LLCs and liability for self-employment taxes.
Sec. 1402(a) generally includes in "net earnings from self-employment" (NESE) an individual's distributive share of income or loss (as defined in Sec. 702(a)(8)) from any trade or business carried on by a partnership of which the individual is a partner. However, Sec. 1402(a)(13) generally excludes from NESE a limited partner's distributive share of partnership income. Practitioners have been unsure whether (and in what circumstances) LLC members might qualify for the exception. After all, if an LLC is classified as a partnership, its members are partners whose liability is limited. This question illustrates the most significant type of tax issue facing LLCs classified as partnerships: how to apply provisions that distinguish between general and limited partners.
The ruling holds that the members' distributive shares cannot be excluded from NESE under the limited partner exception in Sec. 1402(a)(13). The IRS explained that the classification of the LLC as a partnership meant the members were partners for self-employment tax purposes, and that the Sec. 1402(a)(13) exception did not apply. The ruling thus leaves open questions, such as whether the Service might have ruled differently if a partner did not actively participate in the LLC's business, if the LLC did not conduct a professional service business, if the LLC conducted more than one line of business, or if the preconversion partnership had been a limited partnership rather than a general partnership.
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|Title Annotation:||limited liability companies|
|Author:||Wilson, Kathryn A.|
|Publication:||The Tax Adviser|
|Article Type:||Brief Article|
|Date:||Jan 1, 1995|
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