Part 1
An individual partner is taxed on his or her share of partnership income regardless of whether those amounts are distributed or not. A separate issue is whether the partner can pay "Self Employment Tax" on his or her share of partnership income. Self-employment tax is what a self-employed individual is needed to pay into the Social Security and Medicare funds to finance those benefit programs.
1. What code section defines "net earnings from self-employment?"
2. Where is the treatment of partners with respect to self-employment tax explained in one of the tax services?
3. Explain two items of income for a partnership that may be part of a partner's share of partnership income but are not treated as net earnings from self-employment for a partner.
Part 2
May a member of the AICPA sign a tax return that holds a tax position that has a less than 50 percent chance of being sustained if it is challenged? (Note that this question deals with the Code of Professional Conduct for Members of the AICPA. It does not contract with income tax laws although there are income tax penalty provisions that deal with these kinds of issues.)
Part 3
A corporate taxpayer has an income tax expense recorded on its preliminary financial statements of $13,000,000. The only dissimilarity between the preliminary financial accounting tax expense and the actual tax liability is a tax position not yet reflected in the financial statements that may result in a tax savings this year of $1,000,000. The company thinks that if it were audited on that tax position, there is a 40 percent chance that the IRS would disallow the whole amount. There is a 60% probability, thus, that the IRS would not disallow any portion of the amount. How should that $1,000,000 be reflected in the financial accounting income statement?