Self-Employment Tax Treatment of Partners in a Partnership That Owns a Disregarded Entity
| Published date | 02 July 2019 |
| Record Number | 2019-14121 |
| Section | Rules and Regulations |
| Court | Internal Revenue Service,Treasury Department |
Federal Register, Volume 84 Issue 127 (Tuesday, July 2, 2019)
[Federal Register Volume 84, Number 127 (Tuesday, July 2, 2019)]
[Rules and Regulations]
[Pages 31478-31480]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14121]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[TD 9869]
RIN 1545-BM77
Self-Employment Tax Treatment of Partners in a Partnership That
Owns a Disregarded Entity
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulation.
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SUMMARY: This document contains final regulations that clarify the
employment tax treatment of partners in a partnership that owns a
disregarded entity. These regulations affect partners in a partnership
that owns a disregarded entity.
DATES:
Effective date: These regulations are effective on July 2, 2019.
Applicability date: For dates of applicability, see Sec. 301.7701-
2(e)(8).
FOR FURTHER INFORMATION CONTACT: Andrew K. Holubeck at (202) 317-4774
or Danchai Mekadenaumporn at (202) 317-6798 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to 26 CFR part 301. Section
301.7701-2(c)(2)(i) of the regulations specifies that, except as
otherwise provided, a business entity that has a single owner and is
not a corporation under Sec. 301.7701-2(b) is disregarded as an entity
separate from its owner (a disregarded entity). However, Sec.
301.7701-2(c)(2)(iv)(B) treats a disregarded entity as a corporation
for purposes of employment taxes imposed under Subtitle C of the
Internal Revenue Code (Code). This exception to the treatment of
disregarded entities does not apply to taxes imposed under Subtitle A
of the Code, including self-employment taxes, and the regulations
issued in TD 9670 on June 26, 2014 (79 FR 36204) explicitly provided
that the owner of a disregarded entity who is treated as a sole
proprietor for income tax purposes is subject to self-employment taxes.
On May 4, 2016, temporary regulations (TD 9766) clarifying the
employment tax treatment of partners in a partnership that owns a
disregarded entity were published in the Federal Register (81 FR 26693,
as corrected July 5, 2016, at 81 FR 43488). Prior to the publication of
the temporary regulations, the regulations did not explicitly address
situations in which the owner of a disregarded entity is a partnership,
and the Department of the Treasury (Treasury Department) and the IRS
had been informed that some taxpayers were reading the regulations to
permit the treatment of the individual partners in a partnership that
owned a disregarded entity (either directly or through tiered
partnerships) as employees of the disregarded entity. The Treasury
Department and the IRS issued the temporary regulations to clarify that
the rule that a disregarded entity is treated as a corporation for
employment tax purposes does not apply to the self-employment tax
treatment of any individuals who are partners in a partnership that
owns a disregarded entity. The temporary regulations, like the final
regulations they replaced, continued to explicitly provide that the
owner of a disregarded entity who is treated as a sole proprietor for
income tax purposes is subject to self-employment taxes. A notice of
proposed rulemaking (REG-114307-15) cross-referencing the temporary
regulations was published in the Federal Register on the same day (81
FR 26763). No public hearing was requested or held. Comments responding
to the notice of proposed rulemaking were received. All comments were
considered and are available for public inspection and copying at
http://www.regulations.gov or upon request. After consideration of all
the comments, the proposed regulations are adopted as amended by this
Treasury decision, and the corresponding temporary regulations are
removed. The public comments are discussed in this preamble.
