IRS Issues New Ruling on Treatment of Interest Expense
February 19, 2008
The Foley Adviser - February 19, 2008
On February 19, 2008, the Internal Revenue Service issued Revenue Ruling 2008-12, clarifying the tax treatment of interest expense incurred by a securities-trading partnership. The Service ruled that the interest expense is not "business interest" (generally fully deductible), but rather is "investment interest," deductible by each partner only to the extent of the partner's net investment income for the year in question. This will be true whether or not the partnership elects to be treated as a "trading" partnership so that its other expenses are treated as business expenses. The ruling will apply to limited partners of a limited partnership as well as “members” of a limited liability company, other than corporations, who do not “materially participate” in the trading activity. Partners or members that are corporations, or that materially participate in the trading activity, will not be subject to the ruling.