IRS Partnership Self-Employment Tax IRC Tax Return LLC Corporate Distributio

Published: Mar 19, 2018
Share

In Alerts dated February 6, 2017 and December 4, 2017, we reported on the IRS Large Business and International (“LB&I”) division’s first two sets of campaigns under its new issue-based audit approach. On March 13, LB&I announced the identification and selection of five additional compliance campaigns. As described by the IRS, they are as follows:

Self-Employment Tax.

Partners report income passed through from their partnerships. If the partner is an individual who renders services, the partner’s distributive share of income is subject to self-employment tax under the Self-Employment Contributions Act (“SECA”). Some limited partners and limited liability company (“LLC”) members who render services to clients on behalf of the partnership or LLC do not report flow-through income as earnings from self-employment and do not pay SECA tax. The goal of this campaign is “to increase compliance with the law as supported by several recent court decisions.” (Please note that the House Ways and Means Committee’s initial version of comprehensive tax legislation in November 2017 contained language to repeal the existing statutory provision that excludes from self-employment tax a limited partner’s distributive share of partnership trade or business income other than IRC Sec. 707(c) guaranteed payments for services actually rendered. That provision was not included in the Tax Cuts and Jobs Act as finally enacted.)

Costs that Facilitate an IRC Section 355 Transaction.

Costs to facilitate a tax-free corporate distribution under IRC Section 355, such as a spin-off, split-off or split-up, must be capitalized and are not currently deductible. Some taxpayers may execute a corporate distribution and improperly deduct the costs that facilitated the transaction in the year the distribution was completed.

Partnership Stop Filer.

Partners report income, losses, and other items passed through from their partnership. Some partnerships stop filing tax returns for various reasons yet still have economic transactions that are not being reported to their partners. That activity is likely not being reported by the partners.

Sale of Partnership Interest.

A partner must report the sale of a partnership interest on their tax return. This campaign addresses taxpayers who do not report the sale or report the gain or loss incorrectly. Incorrect reporting includes the amount and character of the gain or loss.

Partial Disposition Election for Buildings.

IRC Section 168 disposition regulations (Treas. Reg. Sec. 1.168(i)-8) provide rules for recognizing gain or loss on the disposition of MACRS property and allow taxpayers to elect to recognize partial dispositions of property. As noted by the IRS, to comply with the IRC Section 168 disposition regulations and make a partial disposition election, a taxpayer must be able to substantiate that it: (1) disposed of a portion of a MACRS asset owned by the taxpayer; (2) identified the asset that was partially disposed; (3) determined the placed-in-service date of the partially disposed asset; (4) determined the adjusted basis of the disposed portion; and (5) reduced the adjusted basis of the asset by the disposed portion. This campaign is intended to ensure taxpayers accurately recognize the gain or loss on the partial disposition of a building, including its structural components.