Source: https://www.irs.gov/irb/2016-21_IRB/ar09.html
Timestamp: 2016-10-24 01:51:59
Document Index: 69766894

Matched Legal Cases: ['§ 301', '§ 301', '§\n301', '§ 301', '§ 301', '§ 301', '§ 301', '§ 301', '§ 301', 'art 301', '§ 301', '§ 301', 'art 301', '§ 301', '§ 301', '§ 301', '§ 301', '§ 301', '§ 301', '§ 301', '§ 301', '§ 301', '§ 301', '§ 301', 'art 301', '§ 1']

Internal Revenue Bulletin - May 23, 2016 - T.D. 9766
Internal Revenue Bulletin: 2016-21 May 23, 2016 T.D. 9766
This document contains final and temporary 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. The text
of these temporary regulations serves as the text of proposed regulations (REG–114307–15) published in the Proposed Rules
section in this issue of the Internal Revenue Bulletin.
Effective date: These regulations are effective on May 4, 2016.
Applicability date: For date of applicability, see § 301–7701–2T(e)(8).
Section 301.7701–2(c)(2)(i) states that, except as otherwise provided, a business entity that has a single owner and is not
a corporation under § 301.7701–2(b) is disregarded as an entity separate from its owner (a disregarded entity). However, §
301.7701–2(c)(2)(iv)(B) provides that an entity that is a disregarded entity is treated as a corporation for purposes of employment
taxes imposed under subtitle C of the Internal Revenue Code (Code). Therefore, the disregarded entity, rather than the owner,
is considered to be the employer of the entity’s employees for purposes of employment taxes imposed by subtitle C.
While § 301.7701–2(c)(2)(iv)(B) treats a disregarded entity as a corporation for employment tax purposes, this rule does not
apply for self-employment tax purposes. Specifically, § 301.7701–2(c)(2)(iv)(C)(2) provides that the general rule of § 301.7701–2(c)(2)(i) applies for self-employment tax purposes. After setting forth this
general rule, the regulation applies this rule in the context of a single individual owner by stating that the owner of an
entity that is treated in the same manner as a sole proprietorship is subject to tax on self-employment income. The regulation,
at § 301.7701–2(c)(2)(iv)(D), also includes an example that specifically illustrates the mechanics of the rule. In the example,
the disregarded entity is subject to employment tax with respect to employees of the disregarded entity. The individual owner,
however, is subject to self-employment tax on the net earnings from self-employment resulting from the disregarded entity’s
activities. The regulations do not include a separate example in which the disregarded entity is owned by a partnership.
It has come to the attention of the Treasury Department and the IRS that even though the regulations set forth a general rule
that an entity is disregarded as a separate entity from the owner for self-employment tax purposes, some taxpayers may have
read the current regulations to permit the treatment of individual partners in a partnership that owns a disregarded entity
as employees of the disregarded entity because the regulations did not include a specific example applying the general rule
in the partnership context. Under this reading, which was not intended, some taxpayers have permitted partners to participate
in certain tax-favored employee benefit plans. The Treasury Department and the IRS note that the regulations did not create
a distinction between a disregarded entity owned by an individual (that is, a sole proprietorship) and a disregarded entity
owned by a partnership in the application of the self-employment tax rule. Rather, § 301.7701–2(c)(2)(iv)(C)(2) provides that the general rule of § 301.7701–2(c)(2)(i) applies for self-employment tax purposes for any owner of a disregarded
entity without carving out an exception regarding a partnership that owns such a disregarded entity. In addition, the Treasury
Department and the IRS do not believe that the regulations alter the holding of Rev. Rul. 69–184, 1969–1 CB 256, which provides
that: (1) bona fide members of a partnership are not employees of the partnership within the meaning of the Federal Insurance
Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (chapters 21, 23,
and 24, respectively, subtitle C, Internal Revenue Code of 1954), and (2) such a partner who devotes time and energy in the
conduct of the trade or business of the partnership, or in providing services to the partnership as an independent contractor,
is, in either event, a self-employed individual rather than an individual who, under the usual common law rules applicable
in determining the employer-employee relationship, has the status of an employee.
