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Posted by Drew Edmundson on April 24, 2008, 1:27 pm
Please log in for more thread options On Wed, 23 Apr 2008 17:14:23 EDT, "Haskel LaPort"
>
>> On Tue, 22 Apr 2008 21:44:30 EDT, "Haskel LaPort"
>>
>>>I was requested by a taxpayer to look at a 1065 prepared by his
>>>accountant.
>>>The taxpayer purchased a business in 2007 using funds provided by a
>>>mortgage
>>>on his personal residence. Because the property is half owned by his wife,
>>>she insisted on having a ½ interest in the new business. The attorney
>>>formed
>>>an LLC naming both the husband and wife as equal partners and that both
>>>assets and income were to be divided 50/50. The wife is not involved with
>>>the running of the business.
>>>
>>>The accountant divided the 2007 $60,000 profit evenly on the 1065 but
>>>reported only the husband's half as self-employment income and the wife's
>>>as passive income and not self-employment income. Is there any
>>>justification
>>>for how the accountant handled this situation?
>>
>> I think you have two issues:
>> 1) Is the LLC really a partnership for tax purposes?
>>
>> See IRC 704(e)
>>
>> 2) If answer to #1 is yes, then is wife's share subject to
>> SE tax?
>>
>> The argument is that the wife's interest is "like" a limited
>> partnership interest so she doesn't owe SE tax under
>> 1402(a)(13). But legally for state law purposes she isn't a
>> limited partner. She is an LLC member. So how will a court
>> rule? We don't know. How will IRS rule? Again we don't
>> know. The best we may be able to do is look at Proposed
>> Regulation 1.1402(a)-2. However this proposed regulation
>> (issued 1/13/97) will not be effective until finalized and
>> after Congress told IRS to postpone finalizing them for a
>> while nothing has happened.
>
>While the regulation is not finalized one would be hard pressed to deny that
>the proposed regulation represents treasuary position on this matter.
I would agree that it is unlikely that the IRS will disagree
with the proposed regulations but we don't know for sure.
Obviously Congress disagreed or they wouldn't have told IRS
to put them on hold for a time certain (I don't recall how
long the hold was but it expired a long time ago).
>I read all the paper work the attorney prepared for the formation of the LLC
>and there is no distinction made between the husband and wife. Both can
>contract for the LLC and are equal in all respects.
Did you resolve issue 1? What was your conclusion?
If you decided the LLC was a partnership for tax purposes
then based on your additional information that she is able
to contract on behalf of the LLC she would be subject to SE
tax under the proposed regulation.
Some argue since the proposed regulation is not effective
until finalized and Congress expressed its displeasure about
the proposed regulation then the definition of a limited
partner for SE purposes is open to interpretation. They
then conclude that a reasonable interpretation is that an
LLC member is enough like a limited partner that they
qualify for the SE exclusion. There are large law firms all
over the US paying their LLP/LLC members guaranteed payments
for a portion of their income and then making the balance
not subject to SE tax. I would be shocked if some large
accounting, engineering, architectural, etc. firms aren't
doing the same thing.
--
Drew Edmundson, CPA
Cary, NC
--
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