Advertisement CORPORATE GROWTH & M&A JANUARY 19-25, 2015 S-7 TRENDS Navigating the intricacies of LLCs and SE tax paid for the performance of said services. For the years at issue, the Limited liability company (LLC) management company treated members have long faced confusion each member’s distributive share regarding whether their distribuof earnings as if they were limited tive shares of income are partners, arguing that subject to self-employsince the wages reprement (SE) tax. Prior to sented reasonable compenthe use of LLCs, partners sation for each member’s were either general partservices, such members ners subject to SE tax on should be considered limtheir distributive share ited partners for any profits or limited partners whose allocated to them. share was specifically IRC Section 1401 exempted from SE tax. imposes tax on the selfSPEYER On Sept. 5, 2014, the employment income (net IRS issued Chief Counsel earnings) of individuals. Advice (CCA) that clarified the Self-employment net earnings is issue. the gross income minus certain The subject matter in the CCA deductions plus their distributive is a management company (a LLC share of income or loss (whether or taxed as a partnership) that mannot actually distributed) described ages a large family of funds. The in IRC section 702(a)(8) from a management company generally trade or business carried on by has full authority and responsia partnership of which he is a bility to manage and control the member. funds. Its members and employees The CCA analysis discusses two provide this service in exchange cases, Renkemeyer, Campbell, and for quarterly fees. All LLC Weaver LLP. V. Commissioner, members receive W-2s for wages 136 T.C. 137 (2011) and Riether BY PAUL SPEYER v. United States, 919 F. Supp.2nd 1140 (D. N.M. 2012). Renkemeyer involved a LLP that operated a law firm organized in Kansas. The court distinguished between a limited partner and a general partner, noting that a limited partner lacks the power to manage the entity; is immune from liability for the partnership’s debts; and can lose limited liability protection if he is engaged in the partnership’s business operations. The court concluded that the interest of the limited partner reflected more closely an interest of a passive investor and would not be subject to the SE tax on his distributive share of partnership income. In Riether, the District Court examined whether a husband and wife were subject to SE tax on their distributive shares from an LLC taxed as a partnership. The couple argued that since the LLC issued W-2s and K-1s, they were considered employees and income from the LLC was unearned income not subject to SE tax. The court was not persuaded and cited IRS rules that state members are not employees of the partnership for SE tax purposes. Rather, they are self-employed individuals and should not receive W-2s. The CCA concludes that members of an LLC who provide services are not limited partners within the meaning of IRC Section 1402(a)(13) and are subject to SE tax on their distributive share of LLC income. Paul Speyer, JD, LLM, is a Principal at Maloney + Novotny. Contact him at pspeyer@maloneynovotny.com. is proud to join ACG in recognizing our longstanding clients and the other 2015 Deal Maker Award Winners We are honored to have been legal counsel to Fairmount Santrol and Hyland since the beginning of their successful stories and congratulate them on their achievements in corporate and community growth. Calfee’s Corporate/M&A Group: Helping deal makers get deals done for 111 years. Calfee, Halter & Griswold LLP The Calfee Building 1405 East Sixth Street Cleveland, Ohio 44114 216.622.8200 Cleveland | Columbus | Cincinnati | Calfee.com Crain’s Cleveland Business Custom Publishing