Our accounting firm represents a law firm that is currently owned and operated as a limited liability partnership. The partners of the law firm have met with me to propose a restructuring to save self-employment taxes.
The law firm proposes to convert to a limited liability company. They explain the concept as follows. Under applicable law, the distributive share of limited partners is not subject to the self-employment tax established by IRC. See, IRC 1402(a) (13) the law firm reasons that a member in a limited liability company is analogous to a limited partner. They will provide for 2 forms of membership interest – “managing” and “investor”. The investor membership interests have no rights to participate in the management or voting of the LLC. The recognition of 2 types of membership interests is permitted by applicable state law. The managing membership interests are owned by the individual attorneys and the investor membership interests are owned by a family limited partnership established by each attorney. They believe that only the distributive share of the managing membership interests is subject to self-employment taxes, and that the distributive share allocated to the investor membership interests will not be subject to self-employment taxes.
Partner Managing interest- Member Investor interest
A 1.33 % A Family LP 32%
B 1.33 % B Family LP 32%
C 1.33% C Family LP 32%
Please research the issue to see if the concept is viable and will be successful. I am specifically interested in whether the IRS has addressed this issue in Treasury Regulations and whether there is any tax court, district court or appellate cases that address this issue.
The results of your research should be presented in memorandum form addressed to me. In the memo you should briefly recite the facts, state the issues, state a summary conclusion, identify and analyze any authorities that resolve the issue, and apply the authorities to the facts of this matter. You should also identify any risks presented by the proposal. You will be evaluated based upon the following factors – locating the applicable authorities using RIA Checkpoint technology, analyzing the facts and issue; and clarity of written expression. Your memo should be between 1 and 3 pages in length, and points may be deducted if there is excessive and irrelevant filler material such as quotations. The assignment is not evaluated on verbosity.