In this article, we begin a review of limited partnerships (LPs) and limited liability companies (LLCs) under the passive loss rules1 of the Internal Revenue Code.
The passive loss rules and other provisions of the Tax Reform Act of 19862 require the typical tax shelter investor to pay tax currently on his positive income from his business activities, salary, and investment income (e.g., dividends and interest), and generally limits his ability to use losses and credits from “passive activities” other than against income from passive activities until disposition of the property comprising the passive activity. The effective result of the rules is to reverse a key return element from a tax shelter—in effect, the tax shelter investor must first report and pay tax on his salary and investment income and defer the benefit of the losses from the tax shelter until the investment generates income or upon disposition of the property.
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