This report, which was submitted on behalf of the New York City Bar Association by its Committee on Taxation of Business Entities, proposes new guidance, relating to the treatment of certain partners as employees for federal tax purposes.
Under the current Treasury Department and Internal Revenue Service (collectively, the "IRS") rules, an individual cannot be both a partner and an employee of the same partnership. Because the tax consequences to the individual can vary greatly depending on her classification, individuals and their tax advisors have devised mechanisms to change the characterization of the individual from a partner to an employee for different purposes. These mechanisms, however, add unnecessary complexity and expense, and in some instances, uncertainty as to whether the intended outcome will be respected. Moreover, the authority for a single classification as either a partner or an employee is dated and circumstances have changed. With the explosion in the use of limited liability companies in recent years, the Committee believes it is time to re-examine the basic premise and provide new guidance allowing certain partners to be treated as employees for federal tax purposes.
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