We note that on last Thursday, the 2nd Circuit affirmed the Tax Court’s decision in favor of the IRS in Soroban Capital Partners v. Commissioner, thereby creating an arguable circuit court conflict as to how to apply §1402(a)(13) to an “active” partner. We will provide an analysis of Soroban in the near future.
On August 13th, we provided an overview of the August 12th opinion issued by the 5th Circuit in Sirius Solutions (No. 24-60240) (now named K Alain, L.L.L.P.), in which the 5th Circuit reversed its January 16th opinion and remanded the case to the Tax Court under a newly announced standard as to who can qualify for the limited partner exclusion from self-employment tax contained in §1402(a)(13). And on September 1st, we raised some of the significant questions that come to mind as to what the Tax Court might do on remand along with some structuring decisions that tax professionals might consider while we wait.
For those of you who have been with us at previous Tax Forum programs, you may recall that we have preached using a separate management company as the manager of the LLC, with the management company receiving an allocation of operating income or a guaranteed payment for the fair value of its services rendered to the LLC on its behalf by its owners and other personnel. The owner of the management company providing services to the LLC on behalf of the management company would then receive a non-managing LLC interest commensurate with the value of capital contributed by such person, with income allocations received for such LLC interest reported as non-SE income. We have expressed our view that §1402(a)(13) permits a service provider to wear these two hats, i.e., it is not an “all-or-nothing” determination; however, the IRS should be able to reallocate income from that allocated to the non-managing LLC interest to the management company, if the compensation provided to the managing company is not “fair” for the value of the services rendered.
We want to take this opportunity to call your attention to a largely concurring view in an excellent article (at least in our view) written by Demetrius Robinson entitled “Limited Partners in Name Only? A Self-Employment Tax Roadmap” published in Tax Notes Federal on September 16th. In this concurrence, he makes the following noteworthy statements: (1) “If those payments [i.e., those for services rendered] understate the value of the sponsor’s work, the shortfall can be treated as disguised compensation and taxed as well,” and (2) “A sponsor who houses the services in a separate management company and takes fees there draws a cleaner line between the service return and the investor return.” For those of you who do not subscribe to Tax Notes Federal, a free trial subscription may be well worthwhile.
Needless to say, Sirius and Soroban and the structuring considerations to maximize the SE tax exclusion will be a major topic of discussion at both of this year’s Tax Planning Forum® and Fundamentals of Flow-Through® programs. We hope that you will consider attending either or both of these virtual or in-person programs or our new Fundamentals QAS self-study program. Registration is in full swing, and we encourage you to register soon, especially if you are interested in either of our in-person programs in Las Vegas or Orlando where space is limited.