Explanation and Summary of Comments
The Treasury Department and the IRS received two comments in
response to the proposed regulations. One commenter requested that the
Treasury Department and the IRS consider addressing whether an eligible
entity's election to be classified as an association (and thus a
corporation under Sec. 301.7701-2(b)(2)) pursuant to the final entity
classification regulations under section 7701 of the Code (also known
as the ``Check-the-Box'' regulations) would change the result such that
a partner of the upper tier entity could be an employee at the lower
tier entity that is treated as a corporation. While the temporary
regulations did not address tiered entities, the use of an entity
classified as a corporation under the Check-the-Box regulations
presents different issues, such as whether, under the facts and
circumstances, the partner is an employee of the corporation. However,
these issues are outside the scope of these final regulations, and for
this reason, these regulations do not address this comment.
In the preamble of TD 9766, the Treasury Department and the IRS
requested comments on the appropriate application of the principles of
Rev. Rul. 69-184, 1969-1 C.B. 256, to tiered partnership situations,
the circumstances in which it may be appropriate to permit partners to
also be employees of the partnership, and the impact on employee
benefit plans (including, but not limited to, qualified retirement
plans, health and welfare plans, and fringe benefit plans) and on
employment taxes if Rev. Rul. 69-184 were to be modified to permit
partners to also be employees in certain circumstances.
In response to this request, one commenter described the effects of
the application of the principles of Rev. Rul. 69-184 in the context of
publicly traded partnerships. This commenter noted that one particular
concern in the publicly traded partnership context is that the publicly
traded partnership may not know which service providers treated as
employees (whether at the publicly traded partnership level or at any
disregarded entity owned by the publicly traded partnership) hold units
since individuals may purchase units on the open market without the
knowledge of the publicly traded partnership. If an acquisition of
units by the service provider occurs without the publicly traded
partnership's knowledge, then improper tax withholding and benefit plan
participation may occur until the publicly traded partnership discovers
the error. This commenter also noted a number of negative effects on
service providers receiving equity-based compensation from a publicly
traded partnership and the ensuing burden required in administering any
equity-based compensation plan in the publicly traded partnership
context. This commenter requested that the IRS consider an exception to
the principles of Rev. Rul. 69-184 for publicly traded partnerships.
[[Page 31479]]
As noted in the preamble to TD 9766, these regulations do not
address the application of Rev. Rul. 69-184 in tiered partnership
situations, but rather clarify that a disregarded entity owned by a
partnership is not treated as a corporation for purposes of employing
any partner of the partnership. Similarly, these regulations also do
not address the application of Rev. Rul. 69-184 to publicly traded
partnerships. Accordingly, the final regulations do not provide an
exception to the principles of Rev. Rul. 69-184 for publicly traded
partnerships. However, the Treasury Department and the IRS will
continue to consider the application of Rev. Rul. 69-184, including the
specific issue noted by the commenter, and welcome further comments.
The temporary regulations provided that their applicability date
would be the later of August 1, 2016, or the first day of the latest-
starting plan year following May 4, 2016 of an affected plan (based on
the plans adopted before, and the plan years in effect as of, May 4,
2016) sponsored by an entity that is disregarded as an entity separate
from its owner for any purpose under Sec. 301.7701-2. It has come to
the attention of the Treasury Department and the IRS that some
taxpayers may have read the applicability date to begin on the first
day of the last plan year prior to the termination of an affected plan
(as defined in Sec. 301.7701-2(e)(8)), which may have been a date
after May 4, 2017 . This is not a proper reading of the applicability
date.
In the case of an entity with several affected plans that may have
different plan years, the applicability date was the first day of the
plan year of the affected plan that had the latest plan year beginning
after May 4, 2016, and on or before May 4, 2017 (assuming that date is
after August 1, 2016). For example, an entity may have had two affected
plans, with one plan year that began on September 1, 2016, and another
plan year that began on January 1, 2017. In this case, the
applicability date for this entity would have been January 1, 2017. The
applicability date for any entity affected by these regulations should
not have been delayed beyond May 4, 2017 in any case. For this reason,
the final regulations clarify in Sec. 301.7701-2(e)(8) that the
applicability date of Sec. 301.7701-2(c)(2)(iv)(C)(2) is the later of
August 1, 2016, or the first day of the latest-starting plan year
beginning after May 4, 2016, and on or before May 4, 2017, of an
affected plan (based on the plans adopted before, and the plan years in
effect as of, May 4, 2016) sponsored by an entity that is disregarded
as an entity separate from its owner for any purpose under Sec.
