In CCA 201436049 the IRS concluded that owners of an investment fund management company LLC were not eligible for the limited partner exception to Section 1402 self-employment taxes.  Ultimately the IRS found that the income earned by the partnership directly related to the services from such partners and was not of an investment nature that should be eligible for the exception.

In the CCA, the taxpayers were partner-owners of an LLC that served as the management company for a family of investment partnerships.  The LLC treated partners that were active in day-to-day fund management as qualifying for the “limited partner” exception to the 3.8% self-employment tax otherwise imposed on a partner’s share of partnership ordinary income.  The taxpayer asserted that limited partner status was appropriate as the partners paid more than a nominal sum for their equity interest and were paid “wage” amounts representing “reasonable compensation” for each partner.

The IRS acknowledged that the term “limited partner” is not defined.  However, the IRS cited legislative history for the proposition that the limited partner exclusion was to exclude earnings that were basically of an investment nature.  The IRS further cited the 2011 Renkemeyer case where a law firm LLP partner was similarly denied the limited partner exception and the 2012 Riether case denying the exception for an LLC owner.  The IRS concluded that the LLC members were earning their share of LLC fee income in their capacity as service partners and the exception was intended to apply only to income which was basically of an investment nature.  Interestingly, the CCA contained substantial redacted material under the title “case development, hazards, and other considerations.”  Note also that the IRS never finalized the 1997 proposed regulations to add a definition of limited partner and their analysis in the CCA was not based on the proposed regulations.