Discussion:LLC Taxation Issue

True, partners who receive "payment" in their capacity as partners can not get a W2 for amounts paid to them as partners.

However, I am still looking for the prohibition of a partner becoming an employee of a partnership, and in the capacity of an employee receiving a W2. In the capacity as a partner, a partner is not allowed to take payments, (in a partner capacity), in the form of wages (W2).

I've given the example of the dentist/partner doing the books, for example, and getting a W-2 for that.

If the partner is an employee under the employee rules, the partner is an employee.

Yes, those transaction between a partnership and a partner in the capacity as a partner are not W2 wages.

I have heard the same as you, JR1, I just want to to see it in writing, because, I have been told such writing exists, and I can not find it. I just looked in Pub 15 and 15A and I believe that deals with transactions as a partner with a partnership.

Now, my mind begins to spin...let's take Dave's idea above and run it out. We establish the membership as a passive membership, and pay a salary on W2 to establish a reasonable salary...I wonder what the service would do with profits flowing thru and not subject to SE.....seems like an easy and automatic way to bifurcate the interests....

The employment relationship is not automatically created by causing wages an a W2, it would have to be a real employment relationship.

I'm still a bit skeptical, though. If this really worked, why wouldn't the national accounting and law firms pay their partners most of their shares of income in the form of salaries? They'd probably have to amend their partnership agreements to do it, of course, but it could save the partners who reside in no-tax or low tax states a lot of state taxes.

Please, note I have caveats over the place.

Guarantee payments are, specifically, exempted from the wages category, and can not be W2 wages.

Section 1.707-1(a) of the Income Tax Regulations provides that a partner who engages in a transaction with a partnership other than in the capacity of a partner shall be treated as if the partner were not a member of the partnership with respect to such transaction. The regulation's section further states that such transactions include the rendering of services by the partner to the partnership and that the substance of the transaction will govern rather than its form.

Section 707(c) of the Code provides that to the extent determined without regard to the income of the partnership, payments to a partner for services, termed 'guaranteed payments', shall be considered as made to one who is not a member of the partnership, but only for purposes of section 61(a) and, subject to section 263, for purposes of section 162(a). If the payments were not termed guaranteed payments, nor were they made in the capacity of a partner, then, maybe they were wages for services and should be treated as such for withholding and social security taxes.

I believe for there to be guaranteed payments there needs to be a provision covering the payments in the partnership agreement.

Why then couldn't the same philosophy be principle be applied to a sole-proprietor whereby he, or she, gets a W-2 for the services rendered in a capacity other than as owner?

Discussion:1065_apportionment_between_ca,_nj

One of our old partners here at the firm is our firm mascot "The Colonel", and we send him around to charity events (really any event we can find that's hard up for entertainment), and he drums business for the firm, and brings about goodwill. We give him a W-2 for this. He plays the banjo if you're wondering.

Please don't say that this is wrong, I depend on that W-2. Err, I mean he depends on it.

Well, partners still should not be on the payroll as employees, however, they can be paid as independent contractors.

I still have not seen a well reasoned legal reason why partners can not be employees. The revenue rulings cited above just make a statements about the issue, and, I am happy that the rulings recognize the position that a partner can render services to a partnership as an independent contractor.

This will solve a couple of problems I had, and will present some tax savings opportunities.

Thank you very much.

http://bulk.resource.org/courts.gov/c/F2/394/394.F2d.661.24751.html

It is a 1968 case so it predates Rev. Rul. 69-184.

LLCs aren't really all that different from partnerships under uniform state partnership law, at least, not anymore. A partnership is treated as a separate legal entity for many purposes which was not the case at common law. The big diffeence, of course, is the limited liability LLC members enjoy.

N.M.S.A. 1978, 54-1A-501. Partner not co-owner of partnership property.

A partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred, either voluntarily or involuntarily.

A partnership can also sue and be sued in its own name.

I think it's very strange to ever treat a partner as an employee or independent contractor for tax purposes. It's perfectly meaningful for a partner to supply capital in a capacity other than as a partner: there is a clear distinction between being a partner, that is, owning an equity interest in a partnership, and lending to it or doing some other financial transaction. But I have no clue what it means to perform services in or out of a capacity of being a partner. Being a partner for tax purposes means co-owning a business; there's just no difference at all between performing services as an owner and performing them not as an owner, since ownership just has nothing to do with work.

54-1A-201. Partnership as entity. (1997) Statute text (a) A partnership is an entity distinct from its partners. (b) A limited liability partnership continues to be the same entity that existed before the filing of a statement of qualification under Section 54-1A-1001 NMSA 1978. History

 History: Laws 1996, ch. 53, § 201; 1997, ch. 76, § 4.  

And I guess that means for ALL purposes, as you say.

Jerry DILTS, Barbara Dilts, Plaintiffs, v. UNITED STATES of America, Defendant. United States District Court, D. Wyoming. 845 F.Supp. 1505 No. 93-CV-1001-B. March 11, 1994.

"In Armstrong , the taxpayer was a partner in a partnership which owned a 50,000 acre cattle ranch. The partnership provided a home at the ranch for the taxpayer and his family and purchased most of their groceries and utilities, insurance for the house, and maid service. The taxpayer did not include the value of those benefits in his income. In remanding the case for further consideration, the Fifth Circuit Court of Appeals held that, under IRC § 707(a), a partner could be an employer of his partnership. Section 707(a) provides that a partner who “engages in a transaction with the partnership other than in his capacity as a member of such partnership, . . . except as otherwise provided in this section, [shall] be considered as . . . one who is not a partner.” The court stated that: The terms “outsider” and “one who is not a partner” are not defined by Congress; neither is the relationship between § 707 and other sections of the Code explained. However, we have found nothing to indicate that Congress intended that this section not relate to § 119. Consequently, it is now possible for a partner to stand in any on of a number of relationships with his partnership, including those of creditor–debtor, vendor–vendee, and employee–employer".

The partner is not an officer of a corporation since no corporation exists. I doubt that a partner could be considered an employee of the partnership under common law.

With W-2s issued, the partnership is deducting fica that it normally would not be if the profits were reported on the k-1s.

Any thoughts?

I have a mid sized LLC who despite my repeated, oral & written warnings continue to show a W2 wage (in addition to G/P) for its members.

We've been through two IRS audits (separate auditors both times) who didn't even touch the issue.

In this case it could be that the S/E income itself pushed them far over the FICA max. So in essence the Gov't made out on it...

Nevertheless, the topic did not even come up..