Self-employment tax (“SE Tax”) applies to “net earnings from self-employment” which includes a partner’s distributive share of income from a business conducted by a partnership.  However, an exception provides that the share of income of a “limited partner, as such” (other than guaranteed payments for services to the partnership) are excluded from the definition of self-employment earnings.


On November 28, 2022, in Soroban Capital Partners, L.P. v. Commissioner, the Tax Court considered whether the sole fact that a person is a state law limited partner was sufficient to cause the exception to SE Tax to apply. The Court determined that whether a limited partner in a state law limited partnership qualifies for the exclusion from SE Tax requires an inquiry into the activities of that partner.  The fact that the individuals are state law limited partners is not the end of the inquiry.  This is consistent with the Court’s 2011 decision in Renkemeyer

In Renkemeyer, the Court determined that the exception from SE Tax was intended to apply to individuals who were merely invested in a partnership and who were not actively participating in the partnership’s business operations. Ultimately, the Tax Court ruled in Renkemeyer that partners in the LLP in that case should not be treated as limited partners for purposes of SE Tax because their shares of partnership income arose from legal services performed on behalf of the law firm and not as a return on their investments.

The Court’s decision in Soroban was limited to whether in the case of a state law limited partner it is appropriate to make further inquiry into that partner’s functions and roles.  The Court did not (and was not asked to) examine the activities of the limited partners to determine whether they should be respected as limited partners.  Future proceedings would be necessary to make that determination.

Bottom Line: Since 2018, the IRS has been pursuing SE Tax audits for limited partnerships and LLCs, so proceed with caution in determining whether a limited partner that participates in the business of the partnership is subject to SE Tax on his or her share of partnership income.

“Anyone can do any amount of work, provided it isn’t the work he’s supposed to be doing at that moment.” — Robert Benchley