Tax Court Can Make Limited Partner Inquiry at Partnership Level

Tax Court Can Make Limited Partner Inquiry at Partnership Level

U.S. Tax Court

The Tax Court, granting the IRS summary judgment in a partnership case, held that the limited partner exception in section 1402(a)(13) does not apply to a partner who is limited in name only and determining limited partner status requires a functional inquiry, which the court has jurisdiction to conduct in the partnership-level proceeding. Soroban Capital Partners LP is an investment firm organized as a Delaware limited partnership. On its return, Soroban excluded the limited partners’ shares of ordinary business income in its computation of net earnings from self-employment. The IRS issued Soroban notices of final partnership administrative adjustment increasing Soroban’s net earnings from self-employment income based on the distributions to the limited partners. The partnership petitioned the Tax Court seeking a readjustment of partnership items. In a motion for summary judgment, Soroban argued that the limited partners’ distributive shares of income are excluded from self-employment tax or, alternatively, that any functional inquiry into the role of any of the partners is an impermissible partner-level determination. The IRS also filed a motion for summary judgment arguing that an inquiry into a limited partner’s role at Soroban concerns a partnership item that can be resolved in the Tax Court proceedings. Tax Court Judge Ronald L. Buch stated that the question for the court is whether Soroban’s net earnings from self-employment must include the limited partners’ distributive shares of ordinary business income, but the court must first address two preliminary issues before reaching that question.  The first preliminary issue Buch addressed was the scope of the limited partner exception in section 1402(a)(13), which excludes from net earnings from self-employment the distributive share of a “limited partner, as such.” Buch considered the legislative history and case law in interpreting the phrase “limited partner, as such” in the statute and rejected Soroban’s claim that as state law limited partners the exception automatically applied.  The court found that a functional inquiry should be made to determine whether the exception applied. Looking to the text of the statute, Buch concluded that “the limited partner exception does not apply to a partner who is limited in name only” and the court must examine the functions and roles of the limited partners in the partnership to determine whether their shares of earnings are excluded from net earnings from self-employment. After addressing the scope of the limited partner exception, the second preliminary issue Buch considered was whether the Tax Court has jurisdiction to make the functional inquiry in the partnership-level proceedings or whether it must wait until the partner-level proceedings. Buch found that a functional inquiry into the roles and activities of Soroban’s individual partners as required by section 1402(a)(13) involves factual determinations that are necessary to determine Soroban’s aggregate amount of net earnings from self-employment and is therefore appropriately determined by the court at the partnership level.

Tax Court <a href="/lr/resolve//7f1t5" rel="noopener" target="_blank">petition</a>, No. 16217-22. Tax Court <a href="/lr/resolve//7f1t6" rel="noopener" target="_blank">petition</a>, No. 16218-22

The Tax Court, granting the IRS summary judgment in a partnership case, held that the limited partner exception in section 1402(a)(13) does not apply to a partner who is limited in name only and determining limited partner status requires a functional inquiry, which the court has jurisdiction to conduct in the partnership-level proceeding.

The Tax Court, granting the IRS summary judgment in a partnership case, held that the limited partner exception in section 1402(a)(13) does not apply to a partner who is limited in name only and determining limited partner status requires a functional inquiry, which the court has jurisdiction to conduct in the partnership-level proceeding. Soroban Capital Partners LP is an investment firm organized as a Delaware limited partnership. On its return, Soroban excluded the limited partners’ shares of ordinary business income in its computation of net earnings from self-employment. The IRS issued Soroban notices of final partnership administrative adjustment increasing Soroban’s net earnings from self-employment income based on the distributions to the limited partners. The partnership petitioned the Tax Court seeking a readjustment of partnership items. In a motion for summary judgment, Soroban argued that the limited partners’ distributive shares of income are excluded from self-employment tax or, alternatively, that any functional inquiry into the role of any of the partners is an impermissible partner-level determination. The IRS also filed a motion for summary judgment arguing that an inquiry into a limited partner’s role at Soroban concerns a partnership item that can be resolved in the Tax Court proceedings. Tax Court Judge Ronald L. Buch stated that the question for the court is whether Soroban’s net earnings from self-employment must include the limited partners’ distributive shares of ordinary business income, but the court must first address two preliminary issues before reaching that question.  The first preliminary issue Buch addressed was the scope of the limited partner exception in section 1402(a)(13), which excludes from net earnings from self-employment the distributive share of a “limited partner, as such.” Buch considered the legislative history and case law in interpreting the phrase “limited partner, as such” in the statute and rejected Soroban’s claim that as state law limited partners the exception automatically applied.  The court found that a functional inquiry should be made to determine whether the exception applied. Looking to the text of the statute, Buch concluded that “the limited partner exception does not apply to a partner who is limited in name only” and the court must examine the functions and roles of the limited partners in the partnership to determine whether their shares of earnings are excluded from net earnings from self-employment. After addressing the scope of the limited partner exception, the second preliminary issue Buch considered was whether the Tax Court has jurisdiction to make the functional inquiry in the partnership-level proceedings or whether it must wait until the partner-level proceedings. Buch found that a functional inquiry into the roles and activities of Soroban’s individual partners as required by section 1402(a)(13) involves factual determinations that are necessary to determine Soroban’s aggregate amount of net earnings from self-employment and is therefore appropriately determined by the court at the partnership level.

Sec. 1402 Definitions

Sec. 6226 Alternative to payment of imputed underpayment by partnership

Sec. 6231 Definitions and special rules

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Tax Court Can Make Limited Partner Inquiry at Partnership Level