To address this issue, the Treasury Department and the IRS clarify in these temporary regulations 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 rule that the entity is disregarded for
self-employment tax purposes applies to partners in the same way that it applies to a sole proprietor owner. Accordingly,
the partners are subject to the same self-employment tax rules as partners in a partnership that does not own a disregarded
This document contains amendments to the Procedure and Administration Regulations (26 CFR part 301) under section 7701 of
the Code to clarify that a disregarded entity that is treated as a corporation for purposes of employment taxes imposed under
subtitle C of the Code is not treated as a corporation for purposes of employing its individual owner, who is treated as a
sole proprietor, or employing an individual that is a partner in a partnership that owns the disregarded entity. Rather, the
entity is disregarded as an entity separate from its owner for this purpose. Existing regulations already provide that the
entity is disregarded for self-employment tax purposes and specifically note that the owner of an entity treated in the same
manner as a sole proprietorship under § 301.7701–2(a) is subject to tax on self-employment income. These temporary regulations
apply this existing general rule to illustrate that, if a partnership is the owner of a disregarded entity, the partners in
the partnership are subject to the same self-employment tax rules as partners in a partnership that does not own a disregarded
While these temporary regulations provide that a disregarded entity owned by a partnership is not treated as a corporation
for purposes of employing any partner of the partnership, these regulations do not address the application of Rev. Rul. 69–184
in tiered partnership situations. Several commenters have requested that the IRS provide additional guidance on the application
of Rev. Rul. 69–184 to tiered partnership situations, and have also suggested modifying the holding of Rev. Rul. 69–184 to
allow partnerships to treat partners as employees in certain circumstances, such as, for example, employees in a partnership
who obtain a small ownership interest in the partnership as an employee compensatory award or incentive. However, these commenters
have not provided detailed analyses and suggestions as to how the employee benefit and employment tax rules would apply in
such situations. The Treasury Department and the IRS request comments on the appropriate application of the principles of
Rev. Rul. 69–184 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 order to allow adequate time for partnerships to make necessary payroll and benefit plan adjustments, these temporary regulations
will apply on the later of: (1) August 1, 2016, or (2) 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 § 301.7701–2. For these purposes, an affected
plan includes any qualified plan, health plan, or section 125 cafeteria plan if the plan benefits participants whose employment
status is affected by these regulations. For rules that apply before the applicability date of these regulations, see 26 CFR
part 301 revised as of April 1, 2016.
reaffirmed by Executive Order 13563. Therefore, a regulatory impact assessment is not required. 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. For applicability
of the Regulatory Flexibility Act (5 U.S.C. chapter 6), please refer to the Special Analysis section in the preamble to the
cross-referenced notice of proposed rulemaking in the Proposed Rules section of this issue of the Internal Revenue Bulletin. Pursuant to section 7805(f) of the Code, these regulations were submitted to the Chief Counsel for Advocacy of the Small
The principal author of these regulations is Andrew Holubeck of the Office of the Division Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities). However, other personnel from the IRS and the Treasury Department participated in their
Par. 2. Section 301.7701–2 is amended by:
1. Revising paragraph (c)(2)(iv)(C)(2).
2. Adding paragraph (e)(8).
§ 301.7701–2 Business entities; definitions.
(2) [Reserved]. For further guidance, see § 301.7701–2T(c)(2)(iv)(C)(2).
(e)(8) [Reserved]. For further guidance, see § 301.7701–2T(e)(8).
Par. 3. Section 301.7701–2T is added to read as follows:
§ 301.7701–2T Business entities; definitions (temporary).
(a) through (c)(2)(iv)(C)(1) [Reserved]. For further guidance, see § 301.7701–2(a) through (c)(2)(iv)(C)(1).
(2) Section 301.7701–2(c)(2)(i) applies to taxes imposed under subtitle A, including Chapter 2—Tax on Self-Employment Income.
Thus, an entity that is treated in the same manner as a sole proprietorship under § 301.7701–2(a) 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 § 301.7701–2, 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 § 301.7701–2 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 § 301.7701–2.
(c)(2)(iv)(D) through (e)(7) [Reserved]. For further guidance, see § 301.7701–2(c)(2)(iv)(D) through (e)(7).
(8)(i) Effective/applicability date. Paragraph (c)(2)(iv)(C)(2) of this section applies on the later of–
(A) August 1, 2016, or
(B) 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 § 301.7701–2. For rules that apply before the applicability date of these regulations,
see 26 CFR part 301 revised as of April 1, 2016. For these purposes—
(1) An affected plan includes any qualified plan, health plan, or section 125 cafeteria plan if the plan benefits participants
whose employment status is affected by paragraph (c)(2)(iv)(C)(2),
(2) 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
(3) A health plan means an arrangement described under § 1.105–5 of this chapter.
(ii) Expiration date. The applicability of paragraph (c)(2)(iv)(C)(2) of this section expires on or before May 3, 2019 or such earlier date as may be determined under amendments to the regulations
issued after May 3, 2016.
Approved: April 20, 2016.
(Filed by the Office of the Federal Register on May 3, 2016, 8:45 a.m., and published in the issue of the Federal Register
for May 4, 2016, 81 F.R. 26693)