The IRS and Treasury Department issued proposed, temporary, and final regulations concerning the employment tax treatment of partners in a partnership that owns a disregarded entity. The regulations clarify that when such partners provide services to the disregarded entity, they are subject to the same self-employment tax rules as a partner of a partnership that does not own. In particular, the preamble states that Revenue Ruling 69-184, which provides that a bona fide partner of a partnership is not an employee of the partnership for employment tax purposes, will continue to apply.

However, Treasury and the IRS note in the preamble that a number of commenters have suggested modifying the holding of Rev. Rul. 69-184 to allow partnerships to treat partners as employees in certain circumstances, such as when employees in a partnership obtain a small ownership interest in the partnership as an employee compensatory award or incentive. Treasury and the IRS request comments on this potential change, as well as comments on the appropriate application of the principles of Rev. Rul. 69-184 to tiered partnership situations.