• View detailsArticle

    Firm Partner, Josh Ungerman was quoted in a Tax Notes article published on August 27, 2024...

  • View detailsPresentation

    American Bar Association 2025 Midyear Tax Meeting...

  • Conference

    2024 Meadows Collier Annual VIRTUAL Tax Conference...

  • View detailsFirm News

    Ten Firm Lawyers Recognized on the 2024 Texas Super Lawyers List...

VIEW MOST RECENT
 
 
 
 
 
 
View All
     
Showing 3 of 10

Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P.

901 Main Street, Suite 3700
Dallas, TX 75202

Phone: (214) 744-3700
Fax: (214) 747-3732
Toll Free: (800) 451-0093

submit inquiry
blog

New Treasury Secretary Scott Bessent and SECA Taxes

By Joel N. Crouch on January 29, 2025
Earlier this week the Senate confirmed Scott Bessent to serve as the next Treasury secretary by a vote of 68 to 29. Mr. Bessent is highly qualified to be the Treasury secretary and although he was easily confirmed, there was one area of inquiry which caused some concern, i.e. Mr. Bessent’s use of the limited partnership exception under IRC Section 1402(a)(13) to avoid the Self-Employment Contributions Act (SECA) taxes related to his limited partnership interest in his hedge fund.

The Senate Finance Committee’s review of Mr. Bessent’s financial disclosures and tax returns for 2021 through 2023 showed that Key Square Group, a hedge fund founded by Mr. Bessent and for which he was the CEO of investments, was a Delaware limited partnership. Mr. Bessent took the position that, although he was an active participant in Key Square’s business operations, as a state law limited partner his distributive share of Key Square’s income was not subject to SECA tax because of the limited partner exception in Section 1402(a)(13). Section 1402(a)(13) was enacted in 1977 and has been a source of debate between taxpayers and Treasury and the IRS for several decades. In 2018 the IRS launched a SECA tax compliance campaign and focused its audit attention on the application of Section 1402(a)(13) to state law limited partnerships operating in the asset management, financial services, private equity, and hedge fund industries, like Key Square Group.

By way of background
  1. IRC Section 1401 imposes a tax equal to 15.3% on the “self-employment income of every individual”, i.e., 12.4% for Social Security and 2.9% for Medicare.
  2. Self-employment income consists of the “net earnings” from a trade or business.
  3. Net earnings from self-employment” is defined in section 1402(a) as the “gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business, plus his distributive share (whether or not distributed) of income or loss in section 702(a)(8) from any trade or business carried on by a partnership of which he is a member.
  4. Section 1402(a)(13) provides an exception for limited partners. “There shall be excluded the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payment described in section 707(c) to that 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).
Unfortunately, the Code defines neither the term “limited partner” nor the words “as such,"  which has led to disputes between taxpayers and the IRS. Taxpayers are arguing for a strict construction of the statute and the IRS has a very narrow view of “limited partner."

Fortunately, a more concrete resolution may be on the horizon as there are several cases on the issue currently pending in the Tax Court, a couple of recent IRS friendly Tax Court decisions, which will likely be appealed, and a case on appeal at the Fifth Circuit Court of Appeals scheduled for oral argument in February.

Regarding Mr. Bessent’s tax returns, I would not be surprised if he had very capable tax professionals advising him that his position regarding SECA taxes was, and is, correct. In response to the Senators who had concerns, Mr. Bessent said he is winding down Key Square Group, will establish a reserve fund to address any contingency related to the SECA tax issue and amend his returns if the IRS’s position is upheld on appeal. In addition, Mr. Bessent said he would consult with the Treasury department’s ethics staff to determine if his prior use of the limited partner exception to self-employment tax poses conflicts with Treasury’s efforts to combat perceived abuse of the provision.

If you have any questions about this article or any civil or criminal tax matter, please contact me at (214) 749-2456.