Limited Partners May Be Subject to Self Employment Tax

Many partnerships with limited partners take the position that limited partners can not be subject to self-employment tax since a 1991 Proposed Treasury Regulation was never finalized.

A Tax Court decision concluded partners were not limited partners for tax purposes due to their active involvement in the partnership's management, making their distributive shares of income subject to self-employment tax. Denham Capital Management LP v. Commissioner, T.C. Memo. 2024-114 (December 23, 2024). 

This is similar to a 2022 ruling to another investment LP where the Tax Court found that state law status as a limited partner doesn’t mean you can’t be subject to self-employment tax.