Drawing the Line: Limited Partners and Self-Employment Tax
In this episode of “Tax Stuff You Should Know,” hosts Bob Pluth and Gene Magidenko discuss a significant Fifth Circuit reversal of its earlier decision addressing the self-employment tax treatment of limited partners. They revisit the determination of limited partner status for purposes of determining self-employment taxes and why that distinction can have major tax consequences for partnerships and their owners.
The conversation also examines the ongoing debate between bright-line and functional tests for determining limited partner status, the challenges created by evolving partnership structures, and that future action from the US Treasury or US Congress is needed to bring greater clarity to this complex area of tax law.
Key Takeaways
Limited partner status can significantly affect self-employment tax liability.
Courts continue to grapple with how limited partner status should be determined.
Bright-line and functional approaches offer competing frameworks for analysis.
The Fifth Circuit’s decision may influence future partnership tax planning.
The promulgation of regulations by Treasury or the clarification of the law by Congress is necessary to resolve longstanding questions in this area.
NOTE: On September 17, subsequent to the recording of this podcast, the US Court of Appeals for the Second Circuit held in Soroban Capital Partners LP v. Commissioner that, for self-employment tax purposes, a “limited partner” means one who has limited liability and does not run, manage, or control the partnership’s business, affirming the Tax Court’s functional approach.
Contacts
- Related Practices