Karen C. Burke (Florida), Active Limited Partners Flunk Functional Test, Tax Law. (2026):
In 1977, Congress enacted section 1402(a)(13), which exempts limited partners “as such” from self-employment tax on their share of partnership income. A half century later, active investment management professionals have claimed limited partner status to avoid self-employment tax on investment management fees, seemingly standing this anti-abuse rule on its head. While the Treasury twice issued proposed regulations to clarify and modernize the definition of a limited partner, these attempts encountered a firestorm of protest. The Tax Court’s controversial Soroban decision rejected claims that state-law limited partners are automatically exempt from self-employment tax, holding that a functional analysis is required to determine limited partner status regardless of entity type. State law changes since 1977 have eroded the traditional understanding of limited partners as passive investors who had limited liability and lacked control over the partnership’s business. Active investment management professionals have taken advantage of expansive safe harbors under state statutes that provide a limited liability shield even for “overly active” limited partners who are functionally equivalent to general partners. Given the well-established meaning of a limited partner as a passive investor at the time of enactment, Soroban’s functional approach represents the best reading of the term “limited partner” under section 1402(a)(13).
Related TaxProf Blog coverage:
- Updates on the Limited Partner Exception Litigation (Mar. 18, 2026)
- Reflections on the Fifth Circuit’s Ruling on Limited Partner Exception (Jan. 21, 2026)
