Pass-through Income Subject to NII Tax without Material Participation

The 3.8% net investment income (NII) tax applies to income from pass-through entities (e.g., LLCs) when a threshold is crossed unless an owner can demonstrate that he or she materially participated in the business. In one case, an individual with interests in three businesses failed to prove material participation using “reasonable means” and not merely “ballpark guestimates.” The court rejected as proof his “recollections” (without any calendars, diaries, or other means of tracking his participation) and his post hoc employment agreements.  #IdeaoftheDay