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 email@example.com or 214-749-2417.