On May 28th, the U.S. Tax Court issued a decision in Soroban Capital Partners LP v. Commissioner (T.C. Memo 2025-52) holding that all of the income allocable to the partnership’s limited partners (not just the amount characterized as guaranteed payments) is subject to self-employment tax.
In reaching that decision, the Tax Court applied the “functional analysis” test that it adopted in its 2023 ruling in the Soroban case (161 T.C. No. 12) to conclude that the Soroban limited partners were limited partners in name only and the facts showed that the partners were actively involved in the fund’s operations. Therefore, the limited partner exception to self-employment tax did not apply. This is consistent with the Tax Court’s recent decision in Denham Capital Management LP v. Commissioner (T.C. Memo 2024-114), in which it reaffirmed the application of the functional analysis test and concluded that the limited partner exception did not apply.
These decisions establish a clear trend of rulings in favor of the IRS on the application of the self-employment tax to fund managers, although it remains to be seen whether the taxpayers will appeal these decisions to higher courts and, if so, whether they may be successful in those appeals.
This is an opportune time for funds to consult with their tax advisors to determine the impact that these decisions may have on their structures. Please let us know if you would like to arrange a discussion with one of our tax partners or if there is anything else that we can do to assist.
