Soroban: Management Control Defeated the Limited-Partner Tax Exclusion

A limited-partner title did not exclude the distributive shares of three people who ran an investment-management business from self-employment tax. In Soroban Capital Partners LP v. Commissioner of Internal Revenue, Nos. 25-2079, 25-2250 (2d Cir. Sept. 17, 2026), the Second Circuit affirmed the Tax Court’s decisions on both the tax classification and the partnership-level procedure used to decide it.

The published opinion rested on a stipulated record and unchallenged findings about actual management. It also explained why the fact that partners ultimately pay self-employment tax did not require the underlying income-characterization issue to be decided separately for each partner.

The undisputed record showed control of the business

Soroban was a Delaware limited partnership managing hedge funds. Its three principals held limited-partner interests and were also members of the general-partner entity. They served as managing partner and chief investment officer, co-managing partner, and head of trading and risk management.

During 2016 and 2017, they worked approximately 2,300 to 2,500 hours a year, managed investments, participated in staffing decisions and sat on the firm’s governing committees. Senior managers reported to two of the principals. The partnership agreement assigned management to the general partner, but the stipulated facts showed the principals’ actual control.

The principals received roughly $2.5 million in guaranteed payments across the two years and approximately $141.5 million in distributive shares. Soroban reported self-employment earnings that included the guaranteed payments and the general partner’s ordinary-income share, while excluding the principals’ distributive shares—their allocated shares of partnership profits. The IRS adjustments added about $77.7 million for 2016 and $63.9 million for 2017 to reported net earnings from self-employment. Those were income-characterization adjustments, not the dollar amount of the tax bill.

The partnership proceeding could decide the income’s character

The 2016 and 2017 tax years were governed by the former TEFRA partnership-audit regime. Soroban argued that evaluating an individual partner’s functional role concerned a nonpartnership item. If that were right, the IRS’s partnership-level adjustments and the Tax Court’s jurisdiction to review them would be defective.

The court applied the two parts of TEFRA’s definition of a partnership item: The item had to be taken into account for the partnership’s taxable year under Subtitle A of the Internal Revenue Code, and Treasury regulations had to make it more appropriately determined at the partnership level.

Net earnings from self-employment met both requirements. The partnership had to account for those earnings in computing and reporting its income, even though it did not calculate each partner’s final tax. The regulations covered the relevant components—income, distributive shares and guaranteed payments—as well as the legal and factual determinations underlying an item’s character. Repeating that inquiry separately for each partner would also undermine TEFRA’s centralized process.

The court therefore upheld the partnership-level procedure. The distinction was between determining how the income was treated and calculating each individual’s resulting tax liability. Its discussion drew on United States v. Woods, 571 U.S. 31, 38–39 (2013), and the statutory and regulatory framework applicable to those years.

“Limited partner” required more than limited liability

Section 1402(a)(13) excludes a limited partner’s distributive share received “as such,” while retaining specified guaranteed payments for services. Soroban argued that limited liability under state partnership law established its principals’ qualification for the exclusion.

The court examined the term’s ordinary meaning when Congress enacted the provision in 1977. Contemporary dictionaries, treatises and widely adopted partnership statutes connected limited liability with an absence of managerial control. The federal tax meaning therefore required both: Limited liability and a role that did not involve running, managing or controlling the partnership’s business.

The words “as such” reinforced the capacity in which the income was earned. The court read them as referring to income received as an investing limited partner, rather than from managing the business. It also connected that reading with the surrounding statutory exclusions for investment income and the 1977 legislation’s concern about passive investors obtaining Social Security coverage through small partnership interests.

Some services and managerial control were different questions

Soroban argued that Congress’s express treatment of guaranteed payments showed that limited partners could perform services. The court agreed that some services could be consistent with limited-partner status. It rejected the further inference that providing some services and exercising managerial control were interchangeable.

The court also addressed the IRS’s unfinalized 1997 proposal, which included a 500-hour criterion. It distinguished those proposed numerical boundaries from its own interpretation, which considered control under the circumstances. It also read Congress’s pause on regulations as leaving the statute’s 1977 meaning in place. The opinion’s description of the principals’ full-time hours was part of their actual record, not adoption of a new 500-hour cutoff.

Agency materials did not change the result. The court read Social Security materials as connecting limited-partner status with restricted management. It also explained that an incomplete definition in Form 1065 instructions could inform interpretation but could not override the statute’s meaning.

The court compared the operative Fifth Circuit decision and affirmed

The Second Circuit considered the Fifth Circuit’s August replacement opinion in K Alain, L.L.L.P. v. Commissioner, which described a limited partner as someone playing no significant role in managing or running the business. It agreed that some nonmanagerial services could fit the exclusion. On Soroban’s actual record, the principals clearly played significant management roles and would fail the Fifth Circuit’s test too.

Our Sirius Solutions analysis explains why the January Fifth Circuit opinion and its August replacement must be distinguished. Soroban affirmed the Tax Court’s orders and decisions; its managerial-control findings were unchallenged. This published opinion states the Second Circuit’s interpretation. A California dispute also requires identifying the forum and the appellate authorities governing that proceeding.

Match the role evidence to the tax year and audit proceeding

The decision presents two connected tasks: Establish the partner’s actual role and identify the proceeding in which the income’s treatment must be contested. Our guide to coordinating the partnership audit and personal return addresses the second task. The management-record guide addresses the classification evidence.

The Mishra X tax team can review the operative notice, tax years, partnership returns, payment records and evidence of decision-making authority. Keep the complete notice and its deadline with the substantive tax records; an individual return alone may not identify the proceeding that needs a response.