Potential partnership guidance

In addition to the recently issued guidance regarding partnership related party basis adjustments (see our Tax Alert for additional details), there are a number of critical areas where Treasury and/or IRS guidance is anticipated in the coming months for various partnership items.

Key takeaways

• The IRS priority guidance plan includes several potentially significant areas that would impact partnerships. Below we discuss several of those items we’re continuing to monitor.
• It is critical to note that in light of the Supreme Court’s overturning of the Chevron doctrine, it is unclear how the IRS’s and Treasury’s pursuit of these guidance projects will unfold.

The IRS priority guidance plan includes several potentially significant areas that would impact partnerships. We continue to monitor the following issues:

Self-employment tax guidance for limited partners and LLC members under section 1402(a)(13)

Guidance on the application of the limited partner exception for self-employment income under section 1402(a)(13) is back on the IRS Priority Guidance Plan after a five-year absence. The IRS has given no official indication of when it will release guidance; unofficially, the IRS has said that it is “working on it.” With the renewed focus on auditing large partnerships, as well as recent court cases in this area, we would not be surprised if guidance is issued sooner rather than later.

With this in mind, we recommend that you review with your Baker Tilly advisor any positions taken utilizing section 1402(a)(13) to exclude flow-through income from net earnings from self-employment in order to be prepared for whatever guidance emerges.

Background and Recent Cases

Section 1402(a)(13) generally excludes a limited partner’s distributive share of partnership income or loss from net earnings from self-employment. Guaranteed payments for services rendered to the partnership are not excluded. The Internal Revenue Code does not define the term “limited partner.” The IRS issued proposed regulations in 1997 that would have imposed functional guidelines for determining limited partner status; however, these regulations were revoked in response to the backlash they received, and Congress placed a one-year moratorium on the issuance of any regulations defining limited partner. No new regulations covering the topic have been issued in the intervening 25+ years.