IRA Financial Blog

New Ruling Hurts Investment Fund Managers – Episode 418

Adam Talks

In this episode of Adam Talks, Adam Bergman, Esq. discusses a new court case ruling involving a $10 billion hedge fund and how limited partners are taxed.

New Ruling Hurts Investment Fund Managers

On this episode of Adam Talks, tax attorney Adam Bergman discusses a new US tax court case involving a $10 billion hedge fund and the impact on investment fund managers. The case revolves around whether limited partners in investment funds need to pay self-employment tax on the fund’s income. While historically, limited partners were exempt from self-employment tax on their distributive share of income, recent rulings have challenged this, leading to the Soroban Capital Partners v. Commissioner case.

The case involved a New York hedge fund and its managers who paid self-employment tax on guaranteed payments but were also asked to pay it on their distributive share of profits. The IRS argued that the limited partners should pay self-employment tax on their profits from the partnership. The Tax Court ruled that a functional analysis test should determine the status of a limited partner and that if a limited partner is not purely passive and actively involved in managing the fund, they should pay self-employment tax.

This ruling is significant as it expands the definition of a limited partner and imposes self-employment tax on any distributive share of income from the partnership if the partner is not purely passive. It sets a precedent that could impact all large investment funds and their limited partners, potentially leading to an increase in tax payments for those actively involved in managing the fund. The case also sheds light on the IRS’s approach to challenging tax issues related to investment funds and may signal future changes in tax treatment, such as the treatment of carried interest as ordinary income rather than capital gains.

Overall, Bergman provides insight into a significant tax court case affecting investment fund managers and the potential impact on limited partners’ tax liabilities. Bergman emphasizes the importance of understanding the case and its implications, even for those not directly involved in managing investment funds. He also hints at potential future developments in tax law that could affect investment funds and their stakeholders.

For more information about the case, be sure to listen to the whole podcast!

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