Texas Consulting Firm Seeks SECA Tax Court Case Reversal

Update on Soroban Capital Partners LP v. Commissioner Decision

Investment fund managers, law firms, medical practices and other entities operating as limited partnerships should be aware of an appeal of the Soroban Capital Partners LP v. Commissioner of Internal Revenue (Soroban) decision. The Soroban case focused on Section 1402(a)(13) of the Tax Code which states, “limited partners” are not subject to self-employment taxes on their distributive share of the partnership’s income. The key issue of the case centered around the interpretation of the term “limited partner”. The outcome of the Soroban case was expected to significantly impact how Self-Employment Contributions Act (SECA) tax is applied to limited partners going forward.

Sirius Solutions LLLP v. Commissioner

Sirius Solutions (Sirius), a Delaware limited liability limited partnership providing business consulting services in Houston, Texas is appealing the Soroban decision based on its own IRS dispute related to the scope of Section 1402(a)(13).

In the August 12, 2024, opening brief for Sirius Solutions LLLP v. Commissioner, Sirius challenged the Tax Court’s definition of “limited partner” arguing the following:

1. The ordinary meaning of “limited partner” in section 1402(a)(13) means a state-law limited partner

A. Dictionaries at the time of enactment defined “limited partner” as a partner in a state-law limited partnership with limited liability

B. The IRS issued contemporaneous guidance defining “limited partner” as a state-law limited partner

C. The Social Security Administration issued contemporaneous guidance defining “limited partner” as a state-law limited partner

D. Congress rejected the Treasury Department’s later attempt to define “limited partner” as something other than a state-law limited partner and declined to amend the statute

2. The Tax Court erred by interpreting “limited partner” to mean a partner functioning as a passive investor

A. The Tax Court misinterprets the phrase “as such.”

B. The Tax Court’s interpretation violates a canon of statutory interpretation by rendering the carve-out for “guaranteed payments” meaningless

C. The Tax Court erroneously resorted to the legislative history when the statute is unambiguous

D. The Tax Court applied irrelevant and non-binding case law involving non-state law limited partners

Sirius is one of several limited partnerships that have filed Tax Court petitions challenging the IRS’s position. However, Sirius is the first taxpayer to receive an appellate review of Soroban.

Background of the Soroban Capital Partners LP Case

The Soroban SECA tax court case was a result of the IRS’s focused attention on activities related to its SECA tax campaign. The stated goal of the initiative is to improve tax return and issue selection while making the greatest use of limited IRS resources. Our article, “IRS SECA Tax Campaign: What Limited Partnerships Need to Know”, discusses the case, the decision, and its impact on limited partnerships specifically fund managers in detail.

More to come…

The implications of these cases could be far-reaching for investment fund managers and other limited partnerships, potentially impacting tax liability, partnership structures, compliance and reporting, IRS scrutiny, and investor relations. It’s crucial for fund managers to stay informed and consult with tax professionals to navigate these changes effectively. We will continue to keep you updated on this case and other pending cases.

Questions on SECA tax compliance for your firm? Contact your Keiter Opportunity Advisor | Email | Call: 804-747-0000.

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Sirius Solutions LLLP v. Commissioner