Surgeon Escapes self-employment Tax on distributive share of LLC income from surgery center-application of SE Tax to LLCs remains unclear

The Tax Court recently held in S.P. Hardy, that a plastic surgeon who owned a minority interest in a surgical center operated as a limited liability company (LLC) was not subject to self-employment (SE) tax on his distributive share of LLC earnings because he received the income in his capacity as an investor. The Tax Court distinguished Renkemeyer, Campbell & Weaver, where they held that partners in a law firm operating as a limited liability partnership (LLP) were subject to SE tax on the firm's net business income because the income was derived from legal services performed in their capacity as partners rather than investors. Although Hardy provides precedent for LLC members classifying LLC income as passive income not subject to SE tax when received in an investor capacity, the issue of when LLC members are subject to SE tax remains unsettled. This article reviews Hardy and current authority on this issue.