The LLC Controversy: Classifying LLC Members as Limited Partners under Proposed Treas. Reg. §1.1402(a)-2

The LLC entity form continues to be popular, and LLCs continue to seek definitive guidance regarding the classification of LLC members for purposes of Internal Revenue Code (IRC) §1402. Although a series of recent judicial decisions and Proposed Treas. Reg. §1.469-5(e), issued in November 2011, address when an individual will be treated as a limited partner for purposes of IRC §469, they exacerbate the uncertainty surrounding how LLC members should be classified for other purposes of the Internal Revenue Code. They do not address how LLC members should be classified for purposes of IRC §1402, or whether deference should be afforded Proposed Treas. Reg. §1.1402(a)-2. Through an analysis of the relevant statutes and related regulations, recent judicial decisions, and other recent developments, we show that Proposed Treas. Reg. §1.1402(a)-2 provides limited authority to support classifying LLC members as limited partners.