Sirius Solutions Delivers IRS Serious Blow When Taxing Limited Partners
Tax attorneys Lee Meyercord and Mary McNulty were spotlighted in a Forbes article recapping a federal appellate ruling on limited partner liability for self-employment taxes on partnership income. Partnership taxation is one of the most complicated parts of the Internal Revenue Code, and the case in question – Sirius Solutions L.L.L.P. v. Commissioner – arose when the IRS determined that Sirius, the taxpayer, should have allocated self-employment taxes to its limited partners instead of only its general partners. Ultimately, the U.S. Court of Appeals for the Fifth Circuit sided with Sirius and against the IRS.
Ms. Meyercord, who was part of the Holland & Knight team representing Sirius in the victory before the Fifth Circuit, explained the dispute this way: "Under Internal Revenue Code Section 1402(a)(13), a partner's distributive share of partnership income is exempt from self-employment tax if the partner is a 'limited partner,' except for guaranteed payments for services. The IRS and U.S. Tax Court had interpreted 'limited partner' to mean a passive investor." The Fifth Circuit rejected that argument, applying a simplified test that looks at whether a partner has limited liability, not at whether the partner is passive or active in the business.
Ms. McNulty underscored the significance of the decision, though she cautioned that similar cases before other circuits mean taxpayers should tread cautiously and consult tax professionals before making any changes to their filing regimes.
"The Fifth Circuit rejected the government's attempt to redefine a statute that was clearly understood for more than four decades to exempt limited partners from self-employment taxes," she said. "This ruling brings clarity back to a part of the tax code that never should have been controversial in the first place. The court followed the statute's plain text. It's a big win for taxpayers."
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