The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
By David I. Kempler, Esq., and Elizabeth Carrott
Buchanan Ingersoll & Rooney PC, Washington, DC
In CCA 201351018, the IRS's Chief Counsel's Office resolved
issues regarding employment tax, reporting of income and procedural
matters that arose after a two-person partnership became a
disregarded entity when one partner bought out the interests of the
other partner and then hired the former partner as an
employee. The Chief Counsel's Office advised that the new
disregarded entity must retain the same employer identification
number (EIN) for employment tax purposes it used as a partnership.
However, for all federal tax purposes other than employment tax
obligations, the Chief Counsel's Office advised that the
disregarded entity should generally use the taxpayer identification
number of its owner.
The partnership terminated when partner B became an employee and
partner A was now the only remaining partner. Notwithstanding the
termination of the partnership under state law, partner A continued
to file employment tax returns under the former partnership's name
and EIN. Additionally, notwithstanding the contract stating that
partner B was now an at-will employee, partner B received Form
K-1s, not Form W-2s.
Under §701, and the Treasury regulations thereunder, a
partnership is not subject to tax, but rather the income passes
through to its partners, who pay tax on partnership income in their
individual capacities. Income (or loss) is allocated to each
individual partner's capital account, and is taxed to the partner
without regard to when or whether any income is ever
distributed. Section 6031 provides that a partnership must
file an information tax return, and issue Form K-1s to its
partners. Under the entity classification rules set forth in Regs.
§301.7701-1 through -4, an entity must have two or more owners to
be a partnership and, if there ceases to be two or more partners,
the partnership terminates and the entity becomes a disregarded
entity. While a disregarded entity is not generally treated as
separate from its owner for income tax purposes, it is treated as a
separate entity for purposes of employment tax and certain excise
The Chief Counsel's Office observed that the partnership became
a disregarded entity when it ceased to have more than one partner,
at which time the partnership ceased to exist. The Chief Counsel's
Office noted that, under Rev. Rul. 2001-61, 2001-2 C.B. 573, when a
partnership becomes a disregarded entity, and the disregarded
entity chooses to calculate, report, and pay its employment tax
obligations under its own name and EIN pursuant to Notice 99-6,
1999-1 C.B. 321, the disregarded entity "must retain the same EIN
for employment tax purposes it used as a partnership." The Chief
Counsel's Officel noted that, while Notice 99-6 was obsoleted by
Regs. §301.7701-2(c)(2)(iv)(B), the regulation also provides that
the disregarded entity reports employment tax obligations at the
entity, not owner, level. Accordingly, the Chief Counsel's Office
concluded that the employment tax returns were properly filed under
the former partnership's old EIN.
However, with respect to income or losses attributable to
business activities after the former partnership became a
disregarded entity, they should be reported by the sole owner on
Schedule C to his Form 1040.
The Chief Counsel's Office advised that, since the former
partnership's employment tax returns properly used the former
partnership's EIN, rather than its sole owner's social security
number, the returns were validly filed for purposes of the statute
of limitations. Accordingly, the Chief Counsel's Office concluded
that the IRS Examination Division would need to request an
extension of the statute of limitations to continue its
examination. The Chief Counsel's Office advised that partner A
should sign the statute extension consent in his capacity as the
owner of the disregarded entity.
Finally, the Chief Counsel's Office advised that any notices
should be issued to partner A as the owner of the disregarded
entity because the partnership ceased to exist when its partnership
was reduced to one partner.
For more information, in the Tax Management Portfolios, see
Streng, 700 T.M., Choice of Entity, and in Tax
Practice Series, see ¶4060, Termination of a Partnership.
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