Limited Partner Exception Doesn’t Apply to LPs in Name Only

The Tax Court has determined that the limited partner exception in Code Sec. 1402(a)(13) does not apply to partners who are limited partners in name only. In addition, since calculating net earnings from self-employment is a partnership item, the Tax Court ruled it can determine in a TEFRA proceeding if a partner is functioning as a limited partner.

The case involved Soroban Capital Partners, a limited partnership subject to TEFRA procedures. On its returns, Soroban excluded from its calculation of net earnings from self-employment the distributive shares allocated to its limited partners. After an IRS audit increased Soroban’s net earnings from self-employment to include the income allocated to the limited partners, Soroban argued the income was excluded under Code Sec. 1402(a)(13). It also argued the Tax Court lacked jurisdiction in a TEFRA case to examine the roles of its limited partners.

The Tax Court disagreed on both counts. It found the limited partner exception was intended to apply to partners functioning as limited partners, not just those who are limited partners under state law. And since calculating net earnings from self-employment is done at the partnership level, the Tax Court can determine in a TEFRA case if a partner is functioning as a limited partner. (Soroban Capital Partners LP, 161 TC No. 12)

New Treasury Fact Sheet has Implications for Limited Partnerships

On January 12, 2024, the Treasury released a New Fact Sheet regarding the IRS’s commitment to auditing limited partnerships as part of wider efforts to transform the agency using Inflation Reduction Act resources to pursue people using partnerships to avoid paying self-employment taxes as well as other enforcement priorities announced in the fall of 2023.

Rico D’Amelio Rico D’Amelio is a Tax Partner at Grassi. He has more than 15 years of experience helping private equity firms, hedge funds and other financial service entities meet their tax-savings and compliance objectives. Rico guides clients through all aspects of taxation, from their dealings with the IRS to their accounting and miscellaneous filings. As a true trusted advisor, he works alongside them to provide... Read full bio

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