Individuals Limited by S Corporation Loss Limitation But Not Passive Loss Limitation; Testimony Established Wife Materially Participated; Late-Filing Penalty Applied (Montgomery, TCM)
An individual materially participated in the activities of a limited liability company (LLC) that she and her husband started and for which both taxpayers performed services. Therefore, her claimed share of a net operating loss (NOL) was not precluded on the ground that she was engaged in a passive activity. However, the taxpayers’ claimed loss from their S corporation was limited and their guarantee of a debt owed by that company did not affect that limitation. They were also subject to an addition to tax for the late filing of their return.
The wife participated in the LLC for more than 500 hours during the year at issue, and her participation was regular, continuous, and substantial. Although only the wife was a member of the LLC, the activities of her husband were also taken into account to determine participation. Daily time reports and other logs were not required to establish participation because the taxpayers testified credibly as to their activities in founding the company, negotiating contracts, hiring employees and conducting daily business. As a result, the wife’s share of the construction company’s loss was not a passive loss under Code Sec. 469 and the taxpayers were entitled to claim the NOL.
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