Soroban Hedge Fund Partners Subject to Self-Employment Taxes (1)

A hedge fund’s income distributions to its partners are subject to self-employment taxes because those partners were actively involved in the fund’s operations, the US Tax Court ruled Wednesday.

Soroban Capital Partners LP challenged the IRS’s more than $141 million increase to its net earnings from self-employment, significantly increasing the partnership’s liability for Social Security and Medicare contributions. The firm had excluded distributions to certain partners from self-employment earnings, arguing they qualified for an exclusion the government said is reserved for passive investors.

“Soroban’s limited partners were limited partners in name only,” Judge Ronald L. Buch said. “They were essential ...