In my Nov. 11, 2020 ,column in this newspaper, I wrote about a powerful but little-known and little-used Internal Revenue Service proposed regulation called Prop. Reg. § 1.1402(a)-2 (the “Prop. Reg.” ). The Prop. Reg. enables individuals who are members of multi-member LLCs taxable as partnerships under IRC Subchapter K to lawfully make potentially major savings of their liability for the Self-Employment Tax (the “SET”). Most New Hampshire multi-member LLCs and their members are — and should be — subject to Subchapter K.
Given the potential value of the Prop. Reg. to New Hampshire LLC members, I want to provide today an update of my 2020 column about it.
It is true that under the governing case law, IRS regulations that are “mere” proposed regulations don’t bind the IRS. This is no doubt the reason why many tax professionals don’t advise their clients to make use of the Prop. Reg. But many of them don’t even know about the Prop. Reg.
However:
In two widely reported public forums, the IRS has stated that the Prop. Reg. is its SET audit guideline;
The Prop. Reg. has been on the books since its original publication in 1997; and
The Prop. Reg. is substantively very sound — indeed, impressively so.
Thus, in my view, tax professionals who fail to advise their clients about the Prop. Reg. are making a significant mistake.
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