Fund Managers Reel After Court Ruling on Self-Employment Tax

The IRS got more leeway to remain laser-focused on the wealthy after a closely watched US Tax Court opinion on limited partnerships disrupted the investment fund industry this week.

Soroban Capital Partners LP, an investment firm organized as a Delaware limited partnership, wanted its founders who are classified as limited partners to be exempt from self-employment taxes on their partnership-allocated earnings. But the court ruled in the IRS’s favor Tuesday, saying that a “limited partner” label doesn’t automatically mean those earnings are exempt.

The definition of a limited partner historically has been complicated and ambiguous, leaving it open to interpretation ...