On August 8th, the taxpayer in Denham Capital Management LP v. Commissioner (Dkt. 25-1349) filed its opening appellate brief with the First Circuit in the continuing saga of whether a limited partner in a hedge fund/investment manager, which limited partner “actively” participates in the business of the manager, is entitled to a §1402(a)(13) SE tax exclusion for income allocated to him/her based on his/her being a limited partner. In this TEFRA partnership-level audit, Denham is a limited partnership, which was the general partner of an investment fund. Denham paid guaranteed payments to its limited partners working full-time for the limited partnership and, at the same time, reported the limited partners’ share of partnership income as non-SE taxable. For those of you who are following this contentious issue, the brief is must reading.

Perhaps it is our decades-long view that a taxpayer can “wear two hats” in the partnership arena, one as a service provider and another as a limited partner and have the share of income received as a limited partner qualify for the §1402(a)(13) SE tax exclusion that influences our thinking, but we find that the brief has set forth some excellent arguments supporting the “two hats/dual status” approach pertaining to “active” limited partners and the availability of the §1402(a)(13) limited partner exclusion. Much of the 55-page brief (without attachments) is devoted to this “two hats/dual status” argument, with the brief asserting the Tax Court’s conclusion that a limited partner can qualify for the exclusion only if the partner is a passive investor is in error, belies the clear language of the statute and is an administratively unworkable concept. We will be delving into Denham (as well as Sirius v. Commissioner, which is on appeal to the Fifth Circuit, and Soroban, if an appeal is filed with the Second Circuit) at all our fall/winter Forum and Fundamentals programs. We will be exploring what taxpayers should be doing insofar as current reporting and current entity structuring as we await opinions from the Circuit Courts. Reserve your spot now at your choice of programs, especially if you are considering attending an in-person program in Las Vegas or Orlando, as our room blocks are filling up.