Recently, the Internal Revenue Service ("IRS") has successfully asserted that limited partners in private equity and hedge funds that are organized as limited partnerships were subject to tax under the Self-Employment Contributions Act ("SECA"), the self-employment equivalent to the FICA payroll taxes. The recent court wins continue an earlier line of precedent that challenged the same exclusions claimed by owners of limited liability companies ("LLCs") and similar "hybrid" entities.

Internal Revenue Code ("IRC") Section 1401(a)(1) imposes self-employment tax on the "self-employment income" of every individual. An individual's self-employment income is his "net earnings from self-employment," which is broadly defined in IRC Section 1402(a) as:

• the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business, plus his distributive share . . . of income or loss . . . from any trade or business carried on by a partnership of which he is a member, [subject to numerous exceptions].

One such exception to the SECA tax is the so-called "limited partner exclusion" in IRC Section 1402(a)(13), which excludes "the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments . . . to that partner for services actually rendered to or on behalf of the partnership" from net-earnings from self-employment. That...

Read Full Story: https://news.google.com/rss/articles/CBMivAFBVV95cUxQTnRzQnpUNjk3cTZtVThWRzV4...