Partnership Challenges IRS Adjustments in Tax Court

SOROBAN CAPITAL PARTNERS LP, SOROBAN CAPITAL PARTNERS GP LLC, TAX MATTERS PARTNER,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

UNITED STATES TAX COURT

PETITION FOR READJUSTMENT OF PARTNERSHIP ITEMS UNDER CODE SECTION 6226¹

Soroban Capital Partners GP LLC (“Petitioner”), in its capacity as the tax matters partner of Soroban Capital Partners LP (“Soroban”), hereby petitions for a redetermination of adjustments for the tax year ending December 31, 2016, set forth by the Commissioner of Internal Revenue (“Respondent”) in a Notice of Final Partnership Administrative Adjustment dated April 25, 2022 (the “FPAA”), and as the basis for this proceeding, alleges the following:

1. Petitioner. Petitioner is a Delaware limited liability company with a mailing address of 55 West 46^th Street, 32^nd Floor, New York, New York 10036.

2. Partnership. Soroban is a Delaware limited partnership that, for purposes of Tax Court Rule 241(c)(2), maintains its principal place of business in New York.

2.a. Soroban timely filed its Form 1065 for the tax year ending December 31, 2016 through the Internal Revenue Service electronic filing system.

2.b. During the tax year ending December 31, 2016, Soroban was classified as a partnership for federal income tax purposes, with one general partner and three limited partners. Petitioner was the sole general partner and held a participating interest. The three limited partners were: Eric W. Mandelblatt, Gaurav Kapadia, and Scott J. Friedman (collectively the “Limited Partners”).² Mr. Mandelblatt held his voting interest directly, and held his participating interest through EWM1 LLC, a wholly-owned Delaware limited liability company that is disregarded for federal tax purposes. Mr. Kapadia held his voting interest directly, and held his participating interest through GKK LLC, a wholly-owned Delaware limited liability company that is disregarded for federal tax purposes. Mr. Friedman held his participating interest directly.

2.c. During the tax year ending December 31, 2016, Petitioner was classified as a partnership for federal tax purposes. There were three members of Petitioner during 2016: (1) Mr. Mandelblatt, who held his voting interest directly, and held his participating interest through EWM1 LLC; (2) Mr. Kapadia, who held his voting interest directly, and held his participating interest through GKK LLC; and (3) Scott J. Friedman, who held his participating interest directly.³

3. Tax Matters Partner. Petitioner is the tax matters partner of Soroban, as defined in section 6231(a)(7).

4. Notice of Final Partnership Administrative Adjustment. The FPAA adjusted certain of Soroban's partnership items for the tax year ending December 31, 2016. The New York, New York office of the Internal Revenue Service's Independent Office of Appeals issued the FPAA. A copy of the FPAA, including accompanying statements and schedules, is attached hereto and marked as “Exhibit A.”

5. Amounts in Dispute. Respondent determined the following adjustments to Soroban's partnership items for its tax year ending December 31, 2016:

5.a. Respondent increased Soroban's net earnings (loss) from self-employment by $77,663,962; and

5.b. Respondent increased Soroban's gross nonfarm income by $77,663,962.

Petitioner disputes all determinations made by Respondent in the FPAA.

6. Assignments of Error. Respondent's determinations set forth in the FPAA are based on the following errors:

6.a. Respondent erred in determining that each of the Limited Partners was not a limited partner for purposes of section 1402(a)(13).

6.b. Respondent erred in purporting to make a functional determination regarding the status of each individual limited partner of Soroban in a partnership-level proceeding.

6.c. Respondent erred in making a determination that was inconsistent with the instructions to the 2016 Form 1065, which provided in relevant part, “[g]enerally, a limited partner's share of partnership income (loss) isn't included in net earnings (loss) from self-employment. Limited partners treat as self-employment earnings only guaranteed payments for services they actually rendered to, or on behalf of, the partnership to the extent that those payments are payment for those services.” 2016 Instructions for Form 1065 at 34.

