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December 7, 2023

Tax Court addresses limited partner exception for purposes of self-employment tax

  • The Tax Court directly addressed for the first time whether a state law limited partner in a state law limited partnership is per se exempt from self-employment tax under IRC Section 1402(a)(13).

In Soroban v. Commissioner, 161 T.C. No. 12 (Nov. 28, 2023), the US Tax Court (court) held that the limited partner exception of IRC Section 1402(a)(13) does not apply to a partner who is limited in "name only." Determining whether a partner is a limited partner in "name only," the court concluded, requires an inquiry into the functions and roles of the limited partner.

The court also found that it has jurisdiction to hear the case because net earnings from self-employment is a partnership item and an inquiry into the functions and roles of a limited partner is a factual determination that underlies a partnership item and is properly determined in a TEFRA proceeding.


Soroban Capital Partners LP (Soroban) is a Delaware limited partnership investment firm with one general partner and three regarded limited partners (for federal income tax purposes). The limited partners received guaranteed payments for providing services to Soroban. For 2016 and 2017, Soroban reported the guaranteed payments to its limited partners but excluded their shares of Soroban's ordinary business income from net earnings from self-employment. The IRS adjusted these earnings to include the shares of ordinary business income allocated to the limited partners.

Court analysis

Soroban filed a motion for summary judgment asking the court to hold that a limited partner's distributive share of partnership income is excluded from net earnings from self-employment by virtue of the partners' status as limited partners. Additionally, Soroban and the IRS filed cross-motions for summary judgment on the question of whether the court has jurisdiction in these partnership-level proceedings to inquire into the functional roles of the limited partners.

To resolve the question of whether Soroban's net earnings from self-employment should include its limited partners' distributive shares of ordinary business income, the court said, it must first determine the scope of the limited partner exception in IRC Section 1402(a)(13). IRC Section 1402(a)(13) states: "There shall be excluded the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments described in [IRC S]ection 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).

Addressing whether the limited partners were "limited partners, as such," the court held that a functional analysis test should be applied to make that determination. The court seemed to reach this conclusion on the basis that the term "as such" reflects an intention to apply the limited partner exception only to a limited partner who is functioning as one.

Not much guidance exists in the opinion on how to determine whether a partner is acting as a limited partner versus a general partner. Presumably, this functional test will require an analysis of what role the limited partner plays within the partnership to assess whether the partner is acting in a managerial role or a passive one. The court did not seem to analyze the phrase "as such" in a manner that distinguishes a limited partner interest from a general partner interest when the partner at issue holds both types of interests, as has been suggested in legislative history.

In the court's view, the next question is whether the functional analysis can happen in the court's TEFRA partnership-level proceedings on partnership items, over which it has jurisdiction, or must wait for partner-level proceedings. Partnership items are defined as those that (1) must be taken into account for the partnership's tax year under subtitle A and (2) are more appropriately determined at the partnership level, according to regulations.

After noting that IRC Section 1402 is in subtitle A, the court next found that Treas. Reg. Section 301.6231(a)(3)-1(b) states: "Factors that affect the determination of partnership items. The term 'partnership item' includes the accounting practices and the legal and factual determinations that underlie the determination of the amount, timing, and characterization of items of income, credit, gain, loss, deduction, etc." Applying this regulation, the court said a functional analysis into Soroban's limited partners involves factual determinations to determine Soroban's aggregate amount of net earnings from self-employment. Therefore, the functional analysis is a partnership item and can be addressed in the court's TEFRA proceedings.


This is only a decision on a motion for summary judgment. The IRS has not won the case on the merits, and it will likely be several years before the case is tried and an actual decision on the merits is rendered. The taxpayer may also appeal this decision to the U.S. Court of Appeals for the Second Circuit. For more information on the self-employment tax exclusion, see Tax Alerts 2016-1713, 2016-1773, 2017-0722.


Contact Information
For additional information concerning this Alert, please contact:
FSO – Private Equity Tax
   • Gerald Whelan (
   • Morgan Anderson (
Passthrough Transactions Group
   • Andrea Whiteway (
Private Client Services
   • David H Kirk (
Tax Controversy
   • Kiara Rankin (

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor