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Keywords

attorneyliabilitypartnershipcorporation
attorneypartnershipcorporationrespondent

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Renkemeyer, Campbell & Weaver, LLP v. C.I.R., 136 T.C. No. 7, 136 T.C. 137, Tax Ct. Rep. (CCH) 58,543, Unempl.Ins.Rep. (CCH) P 14768C, Tax Ct. Rep. Dec. (RIA) 136.7

Facts

The case involved Renkemeyer, Campbell & Weaver, LLP, a Kansas limited liability partnership, where the tax matters partner petitioned for review of a final partnership administrative adjustment by the IRS. For the tax year ending April 30, 2004, the law firm allocated a significant portion of its net business income to an S corporation partner, which the IRS disallowed, asserting that the allocation did not reflect economic reality. The law firm's attorney partners had a capital interest and profits and loss interest in the firm, and the IRS determined that their distributive shares were subject to self-employment tax.

For tax year ended April 30, 2004, the law firm allocated 87.557 percent of its net business income to the S corporation. R determined that the special allocation did not reflect economic reality and consequently reallocated the law firm's net business income to its partners on the basis of each partner's profits and loss interest.

Issue

Whether the special allocation of the law firm's net business income for the 2004 tax year should be disallowed and whether the income allocated to the attorney partners is subject to self-employment tax.

After concessions, the issues remaining are: (1) Whether a special allocation of the law firm's net business income for the 2004 tax year should be disallowed, and (2) whether income generated from the law firm's legal practice for the 2004 and 2005 tax years, and allocated to the law firm's attorney partners, is subject to self-employment tax.

Rule

A partnership's distributive share of income is generally determined by the governing partnership agreement, but if the allocation does not have substantial economic effect, it is determined according to the partners' interests in the partnership.

A partnership is not subject to Federal income tax. Secs. 701, 6031. Rather, the partners are liable for tax in their separate or individual capacities. Sec. 701. Each partner is required to take into account his distributive share of the partnership's income, gain, loss, deductions, and credits. Sec. 702(a).

Analysis

The court found that the special allocation of the law firm's net business income was improper because the partnership agreement for the 2004 tax year was not in the record, and the allocation did not reflect the economic reality of the partners' contributions and interests. The IRS's reallocation was consistent with the partners' profits and loss interests, as the attorney partners had significantly contributed to the firm's income through their legal services.

By applying these factors to the specific facts of this case, we conclude that the special allocation of the law firm's net business income for the 2004 tax year was improper.

Conclusion

The court upheld the IRS's reallocation of the law firm's net business income for the 2004 tax year and determined that the attorney partners' distributive shares were subject to self-employment tax.

To conclude, the facts and circumstances support respondent's reallocation of the law firm's net business income for its 2004 tax year consistent with the partners' profits and loss interests.

Who won?

The IRS prevailed in the case because the court found that the special allocation was improper and that the attorney partners' income was subject to self-employment tax.

Decision for IRS.

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