Latest news with #TaxCourt
Forbes
12 hours ago
- Business
- Forbes
Moving? Address Change? Properly Notify IRS (Especially If Abroad)
It is imperative to keep IRS informed of a change of address. Taxpayers need to do it correctly, and understand what can go wrong if they don't, including tax penalties, IRS levies, and passport revocation. Americans abroad face special U.S. tax issues and it is especially critical for this group who often rely on foreign mail services to understand the nuances of notifying IRS of address changes. getty It's summer and many people move to a new home while school is out for a few months. This is especially true in the expat community where changes in work location occur with regularity. Moving can be chaotic, and amid all the packing and logistics, it's easy to forget one critical task—properly advising the IRS of your new address. Skip this step, and you risk missing key correspondence, such as a Notice of Deficiency which can trigger tax assessments, penalties, collection activity and even a passport revocation if you fall into 'seriously delinquent tax debt.' This article explains the imperative of updating your IRS address, how to do it correctly, and what can go wrong if you don't. Many Americans are moving abroad. This group faces various U.S. tax issues and it is especially critical for Americans overseas who rely on foreign mail services to understand the nuances of notifying IRS of address changes. Overseas Americans know all too well the extreme challenges faced by frequent relocations for work and sometimes unreliable foreign postal services. Making sure the IRS is properly notified must be at the top of the moving 'to-do' list. A notice from the IRS is generally deemed valid if it is sent by certified or registered mail to what is called the taxpayer's 'last known address.' If the notice was properly mailed to that address, actual receipt by the taxpayer is immaterial. The address listed on the taxpayer's most recently filed and properly processed tax return is the 'last known address', unless a taxpayer has provided the IRS with clear and concise notice of a new address. Notifying a third party, such as a different government agency, of a change-of-address is not considered clear and concise notification for tax purposes. In Phillips v. Commissioner (T.C. Memo 2024‑44), decided in July 2024, the Tax Court rejected the IRS' claim that it had properly updated its records using the United States Postal Service National Change of Address system. The IRS could not convince the Tax Court that the new address was properly matched under special procedures, leading the court to invalidate the entire notice of deficiency. This case highlights the importance of relying on the USPS's NCOA database. It is understandable that taxpayers might assume that filing a change-of-address with the USPS is enough. While the IRS receives weekly updates from the USPS NCOA database and cross-checks it against taxpayer records, the process is not foolproof. In Phillips the taxpayer's son shared his father's name, and it was the son who had filed a change-of-address with the USPS. The IRS system mistakenly applied the son's new address to the father's tax record and sent a deficiency notice there. The court held the notice invalid because it was not sent to the taxpayer's true last known address. The case is a reminder that while the NCOA system can be very helpful, it can also cause errors for both the IRS and the taxpayer. While notifying the U.S. Postal Service can ensure mail forwarding, this method does not necessarily update IRS records and should not be exclusively relied upon when it comes to U.S. tax matters. The surest way to update the IRS is through means detailed below, filing a Form 8822 or by a direct written notice. In Davis v. Commissioner , T.C. Memo. 2025-72 (July 10, 2025) the Tax Court decided a case involving a taxpayer who moved in 2021 but failed to update the IRS. Even though the taxpayer provided a handwritten letter and claimed to have spoken to IRS agents about the address change, she lacked proof of mailing or official IRS acknowledgment. The court held that because the IRS records still showed the old address, the notice of deficiency sent to her old address was valid. As a result, the petition she had filed with the Tax Court was treated as untimely and her case was dismissed. The lesson is clear: verbal claims and informal letters concerning a change of address just don't cut it. Without verifiable proof, the courts will uphold the IRS if its notice was sent to the 'last known address.' If your move occurs before filing your tax return, simply list your current address on your return. Once processed, the IRS will update its records. Tax returns should always be sent through a method permitting verification (proof of mailing or electronic submission) so that it can be established that the return and updated address was properly delivered. Another option is to file Form 8822 for individuals or Form 8822‑B for businesses. Both of these forms must be processed, which IRS estimates will take four to six weeks' time. They should be sent by certified or registered mail, with proof of mailing retained. You may also write a letter to the IRS that includes your full name, both the old and new addresses, Social Security Number, and signature. If you filed a joint tax return, then the information and signatures for both spouses must be included. Send the written address change information to the IRS processing center that handles your tax return. Again, use registered or certified mail to send in the form and retain the proof. The IRS also permits taxpayers to call and inform the agency that their address is changing. However, this method is not nearly as reliable as written communication backed up by verifiable proof of mailing. Foreign postal systems can be unreliable. If you are living abroad, the rules become complex when it comes to the tax law and acceptance of foreign postmarks. The tax code itself does not recognize foreign postmarks, but, fortunately, the IRS has had a long-standing policy on accepting official foreign postmarks for federal tax returns, refund claims, statements, or other documents. It is highly recommended that a taxpayer use the foreign country's version of certified or registered mail because the receipt can serve as proof of timely mailing/filing. Keep in mind, however, that private couriers such as FedEx or DHL are not covered by this rule unless they are specifically designated as IRS-approved private delivery services. Address changes may feel like a minor administrative detail, but when it comes to U.S. tax matters, making sure that all address changes are properly reported to the IRS is imperative. By updating your address properly, through your tax return, Form 8822 or 8822‑B, or a properly mailed written notice, you protect yourself from missed IRS correspondence and notices, unanticipated penalties, and even messy passport issues. Take care of this step early, especially if you're moving abroad, and keep proof of your notification. Having the proper proof could save you from a bureaucratic nightmare later on. Stay on top of tax matters around the globe. Reach me at vljeker@ Visit my US tax blog NO ATTORNEY-CLIENT RELATIONSHIP OR LEGAL ADVICE This communication is for general informational purposes only. It is not intended to constitute tax advice or a recommended course of action. Professional tax advice should be sought as the information here is not intended to be, and should not be, relied upon by the reader in making a decision.
