Soroban, IRS Clash on Investor Liability for Self-Employment Tax

Hedge fund Soroban Capital Partners LP urged the US Tax Court to treat its partners as “limited partners” for the purposes of the federal self-employment tax exemption because their activities in service of the business were limited enough to qualify them as passive investors.

Soroban allocated ordinary income to its three principals without characterizing that allocation as net earnings from self-employment, limiting the amount that the IRS would collect in Social Security and Medicare contributions under the Self-Employed Contributions Act. In response, the IRS issued adjustments to increase Soroban’s net earnings from self-employment by more than $141 million total across ...