"Trader" income considered as income?

[BG5150]

I have a plan with a group of "traders" who are partners in a business. Their K-1 show a net employment income of, say, $10,000 (14 A).

There is investment income of over $1,000,000. I have read that income could be considered as earned income for plan purposes, even though it is not subject to SE tax.

Any thoughts and/or cites? The EOB search doesn't even register a hit with "trader".

[mbozek]

I though that was how carry interest is taxed which drives the progressives up a wall because they want it to be taxed as W2 income. Carry interest is where a banker or trader receives part of his fee as a portion of the gain on the investment he is managing. For example 20% of all gains on the investment will be paid to the trader and is taxed as capital gains not wage income. There are some arcane tax rules that govern carry interest.

[amcorson]

BG5150: sorry to jump in and add another scenario, but our issues seem closely related and hopefully we can both get some guidance/conversation started on Investment Partnerships. My practice has always been to start with the number in Box 14A and that Capital gains (short or long term) cannot be used as earned income. Now I have come across this issue:

Investment Company is a LP and the K-1 Box 1 = $500k+ (management fees), Box 4 Guaranteed Payments = $150k, Box 14A = $150k.

I believe the firm/CPA are taking the stance that Limited Partners do not have Self Employment earnings other than the Guaranteed Pmts(current, but old IRS regs), even though the IRS recently stated in an OCC Memo that investment management income (not investment gains) should be Self Employment earnings (even for Limited Partners).

I am thinking the $500k+ should not be used as Earned Income for plan purposes if they are not putting it in Box 14A and not paying SE tax. Unfortunately the CPA is not much help.

As mbozek pointed out, Carried Interest can also come into play with these arrangements and complicate things further.

Anyone have experience with Earned Income in Invesment/Hedge Fund partnerships? Thank you.

[BG5150]

The CPA I work with on this said:

Because the transactions are considered trades, not investments, and

Because they were 1256 contracts, and

Because the proceeds were ran through a business entity (an LLC in this case)

Because each individual chose mark to market accounting, then:

The proceeds are considered earned income, even though they are exempt from SE tax.

[amcorson]

That is correct, 1256 contracts are specifically mentioned in IRC 1402.