Guidance On Limited Partnership Exception May Include A Functional Analysis Test

In September, Treasury announced forthcoming guidance that will clarify whether the limited partner exception applies to limited partners that actively participate in their businesses (which we last discussed here).

Since 1977, limited partners have been excluded from paying self-employment tax under Code Section 1402(a)(13). Because the statute does not define a "limited partner," many taxpayers taken the position that a person classified as a limited partner under state law may avail themselves of the exception regardless of such person's level of active participation in the business. The IRS has hotly disputed this position through its ongoing audit initiative, with several cases already ending up in court.