6.d. Respondent erred in failing to exclude from net earnings from self-employment the distributive share of partnership income that the Limited Partners received from Soroban.

7. Supporting Facts. The facts on which Petitioner relies as the basis for its case are as follows:

7.a. At all times during 2016, Soroban was a Delaware limited partnership.

7.b. On January 1, 2015, Soroban was converted from a limited liability company to a limited partnership under Delaware law by filing a Certificate of Conversion from Limited Liability Company to Limited Partnership pursuant to section 17-217 of the Delaware Limited Partnership Act, and by filing a Certificate of Limited Partnership.

7.c. Throughout 2016, the only partners in Soroban were Petitioner, which was the sole general partner, and the Limited Partners, each of which was designated as a limited partner in the limited partnership agreement dated January 1, 2015 (the “Limited Partnership Agreement”).

7.d. Pursuant to section 3.01(a) of the Limited Partnership Agreement, the business and affairs of Soroban were to be carried on and managed solely by Petitioner in its capacity as general partner. That provision also specified that no other partner was permitted to take any part in the management, operation, or control of Soroban.

7.e. Pursuant to section 3.01(b) of the Limited Partnership Agreement, EWM1 LLC and GKK LLC were required to approve certain enumerated actions such as issuing additional interests, setting profits participation, redemptions, additional capital contributions by Messrs. Mandelblatt and Kapadia, and any material transaction with affiliates of Messrs. Mandelblatt and Kapadia.

7.f. Pursuant to section 3.02 of the Limited Partnership Agreement, Petitioner, as general partner, had the ultimate authority to take any action, or make any decision on behalf of Soroban. That provision also specified that Messrs. Mandelblatt and Kapadia would serve as Managing Partner and Co-Managing Partner, respectively, but also specified that each of their direct interests in Soroban was that of a limited partner.

7.g. Pursuant to section 3.07 of the Limited Partnership Agreement, each of the partners of Soroban was to be indemnified and held harmless by Soroban from and against any and all losses, claims, damages, liabilities, reasonably incurred expenses, judgments, fines, penalties, settlements, and other amounts arising from any and all claims, demands, actions, suits, or proceedings relating in any way to Soroban or its business or affairs.

7.h. Pursuant to section 17-303(a) of the Delaware Limited Partnership Act, a limited partner is not liable for the obligations of a limited partnership.

7.i. Pursuant to section 3.10 of the Limited Partnership Agreement, no Limited Partner owes any fiduciary duties to any other partner of Soroban.

7.j. Pursuant to section 4.02(b) of the Limited Partnership Agreement, no partner of Soroban could be required to make any capital contribution without its consent.

7.k. Pursuant to section 4.04 of the Limited Partnership Agreement, allocations of profit and loss generally were to be made in accordance with the partners' respective participating percentages.

7.l. Soroban is a registered investment adviser, and during 2016 Soroban served as an investment adviser to certain private investment funds.

7.m. In its role as investment adviser to the private investment funds, Soroban had a number of duties relating to the management of each fund, including the buying and selling of securities and instruments, and other activities related to the purpose and operation of each fund.

7.n. During the 2016 tax year, the Limited Partners did not, to any extent, participate in the management of Soroban in their capacities as limited partners. Petitioner, as the sole general partner of Soroban, performed all management functions on behalf of Soroban.

7.o. Soroban was respected as a limited partnership under Delaware law at all times during 2016.

7.p. The Limited Partners were respected as limited partners under Delaware law at all times during 2016.

7.q. During the 2016 tax year, Soroban made guaranteed payments to EWM1 LLC of $640,380, to GKK LLC of $365,380, and to Mr. Friedman of $246,624. Such amounts were determined without regard to Soroban's income, paid in exchange for services, reported as self-employment income, and subject to self-employment tax.

