Partners were more akin to employees than passive investors and all the partnership allocations at issue were subject to self-employment
The U.S. Tax Court in December 2024 issued a memorandum opinion in Denham Capital Management LP v. Commissioner on an important question for partnerships and the asset management industry: when can partnership distributive shares to limited partners in state law limited partnerships be excluded from self-employment income? After a full trial and briefing, the court found no special justification to reconsider the standard set out in a 2023 precedential opinion that requires a “functional analysis” to determine the partner’s roles and responsibilities in every case, including cases involving state law limited partnerships. Applying this functional analysis to the evidence presented at trial, the court held that the partners were more akin to employees than passive investors and sustained the IRS determination that all the partnership allocations at issue were subject to self-employment tax.
Read a January 2025 report prepared by KPMG LLP that provides initial analysis and observations on the Tax Court opinion.