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Appeals court decisions could broaden self-employment tax for active LPs

The rulings from the Second and Fifth Circuits backed the IRS view that active limited partners may owe the 3.8% federal self-employment tax.

Reported · Written up by our desk · Fund Industry

Recent US appeals court rulings are putting a longstanding hedge fund tax-planning approach at risk, with courts backing the IRS position that active limited partners can be liable for the 3.8% federal self-employment tax, according to Hedgeweek citing the Wall Street Journal.

The dispute centers on a provision dating back to 1977 that has generally been read to exclude limited partners from self-employment tax, even when they take an active role in running investment businesses.

Hedge fund managers had argued that the exemption should still apply when partners manage or control the investment enterprise, potentially cutting tax bills by millions of dollars over multiple years, Hedgeweek reported.

Two federal appeals court decisions challenged that interpretation, including a September ruling by the Second Circuit in the Soroban Capital Partners case and an August ruling by the Fifth Circuit that supported the government’s position.

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