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Soroban v. Commissioner: Some Limited Partners May Be Subject to Self-Employment Tax

By Jeffrey M. Glassman on December 4, 2023
The Tax Court recently called into question whether a partner designated as a limited partner is truly a limited partner. In Soroban Capital Partners, LP v. Commissioner, the court analyzed whether a partner was truly a limited partner in the context of Section 1402(a)(13) of the Tax Code. That statutory section contains an exclusion from self-employment tax of “the distributive share of any item of income or loss of a limited partner, as such.” In Soroban, the court held that the statutory exclusion did not apply to a partner who was limited in name only. The court further held that determining whether a partner is a limited partner in name only requires an inquiry into the functions and roles of the limited partner.

Soroban shows that return preparers and taxpayers must be careful and intentional in their actions to ensure that a limited partner who does not expect to be subject to self-employment tax does not get hit with an unexpected tax bill. The case will likely have a monumental impact on limited partner investors who provide services to the businesses in which they invest. Such investors, and others impacted by the decision, should meet with reputable tax advisors soon to reduce the risk of an unwanted IRS surprise. No one likes those.

On first glance, Soroban is a victory for the IRS and a loss for taxpayers. But like most things in the tax realm, there may be a gray area left in the decision’s wake.

In determining that the partners in Soroban should not be treated as limited partners, the Tax Court relied heavily on the fact that neither the Tax Code nor regulations defined Section 1402(a)(13)’s phrase “limited partner, as such.” Accordingly, the court determined it was within its purview to consider whether a particular partner was actually a limited partner.

If you are dealing with a federal tax dispute, and the outcome of the case largely depends on an undefined term such as “limited partner, as such,” practitioners should look beyond the statute and consider whether there are arguments that can be made that the statute does not (or does) apply to a taxpayer. Rest assured that the IRS will likely be doing exactly that.

Soroban most certainly adds another arrow to the government’s quiver, but taxpayers may very well have an arrow too.

If you have any questions about this article or any other tax matter, please contact me at jglassman@meadowscollier.com or 214-749-2417.