Private equity, hedge fund, and other investment fund sponsors should be aware that there continue to be significant developments in the Internal Revenue Service's (IRS’s) audit campaign with respect to the potential liability for Self-Employment Contributions Act (SECA) tax of investment professionals through their limited partnership interests in fund management vehicles. In addition to numerous ongoing IRS tax audits, there are two pending cases docketed in the US Tax Court that may provide long-awaited clarity to partnerships and their limited partners currently facing or anticipating an IRS examination related to the application of the SECA tax to limited partners’ distributive shares from a partnership.
LP Exception
In 2018, the IRS launched its SECA tax “compliance campaign,” and began opening issue-based examinations focusing its audit attention on limited partnerships—e.g., state law limited partnerships (LPs), limited liability companies (LLCs), limited liability partnerships (LLPs), and limited liability limited partnership (LLLPs)—operating in the asset management, financial services, private equity, and hedge fund industries.
The IRS asserts that the limited partners in these partnerships provide services to the partnership and thus should be subject to SECA taxes on their annual allocations of partnership earnings at the current self-employment tax rate of 15.3%. The IRS's position is in direct opposition to a reporting position that limited partnerships and...
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