IRS Proposes Change Affecting Partnership Losses

Proposed Change to Definition of "Limited Partnership Interest" for Purposes of Passive Activity Loss Rules Based on Management Rights

On November 25, 2011, the US Internal Revenue Service ("IRS") issued proposed Treasury regulations under the passive activity loss ("PAL") rules which propose to revise the definition of an "interest in a limited partnership as a limited partner". Losses allocated to a limited partner are presumptively subject to the PAL rules, which cannot be used to offset non-passive income, such as interest or dividends. In classifying an interest as a limited or general partnership interest, the Proposed Regulations focus on the holder's ability to manage the entity as opposed to the focus in the current regulations which is the designation as a limited partner or the limited liability of the holder. The Proposed Regulations affect individuals who are partners in partnerships, and are to be effective if and when they are published as final