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socrateaser, Lawyer
Category: Tax
Satisfied Customers: 38802
Experience:  Retired (mostly)
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Is money given to a partnership as a "fee option payment" subject

Customer Question

Is money given to a partnership as a "fee option payment" subject to self employment tax
on the partner level?
Submitted: 7 years ago.
Category: Tax
Expert:  socrateaser replied 7 years ago.

Please define "fee option payment." I like to know exactly what I'm dealing with.



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Customer: replied 6 years ago.
<p>I don't exactly know much detail. There is a fee option money received by a partnership (four partners, 2 individuals, one revocable trust and one S corp) that are for the rights to cut or not cut timber.</p><p> </p><p>I need to know how to code the K-1 for the self-employment income line 14A.There is no other income this year. This partnership in in the principle business of forestry and their product is timber. </p><p> </p>
Expert:  socrateaser replied 6 years ago.

I would treat the payment as a royalty (K-1, box 7), because the payment is in exchange for the opportunity to exploit the timber, rather than for the timber itself. See Treas. Reg. 1.61-8(a).

Hope this helps.

Customer: replied 6 years ago.
So there would be no self employment income on it for any of the entities?
Expert:  socrateaser replied 6 years ago.
A royalty payment is reportable as income from self-employment, unless the partner is a passive investor.
Customer: replied 6 years ago.
So for the general partners the income would be subject to self employment and for the limited it would not? I have two individuals that are general and domestic and two limited and domestic that are an S corp and a revocable trust
Expert:  socrateaser replied 6 years ago.
Timber is a weird corner case. Whether or not the options are passive income or not depends on just how actively youare operating your business. If this is just a stand of trees that has been sitting around for 25 years and it's not ready to cut, then it's probably passive royalty income to everyone.

If you are actively managing the land, in some manner (replanting, excavating, managing log piles, etc., then it could be self employment income (assuming you spend 500+ hours per year managing the timber).

However, it's definitely passive income to a limited partner, under all circumstances.

Hope this helps.
Customer: replied 6 years ago.
Relist: Incomplete answer. Nedd to be absolutely clear on rhis one especially for $ 45. I don't feel I know what should be done yet.
Expert:  socrateaser replied 6 years ago.
You may want to read the following publication from the Dept. of Agriculture.

As I said, this is a difficult issue, and there are numerous ways of classifying the income. I cannot/will not advocate a particular course of action in an area that is arguable, because it carries with it liability if you decide that you later do not agree with my viewpoint, and you believe that I have damaged your interests.

I would treat the income as royalties from a passive activity. You may choose whichever path you think is best.

Best wishes.

Customer: replied 6 years ago.
Relist: Answer quality.
Expert:  socrateaser replied 6 years ago.
I see that you received and paid for an answer from another expert, who copied my answer, verbatim (

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