Category: Individuals; Partnerships & LLCs Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Partner retired from partnership and was entitled to receive Sec. 736(a)(2) payments over a period of 10 years. Partner died before the end of the 10-year period, and his widow will receive the remaining payments. Are the payments considered self-employment income to the widow? My research did not uncover an explicit answer to this question; however, it is my view that the payments to the widow should be subject to self employment tax. 736(a)(2) provides that payments for a retiring or deceased partner's interest are guaranteed payments if the amount thereof is determined without regard to the income of the partnership. In this case, the amounts are determined without regard to partnership income, and the agreement explicitly states that the payments will be treated as guaranteed payments. Guaranteed payments are clearly subject to self employment tax. Regulation §1.1402(a)-1(b) provides in part as follows. Gross income derived by an individual from a trade or business includes payments received by him from a partnership of which he is a member for services rendered to the partnership or for the use of capital by the partnership, to the extent the payments are determined without regard to the income of the partnership. The widow will be a partner for federal income tax purposes until all the payments under the agreement are made. Regulation §1.736-1(a)(6). Since any partner receiving a guaranteed payment is subject to self employment tax, it seems to me that the widow would be so treated. Perhaps it could be argued that because the widow has provided neither services nor capital to the partnership, her guaranteed payment should not be subject to self employment tax under Regulation Section 1.1402(a)-1(b). However, it could also be counter-argued that the regulation does not explicitly require that the partner render the services himself (or herself). The regulation simply requires that the partner be paid for services rendered. If one partner "steps into the shoes" of another partner and is paid for services rendered by the former partner, should this circumstance fall under Regulation §1.1402(a)-1(b)? It seems to me that the best one can say about this regulation is the drafters did not anticipate this kind of problem. Also, Regulation Section 1.1402(a)-1(b) goes on to provide that a guaranteed payment received from a partnership not engaged in a trade or business is not subject to self employment tax. This implies to me that self employment tax results not from the actions of the partner but represents an imputation to the partner of the trade or business of the partnership. This view also brings Regulation §1.1402(a)-1(b) into line with Regulation §1.1402(a)-1(a)(2) which provides that the term "net earnings from self employment" means the partner's distributive share of the income from any trade or business carried on by any partnership of which he is a member. This definition makes no reference to services at all. |
