this comes from Rev Proc 2002-69
SECTION 3. SCOPE
.01 In General. This revenue procedure provides guidance on the classification for federal tax
purposes of a qualified entity (described in section 3.02 of this revenue procedure).
.02 Qualified Entity. A business entity is a qualified entity if:
(1) The business entity is wholly owned by a husband and wife as community
property under the laws of a state, a foreign country, or a possession of the United
States;
(2) No person other than one or both spouses would be considered an owner for
federal tax purposes; and
(3) The business entity is not treated as a corporation under § 301.7701-2.
I would therefore conclude that if they live in a CPS a partnership return is not required. however, they must split everything so there are two schedule E's
in a NON-CPS a partnership return is required because the property is held by an LLC.
