Taxpayers are once again challenging the IRS's position that a partner cannot wear two hats (i.e., service provider and investor) and still qualify as a limited partner for Self-Employment Contributions Act ("SECA") purposes. Although the IRS has successfully challenged SECA tax exemption claims made by the owners of LLPs and LLCs, no court has addressed the IRS's position as applied to state-law limited partnerships. The general partner ("GP") of such a limited partnership ("LP") is now challenging the IRS's position that the limited partners were subject to SECA tax on their distributive shares of partnership income and has now filed a motion for summary judgment in Tax Court in this case.
SECA, which imposes tax on an individual's self-employment income, excepts payments to limited partners, other than guaranteed payments to a limited partner for services actually rendered to or on behalf of the partnership. At issue in this case is the meaning of the term "limited partner," which was last defined before section 1402(a)(13) was enacted in 1977. In its motion for summary judgment, the GP contends that the plain language of the statute is clear: a state-law limited partner in a limited partnership is exempt from self-employment tax on its distributive share of the partnership's income. The GP further contends that even if the statute were ambiguous, the legislative history, statutory history and context, and Treasury's own statements confirm that only a limited partner's guaranteed payments are subject to SECA tax.
The Tax Court's decision in this case is expected to provide long-awaited clarity on the applicability of the SECA limited partner exception for state-law limited partnerships. The IRS must respond to the summary judgment motion by March 2.
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