Partnership retirement payments satisfy SE tax exemption.

• Author: O'Driscoll, David
• Position: Self employment

XYZ is a professional limited liability partnership engaged in the practice of law. It is classified as a partnership for Federal income tax purposes and the members (partners) are treated as partners for Federal income tax purposes. The partners and partnership are calendar-year taxpayers.

XYZ maintains an unfunded retirement benefit program (retirement program) for partners that pro rides payments directly from XYZ to retired partners. The retirement program is set forth in the partner ship agreement governing XYZ's operations.

Under the retirement program, a partner may elect to retire any time after reaching age 60. If a partner retires before 60, benefits generally commence in the year the retired partner attains age 60. For a partner with 25 years of service, the earliest time benefits would commence is the year the partner attains age 55.

For purposes of the retirement program, XYZ partners are divided into two classes, general partners and special partners. Each retiring general partner is entitled to 150% of the partner's highest annual calendar-year compensation during the final four years of service; each retiring special partner is entitled to 100% of the partner's average annual calendar-year compensation during the final five calendar years. Payments are reduced if a partner does not reach a certain minimum number of years of service.

For a general partner, the payment commencement year is the later of the second calendar year following the calendar year in which his or her retirement date occurs, or the calendar year in which he or she attains age 60 (age 55 for 25 or more years of service).

For a special partner, the payment commencement year is the later of the calendar year following the calendar year in which the special partner's retirement date occurs, or the calendar year in which he or she attains age 60 (age 55, for partners with 25 years or more of service). A retired partner receives all compensation due for the year he or she retires by March 15 of the following calendar year. The initial retirement payments are paid in five annual installments. After this series of annual payments is completed, and provided the retired partner is still living, he or she is entitled to $100 per month for the rest of his or her life.

In general, a partner will not tender any services to XYZ following retirement. However, in rare cases a retired partner will enter into an "of counsel" relationship, under which he or she performs...