New Developments in the §1402(a)(13) Limited Partner SE Tax Exclusion Arena
Last Monday, the taxpayer filed its briefs to the Fifth Circuit in
Sirius Solutions v. Commissioner, No. 24-60240, which, as discussed in a prior email blast, essentially is an appeal of the Tax Court’s holding in
Soroban Capital Partners LP v. Commissioner, 161 TC No. 12 (Nov. 28, 2023). These two cases, together with
Denham Capital Management LP v. Commissioner, No. 9973-23, and
Point72 Asset Management LP v. Commissioner, No. 12752-23, all deal with the applicability of the §1402(a)(13) limited partner exclusion from SE tax in the situation where the limited partner is providing services on a full-time basis either directly or indirectly to an operating partnership.
Sirius involves a consulting business and the other three cases involve a hedge fund manager.
This email blast is not going to revisit
Soroban, rather we stress the importance of reviewing the taxpayer’s brief in
Sirius, as it presents many compelling arguments as to why the Tax Court’s holding in
Soroban is in error. However, one argument is especially worth noting, which relates to why, among other reasons, we agree with the brief – that the Tax Court is in error in interpreting the phrase “limited partner, as such” as requiring a “functional analysis” into the role of the service-providing limited partner (which, presumably, could deny the SE tax exclusion). In this regard, §1402(a)(13) provides:
there shall be excluded [from SE tax] 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 (emphasis added);
The taxpayer's brief suggests that the highlighted language following “limited partner, as such” is meant to provide that a limited partner can have a dual status, one relating to the limited partner’s distributive share of income, which is SE tax-free, and one related to the limited partner as a service provider for which a guaranteed payment is received, which is subject to SE tax. We’ll see what the Fifth Circuit has to say about the taxpayer’s view on the IRS's functional analysis concept, as well as all the arguments made by both sides. (We note that approximately 270 pages of IRS and taxpayer briefs were filed in
Denham Capital on August 8th, which appeared in
Tax Notes Federal last Thursday, and we still are wading through them.)