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Renkemeyer Case Sheds Light on Law Firm Tax Issues

BY Richard Stieglitz
July 28, 2011

A recent tax court case involving a law firm dealt with two issues that are relevant to many law firms. In this particular case, the taxpayer had a bad set of facts and consequently ended up with a bad result. However, the court's decision may have a far-reaching effect on other taxpayers taking less aggressive positions. The first issue is the allocation of partnership income to the partners in the absence of a written partnership agreement. The second issue is whether income generated by a limited liability partnership is subject to self-employment tax. This question is of particular interest to law firms as the limited liability partnership is the entity of choice for many law firms.

Allocation of Income

In Renkemeyer Campbell, and Weaver, LLP, et al. v. Commissioner (136 T.C. No. 7 2011), the taxpayer, a Kansas limited liability partnership, allocated 87.557% of its income on its 2004 tax return to RCGW, an S corporation partner that was wholly owned by an ESOP. The LLP also had three individual partners who were attorneys, providing legal services. The taxpayer claimed that the allocation was computed based on a written partnership agreement. The taxpayer was unable to provide a copy of the agreement. In 2005, the taxpayer amended the partnership agreement removing the interest of RCGW. Upon audit, the IRS adjusted the partnership income allocations to reflect the stated profit/loss percentages of 30% for each individual and 10% for the S corporation as stated on the forms K-1.

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