Partnership audit can adjust self-employment income but not impose SECA tax itself

Plain-English summary

Chief Counsel advised that self-employment tax is not itself a partnership-related item under the centralized partnership audit rules. Net earnings from self-employment reported on Form 1065 and a partner's classification as general or limited are partnership-related items, however, and changes to them can affect the imputed underpayment. The IRS can conduct a partnership-level examination, adjust those items, and later assess resulting chapter 2 or 2A tax against the partners under the extended limitations rule. Alternatively, the IRS can adjust partnership-related items in a partner-level examination under Treasury Regulation section 301.6241-6, but only for non-chapter 1 purposes. That second route requires auditing each partner whose self-employment tax will be assessed and cannot produce chapter 1 tax from those adjustments.

Ruling snapshot

• Question: How may the IRS handle partnership items that affect partners' self-employment tax under the centralized partnership audit rules?
• Outcome: Advice given, use either a partnership-level case followed by partner assessments or limited partner-level examinations
• Key authorities: IRC § 6501(c)(12); Treas. Reg. § 301.6241-6

Full text (IRS public release)

ID: CCA_2024051008550643 [Third Party Communication:

UILC: 6221B.00-00, 6225B.01-00 Date of Communication: Month DD, YYYY]

Number: 202444007
Release Date: 11/1/2024
From: --------------------
Sent: Friday, May 10, 2024 8:55:06 AM
To: ----------------
Cc: ---------------------------------------------------------------------------------------------------------------
Bcc:
Subject: RE: BBA and SECA Adjustments - Included in BBA or Not?

Hi ---------,

SECA tax is not a PRI. What is a PRI is net earnings from self-employment as reported
on the Form 1065 and it does go into the calculation of the IU. If you are changing a
partner from general to limited, that is also a PRI. There are two ways to handle issues
that impact chapter 2 taxes under BBA.

1. You could do a BBA exam and make adjustments to NESE and general/limited (plus anything else
   that needs to change). The NESE adjustment would result in an IU. If you look at the IRM, it goes
   into the calculation of the IU when there is an adjustment to NESE and how it interplays with
   chapter 2 tax. I believe it is in Part 9 but don’t quote me. After the partnership-proceeding is
   over, the IRS has a minimum of 1 year to go after chapter 2 or 2A tax on the partnership
   adjustments. See IRC 6501(c)(12). The benefit here is that the adjustments apply to all partners.
       a. Note that we often treat the NESE adjustment as zero for purposes of calculating the IU
           but that’s in cases where the NESE adjustment is caused by adjustments to other things,
           like ordinary income. Not as much when it is a standalone adjustment. That’s all in the
           IRM.
2. Under 301.6241-6 we can adjust PRIs in a partner level exam but ONLY for non-chapter 1
   purposes. In this case we could adjust the partner’s SECA tax at the partner level and make
   adjustments to any of the items of the partnership for purposes of adjusting that SECA tax
   (NESE, general/limited) but we cannot get any chapter 1 tax as a result of those adjustments.
   You would have to audit each partner you wanted to assess.

Please let me know if you have any questions or would like to discuss.

Thanks,
Jenni

Jenni Black (she/her)
Senior Counsel
CC:PA:06
Phone: (202) 317-5216