Tax Update

U.S. Tax Court Opinion May Impact the Self-Employment Tax Exception for Limited Partners

December 4, 2023

On November 28, 2023, the U.S. Tax Court delivered an opinion on summary judgment motions in Soroban Capital Partners LP v. Commissioner¹ addressing the so-called “limited partner exception” to the inclusion of partnership ordinary business income in net earnings from self-employment under Section 1402(a)(13)².

Section 1402(a)(13) excludes from “net earnings from self-employment” the “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 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.” The taxpayer in Soroban, a Delaware limited partnership, had filed a motion for summary judgment asking the court to conclude that ordinary business income allocated to a limited partner in a limited partnership is excluded from the limited partner’s net earnings from self-employment.

The Tax Court denied the taxpayer’s motion, concluding that the limited partner exception applies to “passive investors” and “does not apply to a limited partner who is limited in name only.” The Tax Court based its conclusion on the “plain meaning” of Section 1402(a)(13), finding that Section 1402(a)(13)’s use of the words “as such” means that “the exception applies only to a limited partner who is functioning as a limited partner.” While the court did not analyze whether the taxpayer was entitled to rely on the exception based on this standard, it indicated that its application requires a functional analysis similar to the analysis applied in the Tax Court’s decision in Renkemeyer, Campbell & Weaver, LLP v. Commissioner³.

Taxpayers relying on the limited partner exception may want to consult their tax advisers to discuss the Tax Court’s decision in Soroban Capital Partners LP v. Commissioner as it relates to their particular circumstances.

¹ Soroban Capital Partners LP v. Commissioner, 161 T.C. No. 12 (2023).
² All Section references are to the Internal Revenue Code of 1986, as amended.
³ 136 T.C. No. 7 (2011).

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