Second Circuit Denies Tax Break to Soroban Partners, Creating 2-Circuit Split
Updated
Updated · Bloomberg Tax · Sep 17
Second Circuit Denies Tax Break to Soroban Partners, Creating 2-Circuit Split
1 articles · Updated · Bloomberg Tax · Sep 17
Summary
A Thursday ruling said Soroban Capital Partners’ state-law limited partners must pay self-employment tax on their distributive income shares, rejecting the exemption they claimed.
The Second Circuit backed the US Tax Court’s case-specific functional test, finding the partners were not truly passive because they exercised managerial control over the firm.
Judges pointed to powers to hire, fire, promote, terminate and evaluate employees as evidence that the partners acted more like managers than limited partners.
The decision creates a 2-circuit split over whether that functional analysis governs eligibility for the limited-partner self-employment tax exemption, raising the stakes for future tax disputes.