Washington Tax Alert July 14, 2020

Washington Tax Alert from Don Barnes, [email protected]
July 14, 2020

The Tax Court issued an opinion yesterday discussing the calculation of a partner’s self-employment taxes. Duffy v. Commissioner, T.C. Memo. 2020-108.

Mr. Duffy received guaranteed payments from a partnership and had a distributive share of the partnership’s losses for the year. The Service took the position that in calculating Mr. Duffy’s net earnings from self-employment, Mr. Duffy’s distributive share of the partnership’s losses should reduce his self-employment income only to the extent the losses were currently deductible for regular income tax purposes. According to the Service, the portion of Mr. Duffy’s distributive share of partnership’s losses that exceeded the adjusted basis of his partnership interest at the end of the tax year was not currently deductible for income tax purposes under IRC § 704(d) and should not reduce his net earnings from self-employment.

The Tax Court disagreed with the Service’s position. The Court indicated that, in calculating a partner’s net earnings from self-employment, the partner’s entire distributive share of the partnership’s losses could be taken into account, even if a portion of those losses are not currently deductible for income tax purposes under IRC § 704(d) because the partner has no outside basis for his partnership interest.

Don

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