On 6/13/2014, Curtis Wilson, IRS Associate Chief Counsel (Passthroughs and Special Industries) stated that he is concerned about the rumored use of a disregarded entity to enable a partner to be treated as an employee for withholding purposes. Under the purported structure, a partnership creates a wholly-owned entity that is disregarded for federal income tax purposes, and has the partners of the partnership become employees of the disregarded entity, which for employment tax purposes, is treated as the employer having its own employer identification number and subject to Form W-2 withholding. Wilson stated that the IRS is looking at this issue but that if the use of a disregarded entity works, “it makes it pretty easy to get around what would otherwise be the general rule, and so … we think it’s a stretch.” The general rule Wilson is referring to is that contained in Rev. Rul. 69-184, which states that an individual can not be both be an employee and a partner of the same partnership.
Additionally, Clifford Warren, Special Counsel to the IRS Associate Chief Counsel (Passthroughs and Special Industries), cited the recent case of Reither v. U.S., which confirmed the holding in Rev. Rul. 69-184 that if an individual is a partner, he cannot be an employee of the partnership. Based on the Reither case confirmation of Rev. Rul. 69-184 and on the purported use of disregarded entities as a way to treat a partner of a partnership as an employee, Mr. Warren stated that he expects the IRS will issue further guidance on this issue in the near future.