RS 01802.350 Family Partnerships
Section 704(e) of the IRC provides that a person shall be recognized as a partner for income tax purposes if he owns 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.
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:
The capital interest was acquired from a family member. This includes only his or her spouse, ancestors, and lineal descendents.
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.
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.
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:
Retention of management powers and control over assets essential to the business.
Limitation on the right of the new partner to withdraw or sell his interest;
Retention of control of the distribution of amounts of income;
Restrictions on the amounts of income to the donee partner.