Press Room: Tax Release

September 23, 2014

Taxable Self-Employment Services or Limited Partners

IRS has concluded in a Chief Counsel Advice, partners that are limited partners for virtually all legal purposes are not limited partners for purposes of the “limited partner” exclusion provided under the self-employment tax (SET) provisions of the Internal Revenue Code, where the partnership receives fees for services rendered (a “service partnership”).

Under existing law, a general partner’s share of service partnership’s income is subject to the SET, but a limited partner’s share is not. Any partner’s amount of a “guaranteed payment” for services rendered to a partnership is subject to the SET.

The legislative history for the exception of a limited partner’s distributive share of a partnership’s income comments that such limited partner’s income should not qualify for the exception where the limited partnership received fees for services from third parties based upon services performed by the limited partners to and for the partnership.

In related cases, Renkemeyer, Campbell & Weaver, LLP, (2011) 136 TC 137 (a limited partnership) and Riether v. U.S., (DC NM 2012) 112 AFTR 2nd 2013-6074 (an LLC), the courts held that a distributive share of a service partnership’s income, allocated to the limited partners and LLC members, respectively, was subject to the SET. Each case was somewhat fact specific.

This Chief Counsel Advice conclusion, that an LLC member is not considered a qualifying limited partner, and is subject to SET on his share of partnership income where the LLC earns services income as a result of that member’s efforts on behalf of the LLC management firm, has far-reaching implications for all investment management partnerships, as well as service partnerships in other industries.

This advice by IRS is certainly controversial, and may well lead to further litigation by affected taxpayers.