AN EMPIRICAL INVESTIGATION TO DETERMINE IF A PARTNER MAY SERVE THE PARTNERSHIP AS AN EMPLOYEE

Approximately one-third of all U.S. businesses are partnerships. Partnerships generate $237 billion in revenues, $16.7 billion in profits, and pay $24 billion to 2.5 million employees. Partnerships are an important economic force because partnerships offer advantages not available to corporations: (1) partnership income is not subject to double taxation as is corporate income and (2) partnerships are simple to organize and simple to operate. Internal Revenue Code (IRC) Section 707 established the entity theory as the construct for partnership taxation, which theoretically provides for partners to serve their partnerships as employees. This is the question addressed by this study: May a partner serve the partnership as an employee and receive employer provided fringe benefits? The Armstrong 394 F.2d 661 (5th Cir. 1968) court recognized that partners may be employees of their partnerships; although, the Internal Revenue Service (IRS) continues to challenge the partnership expensing of fringe benefits for partner-employees. To resolve this issue, the consensus of opinion of the American Taxation Association (ATA) was obtained. Four questionnaires of two hundred each were mailed to eight hundred ATA members. The modal class of selected questions from each of the four questionnaires determined the consensus of opinion of the ATA members. A weighted average response to the four questionnaires of 31 percent was obtained. Utilizing the 248 useable questionnaires it was determined that 70 percent of the ATA members perceive that partners may serve their partnerships as employees, but only 49 percent would expense fringe benefits purchased for the benefit of a partner serving as an employee. The results of the study indicate that small partnerships should provide key employees with an equity interest. If those new partners meet the tests of an employee, then continue to provide workers with employee-type fringe benefits