Is sale of C corp stock held by LLC subject to Net Investment Income Tax if I materially participated?

[Anonymous]

In 2015, a C corp that I worked at was sold.  The stock of the C corp was held by an LLC which I was a partner in, and the proceeds will be reported on a K-1 as a combination of long term capital gains and dividend income.  My question is if this sale will be subject to the Net Investment Income tax.  What I've read so far seems to suggest that it would not be since I materially participated in the business during the year.  Is that the case and is this changed in any way due to the stock being held by the LLC rather than by me directly?

If the income is not subject to NIIT, is line 5b on Form 8960 the right place to adjust this in TurboTax?

[TaxGuyBill]

Unless the LLC's business was buying, holding, and selling stock, I would think it would still be subject to the Net Investment Income Tax.  Just having another entity hold the stock will not exempt you from the NIIT.

[Anonymous]

Sorry, I don't think I'm doing a good job explaining-- the LLC was a holding company that only held the C corp's stock and nothing else.  I materially participated in the C corp (full time employee) and own my share of the C corp by being a partner in the LLC.  If I had held the C corp's stock directly and materially participated, the proceeds from the sale of the C corp's stock wouldn't have been subject to NIIT, right (or am I misunderstanding how the material participation exception works)?

Since it was held by the LLC instead and the proceeds are passing through the LLC, would that change its handling for NIIT purposes in any way?

[TaxGuyBill]

First, I am NOT an expert about this.  But here are my thoughts:

For your first paragraph, I don't think so.  If it was an S-corporation, the sale would not be subject to NIIT, but I don't THINK that applies to C-corporations.  Here is an third-party article that confirms my thinking:

"In contrast to partnerships, limited liability companies (LLCs), and S corporations, the NII tax applies to income from a C corporation regardless of whether the corporation's business is active or passive with respect to any shareholder."
<a rel="nofollow" target="_blank" href="http://www.dm-t.com/userfiles/Tax%20Saving%20Opportunities.pdf#page=4">http://www.dm-t.com/userfiles...>

[Rick19744 · Accepted solution]

Andrew I see that the last response was approx 20 days ago, but I doubt you have finished your return yet.  AND this is a complicated area where depending on the $$ at stake you may want to consult with a tax professional.

First and foremost, remember that the NIIT will be applied at the individual level (your 1040).  Items from the LLC will pass through to you as there is no tax at the LLC level.  Additionally, the NIIT will only come into play if your modified adjusted gross income exceeds the threshold; $200,000 for single and $250,000 for married filing jointly and the NIIT will only be applied on the excess of those amounts.

While as I stated above, this is a complicated area, and the technical aspects of this are probably beyond the level of this forum.  Having said that, in general I would say both of the items passing through would be subject to the NIIT under what is known as "little i" (dividends) and "three little i" (capital gain) of the final regulations and would be reflected on form 8960.  Based on the brief details I don't see any exemption from the "three little i" capital gain.  This is where it gets murky and someone else may take an aggressive position.  But once again keep in mind the initial paragraph; does it really even come into play?

Where members of an LLC would receive an exemption from the NIIT is if there was gain on property that was used in the trade or business and the member materially participated.  Also upon a sale of the LLC interest it is possible that the NIIT would not apply to that gain, but that is way more involved.