Three (count ’em, three) limited partners in Soroban Capital Partners LP, Soroban Capital Partners GP LLC, Tax Matters Partner, 161 T. C. 12, filed 11/28/23, claim that because they are limited partners, their respective shares of partnership’s ordinary business income are exempt from FICA/FUTA/ITW per Section 1402(a)(13). The magic language is “limited partners, as such.” But, as Judge Ronald L. (“Ingenuity”) Buch explains, Congress thwarted Treasury from defining by regulation what that means, as it would encroach upon State law. And Treasury, as not uncommon, went long and large with its proposed Regs.

However, judges are ingenious. Legislative history says that investment income isn’t subject to FICA/FUTA/ITW, so to the extent that the distributive shares are return on investment. So what did these limited partners do? For an earlier take in the PLLC context, see my blogpost “Limited Company, Unlimited Member,” 4/12/17.

Soroban says the mere fact that the three are limited partners takes whatever they got out of FICA/FUTA/ITW by virtue of Section 1402(a)(13).

Negatory, says Judge Buch.

“A functional analysis test should be applied when determining whether the limited partner exception under section 1402(a)(13) applies to limited partners in state law limited partnerships.” 161 T. C. 12, at p.10.

The words “as such” in the statute means that a limited partner must be limited. No command-and-control; stay in the stands, not on the bench or on the field.

There’s a TEFRA argy-bargy here, because this case arises pre-BBA. But this is an item that needs to be decided at partnership level, as it involves receipt, timing, and characterization of income.

IRS gets partial summary J that the issue has to be decided at partnership level. Soroban loses summary J that the distributed income isn’t subject to FICA/FUTA/ITW, which will have to be decided on the trial.