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PRACTICE POINT
The self-employment tax for closely held businesses has become more important in light of a number of self-employment tax cases decided by the Tax Court in the last year. This article, based on a panel at the Joint Fall meeting in Austin, Texas, looks at the statutory provisions and the impact of three of these cases: Fleischer v. Commissioner. T.C. Memo 2016-238 (December 29, 2016); Castigliola v. Commissioner. T.C. Memo 2017-62 (April 12, 2017); and Hardy v. Commissioner, T.C. Memo 2017-16 (January 17, 2017).
Self-employment income is defined under section 1402(a) as "gross income derived by an individual from any trade or business carried on by such individual, less the deductions...plus his distributive share (whether or not distributed) of income or loss... from any trade or business carried on by a partnership of which he is a member..." It does not include any net earnings over the contribution and benefit base ($127,200 in 2017), subtracting the wages paid to such individual during such taxable year (section 1402(b)(1)), or earnings less than $400 in a particular tax year (section 1402(b)(2)).
Section 1402(a)(13) states that "there shall be excluded the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments described in section 707(c) to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services."
The Code and Treasury Regulations do not provide any guidance on how to treat a member of a limited liability company (LLC) for purposes of the self-employment tax rules. The key provision, section 1402(a) (13), was added to the statute in 1977 to cover conventional partnerships, including limited partnerships. This was before the existence of limited liability companies. In 1994 and 1997, the IRS issued proposed regulations to determine whether distributive shares of partnership income of LLC members are included in self-employment income.1 The intent of the proposed regulations was to treat owners of an LLC interest in the same manner as similarly situated partners in a state law partnership.
Because the proposed regulations were never finalized, tax practitioners have relied on the 2011 Renkemeyer case2 to advise partnership...