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As we have discussed previously, the classification of a taxpayer's status as a "limited partner" or "general partner" can be important not only for federal income tax purposes but also for state income and franchise tax purposes. see, e.g., Shop Talk, "Are LLC Members GPs or LPs for Federal or State Tax Purposes?" 98 JTAX 62 (January 2003), and "LLC Members-GPs or LPs for State Tax Purposes?," 88 JTAX 316 (May 1998). Recently adopted Oregon personal income tax regulations prove the topic remains timely and the solution elusive.
As we previously noted, over a dozen Code provisions and 70 Regulations explicitly use the terms "limited partner" or "general partner." In addition, there are several other Code sections and Regulations whose operative effect turns on the taxpayer's status as a "limited partner" or "general partner," even though these terms are not explicitly used in the provisions in question (such as the tax treatment of limited and general partners with respect to imputation of a partnership's trade or business). see, e.g., Banoff, Frost, and Keatinge, "Defining 'General Partner' and 'Limited Partner' for Federal Tax Purposes," 70 Tax Notes 1019 (2/19/96); Banoff, "Tax Distinctions Between Limited and General Partners: An Operational Approach," 35 Tax L. Rev. 1 (Fall 1979).
The problem is compounded with respect to members of LLCs, who are treated as partners for federal tax purposes if the LLC is treated as a partnership for entity classification purposes under Reg. 301.7701-2. To date, Congress has provided no clarification as to the status of the LLC's members for tax purposes, and the IRS has failed to adopt a uniform (or even logically consistent) approach to classification of LLC members. see, e.g., Banoff, Frost, and Keatinge, supra; Frost, "Square Peg, Meet Round Hole: Classifying LLC Members as General Partners or Limited Partners for Federal Tax Purposes,"73 Taxes 676 (December 1995).
For example, the Service takes the position that for some operative purposes a distinction exists as to the imputation of a partnership's trade or business to its general partners and limited partners. It remains unclear as to how such imputation of a trade or business would occur with respect to members of an LLC that is treated as a partnership for tax purposes. see TAM 9728002; see...