The Beat Goes On – More §1402(a)(13) Developments
On “Tax Day,” two new developments addressing the §1402(a)(13) limited partner exclusion from SE tax were published. As has been well-chronicled in our email blasts and at our
Tax Forum programs, the eligibility of a partner who provides substantial services to a personal service-type partnership to qualify for the §1402(a)(13) exclusion for allocations of income received with respect to an interest held as a limited partner is, perhaps, the most contentious issue in the partnership arena in decades. (To date, all the cases appear to involve only partners who are providing full-time services to the partnership.)
Newly added to the ranks of pending cases is
Hudson Bay Capital Management LP v. Commissioner, No. 4654-25 (Apr. 11, 2025), another hedge fund manager case. The taxpayer’s petition is one of the shorter ones (only nine pages), and the amount of reclassified income of $10.7 million (which is all the partnership’s income) is near the bottom of the amounts in controversy in the approximate dozen reported cases at various stages in the litigation process.
Also greeting us for our morning coffee on April 15th was news of the taxpayer’s appeal to the First Circuit (No. 25-01349) of the decision in
Denham Capital, Management, LP v. Commissioner, TC Memo 2024-114 (Dec. 23, 2024). This is a particularly important development, as there now are two appellate cases pending in different circuits, with the other being the appeal to the Fifth Circuit in
Sirius Solutions v. Commissioner, No. 24-60240.
Sirius is the only reported case that does not involve an investment manager, with
Sirius being a consulting business. We now wait to hear whether the phrase “limited partner, as such” contained in §1402(a)(13) is meant to provide that a limited partner can have a dual status, one relating to the limited partner’s distributive share of income, which is SE tax-free, and one related to the limited partner as a service provider for which a guaranteed payment is received, which is subject to SE tax, or whether a taxpayer can wear only one hat (at least when providing full-time services in a personal service-type partnership), as seems to be suggested by the Tax Court.
We will continue to monitor developments in this arena, and we will be reporting the current status of the litigation at our live Q&A sessions at
this spring’s three Fundamentals courses, as well as at all our
fall Forum and
Fundamentals programs.