Tax Treatment of Compensation to Service Provider Partners: Navigating New IRS Prohibitions on Employee Treatment

Reporting Payments to and Benefit Plans for Service Provider Partners, Structuring Grants of Interests to Employees

Recording of a 110-minute CPE webinar with Q&A


Conducted on Tuesday, May 9, 2017
Recorded event now available


This webinar will address the recent IRS regulations prohibiting a partnership from treating a partner who owns a single-member LLC as an employee. The panel will discuss the rules within the broader framework of structuring and reporting compensation for partner/employees. The program will review structuring downstream tiered partnerships to facilitate compensation agreements with partners, designing equity compensation plans for existing employees, making necessary alterations to partnership structures, and reporting plan modifications on Form 1065.

Description

The IRS recently issued final and temporary regulations clarifying Self-Employment Tax Treatment of Partners in a Partnership that Owns a Disregarded Entity. Under the new regulations, the Service’s position is that partnerships that own single-member LLCs electing under Section 7701 to be treated as a corporation for employment tax purposes may not treat the service provider partners as employees eligible to participate in employee benefit plans.

The new regulations clarify IRS rules that require partners to be treated as self-employed for purposes of withholding tax. Many partnerships had used downstream DREs to include service provider partners in benefit plans set up for non-partner employees. The new rules require partnerships to amend any benefit plan documents that included partners covered under these arrangements.

The regulations requested comments on whether and under which circumstances tiered partnerships could treat lower-tier partners as employees. The rules likely will have broader implications on partnership operations, including compelling changes in how partnerships compensate service provider partners and forcing partnerships to alter how they grant partnership interests to existing employees. Partnership tax advisers should have a thorough grasp of the service provider partner compensation rules to avoid costly tax consequences.

Listen as our experienced panel provides a thorough and practical guide to the rules governing service provider partner compensation, including a detailed discussion on the impact of the new disregarded entity and employee benefit plan rules.

Outline

  1. IRS final and temporary regulations TD 9766, Self-Employment Tax Treatment of Partners in a Partnership that Owns a Disregarded Entity
  2. Previous positions taken by taxpayers under Treas. Reg. Sec. 301.7701-2(c)(2)(iv)(B)
  3. Factors in employee vs. non-employee treatment
  4. Restructuring partnership agreements and benefit plans
  5. Possible impact on tiered partnerships
  6. Reporting payments to service provider partners

Benefits

The panel will discuss these and other important topics:

  • What should partnerships that have not yet corrected operating agreements or plan documents do to comply with the regulations?
  • Why would a service provider partner elect to be treated as an employee?
  • How to treat partnership payments for benefit plans operated for the benefit of service provider partners
  • Impact of new regulations on granting of partnership interests to existing employees
  • Including benefit plans costs in guaranteed payment calculations

Learning Objectives

After completing this course, you will be able to:

  • Identify scenarios in which a partnership’s payments to partners/employees may run afoul of IRS rules prohibiting employee treatment for purposes of benefit plan participation
  • Discern when and how to restructure deficient plans based on unauthorized treatment of a partner as an employee
  • Recognize risks and opportunities in structuring partnership and plan documents to provide benefits for service provider partners
  • Determine the impact of the new regulations on the granting of partnership equity interests to employees

Faculty

Olga A. Loy, Partner
Jenner & Block, Chicago

Ms. Loy focuses on all aspects of tax planning, private equity, regulatory and compliance work, merger and acquisitions and fund formation matters. She represents funds and fund sponsors in structuring, negotiating and forming private equity and venture capital funds. She plans and structures other complex business transactions, including corporate mergers and acquisitions, leveraged buyouts, recapitalizations and venture capital investments. She also advises investment advisers, hedge funds, registered investment companies and broker-dealers across a broad range of investment management, securities and general corporate matters. In addition, she represents institutional investors in connection with their investment in funds and other types of investment pools.

Rafi W. Mottahedeh
Jenner & Block, Chicago

Mr. Mottahedeh focuses on a broad range of federal, state and international tax planning and tax controversy matters. Previously, he worked at one of the best-known tax boutiques in the United States and handled a wide variety of domestic and international tax matters, including structured finance transactions, the licensing and sale of intellectual property, and complex loss deductions. In addition, he has worked extensively representing taxpayers before the I.R.S. in both criminal and civil investigations.

S. Tony Ling, Partner
Jenner & Block, Chicago

Mr. Ling focuses his practice on the executive compensation and employee benefit aspects of mergers and acquisitions. Clients ranging from large corporations to individual executives who seek his advice on a full spectrum of executive compensation and ERISA matters, as well as general employee benefits. He has represented clients in multi-million dollar transactions as well as before the Internal Revenue Service and the Department of Labor.


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