When You're In, You're In

There has been some question whether members of a multi-member LLC that has not elected to be classified as a corporation for income tax purposes can also "elect out" of Subchapter K pursuant to the provisions of IRC Section 761(a). In PLR 200305026, the Service rejected an attempt by a limited partnership to elect out of Subchapter K. The result indicates that the Service would likely reject a similar effort by an LLC.

The ruling notes that Treas. Reg. Section 1.761-2(a)(2) requires that the participants in the joint purchase, retention, sale, or exchange of investment property meet three conditions to elect out of Sub K. Namely, (i) they must own the property as co-owners, (ii) they must reserve the right separately to take or dispose of their shares of any property acquired or retained, and (iii) subject to certain exceptions, they cannot not actively conduct business or irrevocably authorize any some person or persons acting in a representative capacity to purchase, sell, or exchange the investment property.

The Service rejected the attempt to elect out of Sub K because the partners in the limited partnership did not own the limited partnership's property as co-owners. Members of an LLC have the same relationship to the LLC's property as do the limited partners to the property held by their limited partnership. That is, the property belongs to the LLC, not the members as co-owners. Hence, it is likely that the Service will rule that the members of an LLC are similarly barred from electing out of Subchapter K.