Sutherland Asbill & Brennan LLP, Thomas A. Cullinan, Sheldon M. Kay , Daniel R. McKeithen, David A. Roby, Jr., Amish M. Shah and H. Karl Zeswitz: “On November 2, 2015, President Obama signed the Budget Act of 2015 (the “2015 Budget Act”), which makes significant amendments to the procedural rules governing federal income tax audits and judicial proceedings that apply to partnerships and other entities (such as limited liability companies or statutory trusts) classified as partnerships for federal income tax purposes. . . . existing partnerships and their partners will also need to consider the extent to which the new rules will necessitate amendments to their partnership agreements to preserve their existing arrangements.”
The Tax Advisor: “S corporation shareholders [and owners of LLCs taxed as S corporations] generally prefer dividend distributions of their S corporations’ [or LLC’s] profits over compensation payments from the S corporations [LLCs] because the compensation payments are subject to payroll taxes and dividend distributions are not. To prevent S corporations and their shareholders from avoiding payroll taxes by maximizing distributions and minimizing compensation payments, the IRS requires S corporations to pay shareholders who provide substantial services reasonable compensation. Disputes between the IRS and taxpayers have required courts to determine on a regular basis whether an S corporation has paid reasonable compensation to its shareholder(s).