The debate over the issue of whether self-employment taxes apply to distributions from limited liability entities, such as limited liability partnerships or limited liability companies, was reignited in Renkemeyer v. Commissioner, 136 T.C. No.7 (2011). In that case, the court held that the partners' distributive shares of the net business income of a law firm that was organized as a limited liability partnership (LLP) were subject to self-employment taxes and not subject to the exclusion for the distributive shares of limited partners. After Renkemeyer, where does the law stand?

Introduction and Background

Code section 1401 imposes a tax on self-employment income. With respect to partnerships, section 1402(a) defines the term "net earnings from self-employment" as including an individual's "distributive share (whether or not distributed) of income or loss described in code section 702(a)(8) from any trade or business carried on by a partnership" of which the individual is a member. Code section 1403(a)(13) provides a limitation for income allocated to a limited partner (LP) by providing that "there shall be excluded from the computation of a partner's self-employment income the distributive share of any item of income or loss of a LP, as such, other than guaranteed payments described in code section 707(c) to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services."

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