7.r. As set forth on schedule M-2 to Soroban's 2016 Form 1065, the aggregate amount of capital in the partnership increased from $24,060,150 to $46,485,205 during the 2016 tax year.

7.s. The Limited Partners' distributive shares of net profits of Soroban in 2016 were reported on Schedule K-1 Partner's Share of Income, Deductions, Credits, etc., of Soroban's 2016 Form 1065 identifying each of the Limited Partners as a limited partner.

7.t. Petitioner's distributive share of net profits of Soroban in 2016 was reported on Schedule K-1 Partner's Share of Income, Deductions, Credits, etc., of Soroban's 2016 Form 1065 identifying it as a general partner. Such amounts were reported by Soroban as self-employment income and were subject to self-employment tax at the level of the members of Petitioner, who were allocated a share of Petitioner's income in 2016.

7.u. During the 2016 tax year, each of Messrs. Mandelblatt, Kapadia and Friedman devoted between 2300 to 2500 hours to their work for Petitioner, Soroban, and other affiliates of Petitioner and Soroban, including their affiliated investment funds.

7.v. During the 2016 tax year, each of Messrs. Mandelblatt, Kapadia, and Friedman held different positions and performed different services to Soroban.

7.v.1. During the 2016 tax year, Mr. Mandelblatt served as the Managing Partner and Chief Investment Officer. In this role, Mr. Mandelblatt had final decision-making powers on all investment decisions. He also managed the investing of Soroban's affiliated investment funds' portfolios.

7.v.2. During the 2016 tax year, Mr. Kapadia served as the Co-Managing Partner. In this role, Mr. Kapadia helped manage the investing of Soroban's affiliated investment funds' investment portfolios.

7.v.3. During the 2016 tax year, Mr. Friedman served as the Head of Trading and Risk Management. His primary responsibility was to execute the investing decisions of Mr. Mandelblatt and Mr. Kapadia for Soroban's affiliated investment funds' portfolios. He had no discretionary investment authority.

7.w. During the 2016 tax year, the Limited Partners and three employees comprised Soroban's management committee. The three employee members of the management committee were the Chief Operating Officer/Chief Financial Officer ("COO/CFO"), the General Counsel, and the Head of Investor Relations.

7.x. The COO/CFO, General Counsel, and Head of Investor Relations managed the daily business operations of Soroban.

7.y. During the 2016 tax year, Soroban had 27 employees and paid salaries and wages to those employees. The work performed by non-partners contributed to Soroban's profits.

7.z. The Limited Partners were allocated $77,663,962 in aggregate distributive shares of Soroban's net income in 2016.

7.aa. These profit allocations were not remuneration for services rendered to or on behalf of Soroban.

WHEREFORE, Petitioner prays that this Court will hear this case and determine that:

1. No adjustment should be made to the net earnings (loss) from self-employment reported on Soroban's 2016 Form 1065;

2. No adjustment should be made to the gross nonfarm income reported on Soroban's 2016 Form 1065;

3. No other adjustments should be made to the items of income, gain, loss, deduction, and credit reported on Soroban's 2016 Form 1065;

4. Respondent erred in using a partnership-level proceeding under the Tax Equity and Fiscal Responsibility Act to make a functional determination regarding the status of each individual limited partner of Soroban; and

5. Soroban, and each of its partners, is entitled to such further relief as the Court, in its discretion, deems just and proper.

Date: July 21, 2022

Respectfully submitted,

Armando Gomez
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
1440 New York Avenue, NW
Washington, DC 20005
(202) 371-7868
T.C. Bar Number: GA0514
armando.gomez@skadden.com

Kathleen S. Gregor
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
500 Boylston Street
Boston, MA 02116
(617) 573-4808
T.C. Bar Number: GK0129
kat.gregor@skadden.com

Elizabeth J. Smith
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
500 Boylston Street
Boston, MA 02116
(617) 573-4821
T.C. Bar Number: SE0701
elizabeth.smith@skadden.com

COUNSEL FOR PETITIONER