📅 Case Date: May 28, 2025
📍 Case: Soroban Capital Partners LP, TC Memo 2025-52
🏛️ Court: U.S. Tax Court
🔍 Background at a Glance
🧾 Entity Involved:
Soroban Capital Partners LP, a Delaware registered limited partnership (LLC structure), based in New York.
📅 Tax Years in Question: 2016 & 2017
📬 IRS Action: Final Partnership Administrative Adjustments (FPPAs) issued in April 2022.
📈 IRS Adjustment Total:
- 2016: $77.6 million
- 2017: $63.8 million
- 👉 Reclassified as net self-employment earnings, not passive income.
📘 Legal Context
🔹 General Rule:
Under IRC §1402(a), self employment tax applies to income actively earned by individuals through a trade or business.
🔹 Exception – IRC §1402(a)(13):
“Limited partners” are excluded from self employment tax but only if they’re truly passive and not receiving guaranteed payments.
🧠 What Was at Stake?
Soroban claimed that three of its partners were “limited partners” and thus not subject to self employment tax under §1402(a)(13).
🚨 The IRS disagreed arguing these partners were not passive investors, but active contributors to Soroban’s daily operations.
⚖️ Key Court Rulings
✅ Functional Test Matters More Than Titles
- The Tax Court reaffirmed its “functional analysis test” (from Soroban v. Commissioner, 161 TC 310).
- Titles are irrelevant; courts look at what partners actually do.
🧑💼 These “Limited Partners” Were Not Passive
- Worked full time
- Involved in decision making and income generation
- Held out to the public as essential business managers
- Their work was not investment-based, but operational
🧾 “Legal Fiction” Rejected
- Soroban argued these individuals were only acting under authority of the general partner.
- The court said this distinction was meaningless for federal tax purposes.
✅ Takeaways for Businesses & Taxpayers
🧠 1. Titles Don’t Shield You from Taxes
Just calling someone a “limited partner” doesn’t make their income passive.
💼 2. Passive vs Active Involvement Matters
Federal law looks at how integral a partner is to business ops not just paperwork.
🔍 3. Expect Closer IRS Scrutiny
Partnership structures with high earnings and active members could be re-evaluated.
📄 4. Document Roles Carefully
Your operating agreements and actual day to day operations must align.📘 5. TEFRA & Functional Test Will Guide Future Cases Courts will continue applying a functional lens, especially under TEFRA procedures.
🔚 Conclusion
The Soroban ruling sends a loud message to partnerships:
⚠️ “If you work like an employee or a manager you’re taxed like one, even if your title says otherwise.”With self employment tax liabilities soaring into tens of millions, this case reinforces that substance over form remains the gold standard in federal tax law.
