Tax Court’s Decision in Soroban—Potential SECA Tax Implications for Management Fee Income

On May 28, 2025, the U.S. Tax Court issued its decision in Soroban Capital Partners LP v. Commissioner (T.C. Memo 2025-52) (“Soroban”), holding that “limited partners” of a management company organized as a Delaware limited partnership were not entitled to the self-employment tax exception for their distributive share of management fee income under Internal Revenue Code Section 1402(a)(13) (the “SECA Exception”). The SECA Exception provides that self-employment tax generally does not apply to the distributive share of income of a “limited partner, as such.” The phrase “limited partner, as such” is not defined in the Internal Revenue Code or Treasury Regulations.

This decision continues a recent trend in which courts have sided with the IRS and focused on the substance of partners’ activities—rather than their title or the entity’s state law form—in determining eligibility for the SECA Exception.

Key Takeaways from Soroban

The Tax Court reaffirmed the “functional analysis” test, a facts-and-circumstances approach that evaluates the actual activities and roles of partners. The Tax Court considered several core factors, including:

• The partner’s role and importance in generating partnership income;
• The partner’s management authority over the partnership;
• The partner’s time commitment to the partnership;
• The partnership’s marketing materials highlighting the partner’s importance and skills; and
• The partner’s capital contributions to the partnership.

Implications for Private Fund Managers

In light of Soroban, private fund sponsors and managers should closely review the roles and activities of each owner in relation to the management company’s business operations and should review, and if necessary, modify compensation arrangements to support the position that an owner qualifies as an investor or a “limited partner, as such.” 

Next Steps and Ongoing Developments

While Soroban does not create new law, it further strengthens the IRS’s position and may impact IRS examination and litigation strategies on this issue. The decision is appealable to the Second Circuit, and similar cases are pending in the First and Fifth Circuits.

Given the implications discussed above, we encourage private fund managers to proactively evaluate their current structures in light of this decision. The Morrison Foerster Private Funds and Tax teams are available to discuss the implications of Soroban for your management company and fund structures.