IRS Grilled Over Self-Employment Tax Exemption Test on Appeal

A Fifth Circuit judge appeared highly skeptical of the IRS’s oral arguments on Thursday urging the panel to uphold a standard for when to disqualify state-law limited partners from a self-employment tax exemption.

Sirius Solutions appealed a US Tax Court ruling to increase its taxable net earnings from self-employment by $7.37 million for 2015 because the roles and activities of its state-law limited partners exceeded those of a passive investor. Supplanting the Tax Court’s passive-investor standard could offer significant tax benefits to businesses organized as limited partnerships.

Sirius argued the standard broke from past enforcement, but the IRS called its ...