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The Tax Court recently ruled for the IRS in another case involving the "limited partner exception" under the Self Employment Contributions Act (SECA). Code Section 1402(a)(13) generally exempts the distributive share of partnership income allocable to a "limited partner, as such," from self-employment tax, but the term "limited partner" is not defined, leading to ongoing litigation.
In November 2023, the Tax Court rejected Soroban Capital Partners LP's ("Soroban") summary judgment argument that state law classification controls and held that a "functional analysis" should be applied to assess whether the limited partners act like passive investors.
In accordance with its summary judgment decision, the Tax Court applied a functional analysis to the relevant facts and circumstances and concluded that Soroban's limited partners did not qualify for the limited partner exception under SECA, because they managed portfolios, monitored and hedged transactions, executed trades, served on core committees, worked full-time on investment activities and were marketed for their expertise—all while contributing limited capital to Soroban. The Tax Court found that these activities were not consistent with classification as a limited partner.
This decision aligns with similar rulings against Denham Capital Management LP, and Sirius Solutions, L.L.L.P., which have appealed to the First and Fifth Circuits. Soroban has not yet indicated whether it will join these two in elevating this issue to the Circuit Court level.
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