limited partner”;

the Schedules K-1 for the two L.L.C.s that were not holding

L.L.C.s described each interest as that of a “limited liability

company member.”   Respondent contends that petitioners obtained a

tax benefit by failing to designate their interests as “general

partner” interests, in that they thereby avoided self-employment

tax pursuant to section 1402(a)(13), which excludes from self-

employment earnings certain distributive shares of a “limited

partner”.

     Petitioners contend that they or the holding L.L.C.s were

listed as “limited partners” on the L.L.P.s’ Schedules K-1 only

because Schedule K-1 does not list “limited liability partner” as

one of the check-the-box options.29

     With respect to the L.L.C.s’ Schedules K-1, we see no

irregularity or inconsistency in the interests’ being listed as

those of a “limited liability company member.”    In any event,

respondent concedes that the manner in which the Schedules K-1



     28
      One of the tenancies in common, GRD I, described the
holding L.L.C.’s (GFF I’s) interest as “general partner”.
     29
      Petitioners have not expressly offered an explanation as
to why GFF I identified the holding L.L.C.’s interest as “general
partner” while GFF II identified the holding L.L.C.’s interest as
“limited partner”.
                             - 27 -

described the interests does not conclusively establish that

petitioners held limited partnership interests.    Respondent does

not assert that petitioners are collaterally estopped or

constrained by any duty of consistency from asserting in this

proceeding that they did not hold interests as limited partners

for purposes of section 469(h)(2).    In neither the notice of

deficiency nor the answer has respondent asserted any deficiency

attributable to underpaid self-employment taxes.

     In these circumstances, we are not persuaded that the

alleged inconsistencies in the manner in which petitioners’

interests were listed on the Schedules K-1 are material.     Nor has

respondent otherwise set forth specific facts to show that there

is a genuine issue of material fact requiring trial as to the

application of section 469(h)(2).    See Rule 121(d).

     Accordingly, we shall grant petitioners’ motion for partial

summary judgment and deny respondent’s motion for partial summary

judgment.


                                          An appropriate order

                                     will be issued.