Limited Partners in Name Only Subject to Self-employment Tax

In general, limited partners are not subject to self-employment tax on their distributive share of partnership income. But when they function as general partners, the label under state law does not protect them from this federal tax. The Tax Court, in applying a functional analysis test, said that 3 limited partners in an investment firm were subject to self-employment tax on their distributive share because they maintained control over the operations of the business, devoted their full-time efforts to it, and in marketing materials were publicly held out as essential to the operations of the business. They did not function as passive investors in the business. #IdeaoftheDay

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