[Federal Register Volume 84, Number 127 (Tuesday, July 2, 2019)]
[Rules and Regulations]
[Pages 31478-31480]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14121]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9869]
RIN 1545-BM77


Self-Employment Tax Treatment of Partners in a Partnership That 
Owns a Disregarded Entity

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

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SUMMARY: This document contains final 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.

DATES: 
    Effective date: These regulations are effective on July 2, 2019.
    Applicability date: For dates of applicability, see Sec.  301.7701-
2(e)(8).

FOR FURTHER INFORMATION CONTACT: Andrew K. Holubeck at (202) 317-4774 
or Danchai Mekadenaumporn at (202) 317-6798 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR part 301. Section 
301.7701-2(c)(2)(i) of the regulations specifies that, except as 
otherwise provided, a business entity that has a single owner and is 
not a corporation under Sec.  301.7701-2(b) is disregarded as an entity 
separate from its owner (a disregarded entity). However, Sec.  
301.7701-2(c)(2)(iv)(B) treats a disregarded entity as a corporation 
for purposes of employment taxes imposed under Subtitle C of the 
Internal Revenue Code (Code). This exception to the treatment of 
disregarded entities does not apply to taxes imposed under Subtitle A 
of the Code, including self-employment taxes, and the regulations 
issued in TD 9670 on June 26, 2014 (79 FR 36204) explicitly provided 
that the owner of a disregarded entity who is treated as a sole 
proprietor for income tax purposes is subject to self-employment taxes.
    On May 4, 2016, temporary regulations (TD 9766) clarifying the 
employment tax treatment of partners in a partnership that owns a 
disregarded entity were published in the Federal Register (81 FR 26693, 
as corrected July 5, 2016, at 81 FR 43488). Prior to the publication of 
the temporary regulations, the regulations did not explicitly address 
situations in which the owner of a disregarded entity is a partnership, 
and the Department of the Treasury (Treasury Department) and the IRS 
had been informed that some taxpayers were reading the regulations to 
permit the treatment of the individual partners in a partnership that 
owned a disregarded entity (either directly or through tiered 
partnerships) as employees of the disregarded entity. The Treasury 
Department and the IRS issued the temporary regulations to clarify 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 temporary regulations, like the final 
regulations they replaced, continued to explicitly provide that the 
owner of a disregarded entity who is treated as a sole proprietor for 
income tax purposes is subject to self-employment taxes. A notice of 
proposed rulemaking (REG-114307-15) cross-referencing the temporary 
regulations was published in the Federal Register on the same day (81 
FR 26763). No public hearing was requested or held. Comments responding 
to the notice of proposed rulemaking were received. All comments were 
considered and are available for public inspection and copying at 
http://www.regulations.gov or upon request. After consideration of all 
the comments, the proposed regulations are adopted as amended by this 
Treasury decision, and the corresponding temporary regulations are 
removed. The public comments are discussed in this preamble.

Explanation and Summary of Comments

    The Treasury Department and the IRS received two comments in 
response to the proposed regulations. One commenter requested that the 
Treasury Department and the IRS consider addressing whether an eligible 
entity's election to be classified as an association (and thus a 
corporation under Sec.  301.7701-2(b)(2)) pursuant to the final entity 
classification regulations under section 7701 of the Code (also known 
as the ``Check-the-Box'' regulations) would change the result such that 
a partner of the upper tier entity could be an employee at the lower 
tier entity that is treated as a corporation. While the temporary 
regulations did not address tiered entities, the use of an entity 
classified as a corporation under the Check-the-Box regulations 
presents different issues, such as whether, under the facts and 
circumstances, the partner is an employee of the corporation. However, 
these issues are outside the scope of these final regulations, and for 
this reason, these regulations do not address this comment.
    In the preamble of TD 9766, the Treasury Department and the IRS 
requested comments on the appropriate application of the principles of 
Rev. Rul. 69-184, 1969-1 C.B. 256, 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 response to this request, one commenter described the effects of 
the application of the principles of Rev. Rul. 69-184 in the context of 
publicly traded partnerships. This commenter noted that one particular 
concern in the publicly traded partnership context is that the publicly 
traded partnership may not know which service providers treated as 
employees (whether at the publicly traded partnership level or at any 
disregarded entity owned by the publicly traded partnership) hold units 
since individuals may purchase units on the open market without the 
knowledge of the publicly traded partnership. If an acquisition of 
units by the service provider occurs without the publicly traded 
partnership's knowledge, then improper tax withholding and benefit plan 
participation may occur until the publicly traded partnership discovers 
the error. This commenter also noted a number of negative effects on 
service providers receiving equity-based compensation from a publicly 
traded partnership and the ensuing burden required in administering any 
equity-based compensation plan in the publicly traded partnership 
context. This commenter requested that the IRS consider an exception to 
the principles of Rev. Rul. 69-184 for publicly traded partnerships.