301.7701-2.
Special Analysis
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Department of the Treasury and the Office of
Management and Budget regarding review of tax regulations. It has also
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and because
the regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, the NPRM preceding this
regulation was submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on its impact on small business.
Drafting Information
The principal author of these regulations is Andrew Holubeck of the
Office of the Associate Chief Counsel (Employee Benefits, Exempt
Organizations and Employment Taxes). However, other personnel from the
IRS and the Treasury Department participated in their development.
Statement of Availability
IRS Revenue Procedures, Revenue Rulings, Notices, and other
guidance cited in this document are published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and are available from the
Superintendent of Documents, U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov.
List of Subjects in 26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 301 is amended as follows:
PART 301--PROCEDURE AND ADMINISTRATION
0
Paragraph 1. The authority citation for part 301 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 301.7701-2 is amended by:
0
1. Revising paragraph (c)(2)(iv)(C)(2).
0
2. Removing the ``(e)'' from the ``(e)(8)'' paragraph designation and
revising paragraph (e)(8).
The revisions read as follows:
Sec. 301.7701-2 Business entities; definitions.
* * * * *
(c) * * *
(2) * * *
(iv) * * *
(C) * * *
(2) Paragraph (c)(2)(i) of this section applies to taxes imposed
under subtitle A of the Code, including Chapter 2--Tax on Self-
Employment Income. Thus, an entity that is treated in the same manner
as a sole proprietorship under paragraph (a) of this section is not
treated as a corporation for purposes of employing its owner; instead,
the entity is disregarded as an entity separate from its owner for this
purpose and is not the employer of its owner. The owner will be subject
to self-employment tax on self-employment income with respect to the
entity's activities. Also, if a partnership is the owner of an entity
that is disregarded as an entity separate from its owner for any
purpose under this section, the entity is not treated as a corporation
for purposes of employing a partner of the partnership that owns the
entity; instead, the entity is disregarded as an entity separate from
the partnership for this purpose and is not the employer of any partner
of the partnership that owns the entity. A partner of a partnership
that owns an entity that is disregarded as an entity separate from its
owner for any purpose under this section is subject to the same self-
employment tax rules as a partner of a partnership that does not own an
entity that is disregarded as an entity separate from its owner for any
purpose under this section.
* * * * *
(e) * * *
(8) Paragraph (c)(2)(iv)(C)(2) of this section applies on the later
of--
(i) August 1, 2016; or
(ii) The first day of the latest-starting plan year beginning after
May 4, 2016, and on or before May 4, 2017, of an affected plan (based
on the plans adopted before, and the plan years in effect as of, May 4,
2016) sponsored by an entity that is disregarded as an entity separate
from its owner for any purpose under this section. For rules that apply
before the applicability date of paragraph (c)(2)(iv)(C)(2) of this
section, see 26 CFR part 301 revised as of April 1, 2016. For the
purposes of this paragraph (e)(8)--
(A) An affected plan includes any qualified plan, health plan, or
section 125 cafeteria plan if the plan benefits
[[Page 31480]]
participants whose employment status is affected by paragraph
(c)(2)(iv)(C)(2) of this section;
(B) A qualified plan means a plan, contract, pension, or trust
described in paragraph (A) or (B) of section 219(g)(5) (other than
paragraph (A)(iii)); and
(C) A health plan means an arrangement described under Sec. 1.105-
5 of this chapter.
* * * * *
Sec. 301.7701-2T [Removed]
0
Par. 3. Section 301.7701-2T is removed.
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
Approved: May 15, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-14121 Filed 6-28-19; 4:15 pm]
BILLING CODE 4830-01-P
