Investment Fund Manager Update on Self-Employment Limited Partner Exception: Tax Court Holds that Limited Partners May Be Subject to Self-Employment Tax

On November 28, 2023, the Tax Court held that limited partners in state law limited partnerships cannot automatically rely on Section 1402(a)(13) of the Self-Employment Contributions Act (“SECA”) to exclude their distributive share of partnership income from the self-employment taxes due under SECA. Instead, the Tax Court held that a functional analysis is required to determine whether a person qualifies as a “limited partner” under Section 1402(a)(13).


SECA requires individuals to report and pay taxes on income earned through self-employment, similar to employment taxes payable under the Federal Insurance Contributions Act on the wages of employees. These self-employment taxes are in addition to any federal income taxes. Section 1402(a)(13) excludes from self-employment taxes:

“[t]he distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments described in Section 707(c) to the partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services.” (Emphasis added.)

The term “limited partner” is not defined for these purposes in either the Internal Revenue Code or Treasury Department regulations. Investment fund managers and founders commonly rely on this exception to exclude the distributive share of income generated from investment entities organized as limited partnerships from their taxes.

Soroban Capital Partners LP v. Commissioner

Soroban Capital Partners LP (“Soroban”) is an investment firm based in New York that is organized as a Delaware limited partnership and classified as a partnership for U.S. federal income tax purposes. During the tax years at issue, Soroban had reported the guaranteed payments made to limited partners as net earnings from self-employment on its partnership tax returns but excluded the distributive share of ordinary business income under the theory that such income fell within the scope of Section 1402(a)(13).

After an audit, the Internal Revenue Service (the “IRS”) disallowed this exclusion and adjusted Soroban’s net self-employment earnings to include the distributive share of ordinary business income allocated to limited partners, which in turn increased the tax liability of each limited partner. According to the IRS, the individuals were limited partners “in name only[1]” and therefore should be unable to rely on Section 1402(a)(13). Soroban challenged the adjustment in the Tax Court, arguing in their motion for summary judgement that, under the plain meaning of SECA and as a matter of law, limited partners of state law limited partnerships were not subject to the self-employment tax on their distributive share of earnings.

The Tax Court rejected Soroban’s argument, instead holding that a “functional analysis” is required to determine whether someone is a “limited partner, as such” for purposes of Section 1402(a)(13). The Tax Court looked at the plain meaning of the term “limited partner” and the inclusion of the phrase “as such” and determined that the statute was intended to apply to passive investors in a limited partnership, as opposed to limited partners who were actively participating in the operations of the limited partnership. The functional analysis test focuses on the purpose and role of a partner, particularly the extent to which the partner is performing services for the limited partnership. Unless Soroban appeals this decision to the Second Circuit Court of Appeals, the Tax Court will apply the functional analysis test to the facts in Soroban to determine how much of the limited partners’ distributive share of net income should be subject to the self-employment tax.


The IRS initiated in March 2018 an audit campaign regarding the potential SECA tax liability of investment professionals through their limited partnership interests in fund management companies, actively targeting asset managers for audit and litigation. When announcing this audit campaign, the IRS noted that, in its view, some individuals were improperly claiming limited partner status to exclude their income from self-employment taxes. In addition to Soroban and ongoing IRS audits, there are three pending Tax Court cases involving Section 1402(a)(13)[2] that may provide long sought after guidance to partnerships and their limited partners related to the application of the SECA tax to limited partners’ income from partnerships.

As a result of the Tax Court’s decision in Soroban, investment fund managers and founders should consider the distinction between income generated as a result of services provided to, or for the benefit of, the limited partnership and income generated as a result of the limited partner’s passive capital investment in the limited partnership, as this distinction may be the determining factor over the portion of income subject to SECA tax. Given the result in this case, we expect continued IRS SECA tax audits and challenges to limited partner qualifications for purposes of Section 1402(a)(13) for investment management companies. We will continue to monitor developments in this area.

[1] Soroban Capital Partners LP v. Commissioner, 161 T.C. No. 12 (November 28, 2023).

[2] Denham Capital Management LP v. Commissioner, Dkt. No. 9973-23; Point72 Asset Management LP v. Commissioner, Dkt. No. 12752-23; Sirius Solutions LLLP v. Commissioner, Dkt. Nos. 11587-20, 30118-21.

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12.18.2023  |  PUBLICATION: BulletPoint  | 

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