[[Page 31479]]

    As noted in the preamble to TD 9766, these regulations do not 
address the application of Rev. Rul. 69-184 in tiered partnership 
situations, but rather clarify that a disregarded entity owned by a 
partnership is not treated as a corporation for purposes of employing 
any partner of the partnership. Similarly, these regulations also do 
not address the application of Rev. Rul. 69-184 to publicly traded 
partnerships. Accordingly, the final regulations do not provide an 
exception to the principles of Rev. Rul. 69-184 for publicly traded 
partnerships. However, the Treasury Department and the IRS will 
continue to consider the application of Rev. Rul. 69-184, including the 
specific issue noted by the commenter, and welcome further comments.
    The temporary regulations provided that their applicability date 
would be the later of August 1, 2016, or 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 Sec.  301.7701-2. It has come to 
the attention of the Treasury Department and the IRS that some 
taxpayers may have read the applicability date to begin on the first 
day of the last plan year prior to the termination of an affected plan 
(as defined in Sec.  301.7701-2(e)(8)), which may have been a date 
after May 4, 2017 . This is not a proper reading of the applicability 
date.
    In the case of an entity with several affected plans that may have 
different plan years, the applicability date was the first day of the 
plan year of the affected plan that had the latest plan year beginning 
after May 4, 2016, and on or before May 4, 2017 (assuming that date is 
after August 1, 2016). For example, an entity may have had two affected 
plans, with one plan year that began on September 1, 2016, and another 
plan year that began on January 1, 2017. In this case, the 
applicability date for this entity would have been January 1, 2017. The 
applicability date for any entity affected by these regulations should 
not have been delayed beyond May 4, 2017 in any case. For this reason, 
the final regulations clarify in Sec.  301.7701-2(e)(8) that the 
applicability date of Sec.  301.7701-2(c)(2)(iv)(C)(2) is the later of 
August 1, 2016, or the first day of the latest-starting plan year 
beginning after May 4, 2016, and on or before May 4, 2017, 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 Sec.  
301.7701-2.

Special Analysis

    This regulation is not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Department of the Treasury and the Office of 
Management and Budget regarding review of tax regulations. 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, and because 
the regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, the NPRM preceding this 
regulation was submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on its impact on small business.

Drafting Information

    The principal author of these regulations is Andrew Holubeck of the 
Office of the Associate Chief Counsel (Employee Benefits, Exempt 
Organizations and Employment Taxes). However, other personnel from the 
IRS and the Treasury Department participated in their development.

Statement of Availability

    IRS Revenue Procedures, Revenue Rulings, Notices, and other 
guidance cited in this document are published in the Internal Revenue 
Bulletin (or Cumulative Bulletin) and are available from the 
Superintendent of Documents, U.S. Government Publishing Office, 
Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov.

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 301 is amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

0
Paragraph 1. The authority citation for part 301 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 301.7701-2 is amended by:
0
1. Revising paragraph (c)(2)(iv)(C)(2).
0
2. Removing the ``(e)'' from the ``(e)(8)'' paragraph designation and 
revising paragraph (e)(8).
    The revisions read as follows:


Sec.  301.7701-2  Business entities; definitions.

* * * * *
    (c) * * *
    (2) * * *
    (iv) * * *
    (C) * * *
    (2) Paragraph (c)(2)(i) of this section applies to taxes imposed 
under subtitle A of the Code, including Chapter 2--Tax on Self-
Employment Income. Thus, an entity that is treated in the same manner 
as a sole proprietorship under paragraph (a) of this section 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 this section, 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 this section 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 this section.
* * * * *
    (e) * * *
    (8) Paragraph (c)(2)(iv)(C)(2) of this section applies on the later 
of--
    (i) August 1, 2016; or
    (ii) The first day of the latest-starting plan year beginning after 
May 4, 2016, and on or before May 4, 2017, 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 this section. For rules that apply 
before the applicability date of paragraph (c)(2)(iv)(C)(2) of this 
section, see 26 CFR part 301 revised as of April 1, 2016. For the 
purposes of this paragraph (e)(8)--
    (A) An affected plan includes any qualified plan, health plan, or 
section 125 cafeteria plan if the plan benefits

[[Page 31480]]

participants whose employment status is affected by paragraph 
(c)(2)(iv)(C)(2) of this section;
    (B) 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
    (C) A health plan means an arrangement described under Sec.  1.105-
5 of this chapter.
* * * * *


Sec.  301.7701-2T  [Removed]

0
Par. 3. Section 301.7701-2T is removed.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
    Approved: May 15, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-14121 Filed 6-28-19; 4:15 pm]
BILLING CODE 4830-01-P