In a decision that will come as potentially bad news to many private equity and hedge funds, on November 28, 2023, the U. S. Tax Court opined in Soroban Capital Partners LP versus Comm’r that limited partners in a limited partnership who actively participate in the limited partnership are required to treat their entire distributive share of the partnership’s ordinary income as net earnings from self-employment income subject to self-employment (“SECA”) taxes. It has been common practice for limited partnerships to only treat amounts paid to limited partners that are specifically denominated as compensation as being subject to SECA taxes.
