Effective Dates: 09/30/2024 - Present Previous | Next

TN 54 (09-24)

RS 01802.350 Family Partnerships

A. BACKGROUND

Section 704(e) of the IRC provides that a person shall be recognized as a partner for income tax purposes if they own a capital interest in a partnership in which capital is a material income-producing factor, whether or not such interest was derived by purchase or gift from any other person.

B. OPERATING POLICY

The provision applies in figuring NESE for Social Security purposes, as well as for income tax purposes.

1. General

If a partnership can be found using the tests in RS 01802.316, it is unnecessary to apply section 704(e) of the IRC.

2. Section 704(e)

An owner of a capital interest in a partnership would be recognized as a partner if the following conditions exist:

  1. a. 

    The capital interest was acquired from a family member. This includes only their spouse, ancestors, and lineal descendents.

  2. b. 

    Capital is a material income-producing factor, i.e., a substantial portion of the gross income of the business is attributable to the employment of capital in the business.

  3. c. 

    A valid partnership according to the test in RS 01802.316 was in existence before the transfer or, if not, such a partnership was created at the time of the transfer.

C. DEVELOPMENT

Consider whether the new partner actually acquired ownership of a capital interest, or the validity of the transfer where the person who made the transfer retains substantial control over the new partner's interest, such as:

  1. 1. 

    Retention of management powers and control over assets essential to the business.

  2. 2. 

    Limitation on the right of the new partner to withdraw or sell their interest;

  3. 3. 

    Retention of control of the distribution of amounts of income;

  4. 4. 

    Restrictions on the amounts of income to the donee partner.

To Link to this section - Use this URL:
http://policy.ssa.gov/poms.nsf/lnx/0301802350
RS 01802.350 - Family Partnerships - 09/30/2024
Batch run: 09/30/2024
Rev:09/30/2024