What is the limited partner exception to self-employment tax?

Section 1402(a)(13) excludes a limited partner's distributive share from net earnings from self-employment. Guaranteed payments for services actually rendered stay taxable. The code does not define "limited partner," which is why courts have been deciding what it means.

Does the Soroban ruling apply to a Florida partnership?

Not directly. The Second Circuit covers Connecticut, New York, and Vermont. A Florida partnership's Tax Court appeal goes to the Eleventh Circuit under section 7482(b)(1)(E), and that court has not ruled on this provision. The Tax Court's own functional analysis still applies in the first instance.

How do the Second and Fifth Circuit tests differ?

The Second Circuit asks whether the partner has limited liability and does not run, manage, or otherwise exert control over the partnership. The Fifth Circuit asks whether the partner plays no significant role in managing or running the business. The Second Circuit said the two positions do not appear far apart.

Can a partner do any work and still be a limited partner?

The Second Circuit said yes, within limits. So long as the activities do not amount to controlling, managing, or running the business, a partner may play a role and still qualify. The Soroban principals worked full time and sat on the governing committees, which put them well past that line.

Which tax years does the Soroban decision cover?

The case concerned 2016 and 2017, which were governed by the TEFRA partnership audit rules. Congress repealed TEFRA in 2015 and kept it in force through the 2017 tax year. Later years are audited under the centralized regime that replaced it.