Question

Tax Treatment of Corporations & Partnerships

Please answer the following questions. Your responses to all questions combined should not exceed two double-spaced typed pages. Each part of the paper should be separately labeled.

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 must pay "Self Employment Tax" on his or her share of partnership income. Self-employment tax is what a self-employment individual is required 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 described in one of the tax services?
3 - Describe 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 contains a tax position that has a less than 50% 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 deal with income tax laws although there are income tax penalty provisions that deal with these types of issues.)

Part 3
A corporate taxpayer has an income tax expense recorded on its preliminary financial statements of $13,000,000. The only difference between the preliminary financial accounting tax expense and the actual tax liability is a tax position not yet reflected in the financial statements that will result in a tax savings this year of $1,000,000. The company believes that if it were audited on that tax position, there is a 40% chance that the IRS would disallow the entire amount. There is a 60% probability, however, 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?

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Solution 1

Section 702(a)(8) code section defines "net earnings from self-employment". According to me , treatment of partners with respect to self-employment tax described in one of the tax services should be in their respective individual accounts because the term self employment itself defines that tax from being employing yourself . So, the firm should not bear any self-employment tax, the partners are therefore themselves liable for the same. 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 are interest on capital and drawings, remuneration of the partners etc....

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