Private Fund Managers Petition Tax Court on Self-Employment Tax Issue

Two separate Tax Court petitions recently filed by private fund managers challenge IRS assessments of self-employment (SECA) tax on limited partners in fund management companies. The cases – Point 72 Asset Management LP v. Commissioner and Denham Capital Management LP v. Commissioner – involve some similar facts and issues as Soroban Capital Partners LP v. Commissioner, a case much closer to resolution in the Tax Court. 

As previously reported, the key issue in the Soroban case is whether limited partners in state law limited partnerships may claim exemption from SECA taxes – despite being more than passive investors. For additional discussion, see BDO’s Tax Strategist Insight, “Is the Door Closing on the Self-Employment Tax Exemption for Active Limited Partners?” 

The proliferation of these cases is a result of the IRS’s audit campaign targeting limited partners who, in the IRS’s view, are active participants in the operations of the management company and thus not entitled to the SECA tax exemption under Section 1402(a)(13). The IRS has asserted that the determination of limited partner status is a “facts and circumstances inquiry” that requires a “functional analysis”.  The issue has not yet been specifically addressed by the courts.  

It is likely that more such cases will be brought before the Tax Court in the future, since the IRS has audited a large number of fund managers in recent years and in many instances assessed SECA taxes. 

BDO will continue to monitor these and similar cases that are brought before the Tax Court.