Tax Court docket Case Watch: Tax Court docket Considers the Software of the Self-Employment Tax Guidelines to Funding Funds
Sponsors of funding partnerships must be conscious that the IRS is aggressively difficult administration buildings designed to qualify for the restricted associate exclusion from tax below the Self-Employment Contribution Act (“SECA”). At the moment, there are two pending circumstances docketed within the US Tax Court docket which might be contemplating the applying of the restricted associate exclusion from self-employment tax when the restricted companions in a state regulation restricted partnership (versus restricted legal responsibility corporations and restricted legal responsibility partnerships) actively take part within the partnership’s enterprise. The IRS has efficiently challenged the restricted associate exclusion claims made by homeowners of restricted legal responsibility corporations and restricted legal responsibility partnerships.
Part(1) 1402(a)(13) excludes from SECA taxes the distributive share of partnership revenue or loss allotted to a “restricted associate,” aside from quantities constituting “assured funds” for providers rendered to or on behalf of the partnership by the associate. To qualify below this exception, contributors within the funding partnership business have structured their administration corporations as state regulation restricted partnerships. These contributors take the place that their “wage” or assured funds are topic to the SECA tax however revenue allotted to them of their capability as restricted companions qualifies for the exclusion and isn’t topic to the SECA tax no matter their degree of exercise within the partnership enterprise.
The Code, nevertheless, doesn’t outline “restricted associate.” The IRS believes that the shortage of each a transparent definition and immediately relevant authority opens the door for interpretation as to who’s or could also be a “restricted associate” for functions of the SECA tax. The IRS asserts that, based mostly on an examination of the legislative historical past of the SECA and the Tax Court docket’s precedent, the Tax Court docket ought to apply a purposeful evaluation wherein the court docket appears to the connection of the proprietor to the entity’s enterprise and never the character of the partnership curiosity. The IRS believes that this method treats equally located taxpayers equally by analyzing the character of the providers offered to the partnership enterprise.
The taxpayers’ place within the two circumstances is easy. They assert that the Code is obvious on its face, and, as such, the time period “restricted associate” below the SECA tax must be outlined by state regulation. Additional, as a result of the Code is obvious on its face, the Tax Court docket mustn’t apply its precedent to entities wherein the companions are state regulation restricted companions (versus companions or members of restricted legal responsibility partnerships or restricted legal responsibility corporations, respectively) whatever the companions’ degree of exercise within the partnership enterprise. Accordingly, distributive shares of partnership revenue and loss (aside from assured funds) must be excluded from the SECA tax.
The Tax Court docket’s determination in these circumstances is anticipated to deliver long-awaited readability and certainty to the funding fund business because it pertains to the restricted associate exception of the SECA tax. We’re intently monitoring developments within the circumstances and can present updates as applicable.
(1) All “Part” references are to the Inside Income Code of 1986, as amended (“Code”).
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