Forbes
4 days ago
- Business
- Forbes
WT Art Partnership LP: Valuation Lessons From A $26 Million Fiasco
A stock photo of a Red Audit stamp on a 1040 US individual income tax return. Photographed at 50mp with the Canon EOS 5DSR and the 100mm 2.8 L lens. getty High-net-worth individuals who collect art and other valuable collectibles face a complex web of tax regulations that can make or break their estate planning strategies. A recent Tax Court decision in WT Art Partnership LP v. Commissioner serves as a stark reminder that even sophisticated taxpayers can stumble when it comes to properly valuing their art and collectibles—and the penalties can be devastating. The $14 Million Mistake That Changed Everything In what would become a cautionary tale for collectors and their advisors, WT Art Partnership claimed a $26 million charitable deduction for donating a painting titled "Palace Banquet" in 2010. The partnership's confidence in this valuation would prove costly. The Tax Court ultimately determined the artwork's fair market value at just $12 million—a staggering $14 million overstatement that triggered severe penalties. The court's decision in T.C. Memo. 2025-30 reveals how technical compliance failures can cascade into financial disasters. Despite allowing a $12 million deduction, the court imposed a punishing 40% gross valuation misstatement penalty under Section 6662(h) because the claimed value exceeded the actual value by more than 200%. Perhaps most troubling for the taxpayers, their appraisals failed to meet the "qualified appraisal" requirements under Section 170(f)(11)(E)—not because the appraisals were poorly done, but because the appraisers weren't technically "qualified appraisers" under the tax code's strict definitions. The Hidden Minefield of Art and Collectibles Valuation Rules For estate planners working with art and collectibles enthusiasts, understanding the intricate requirements for qualified appraisals is crucial. The Internal Revenue Code demands that charitable contributions of art, collectibles, and other tangible personal property exceeding certain thresholds must be supported by qualified appraisals conducted by qualified appraisers who meet specific education, experience, and professional standards. These aren't merely bureaucratic hurdles—they're legal requirements with teeth. The regulations under Section 170(f)(11)(E) require appraisers to demonstrate appropriate credentials and experience, while being free from disqualifying relationships with the taxpayer. For estate tax purposes, the stakes are equally high. Section 2055 allows deductions for charitable bequests, but the valuation must reflect fair market value as of the decedent's death or an alternate valuation date under Section 2032A. Treasury Regulation 20.2031-6 emphasizes the critical importance of detailed appraisals that include comprehensive descriptions of the property's condition, provenance, and market factors—whether dealing with fine art, vintage automobiles, rare wines, coins, stamps, or other collectibles. The Bigger Picture for Estate Planners The WT Art Partnership case underscores a fundamental truth: technical compliance in art and collectibles valuation isn't optional, it's essential. The court's willingness to impose substantial penalties despite finding "reasonable cause" for the qualification failures demonstrates the high stakes involved. For families with significant art and collectibles portfolios, this case highlights the importance of working with experienced estate planning attorneys who understand both the collecting world and regulatory landscapes. The intersection of collectibles, taxes, and estate planning requires specialized knowledge that can mean the difference between successful wealth transfer and costly penalties. Protecting Your Legacy Art and collectibles represent more than financial assets, they're often deeply personal expressions of taste, culture, passion, and family heritage. Proper estate planning ensures these treasures can be preserved and transferred according to your wishes while minimizing tax consequences. The lesson from WT Art Partnership is clear: when it comes to art and collectibles valuation for tax purposes, perfection in process is as important as accuracy in pricing. Don't let technical compliance failures undermine your estate planning objectives or expose your family to unnecessary penalties. Working with qualified professionals who understand the nuanced requirements for appraising art and collectibles isn't just good planning, it's essential protection for your wealth and legacy. For a Due diligence Checklist on Valuation of Art and Collectibles, please contact me at
Forbes
25-07-2025
- Business
- Forbes
The End Of ‘Smelly' Arguments? Tax Court Targets Easement Abuses
United States Tax Court building in Washington DC Judge Ronald L. Buch has issued a warning to the syndicated conservation easement industry and their attorneys about the litigation that is piling up in the Tax Court. When I think of the Tax Court issuing sanctions, I usually think of stubborn pro se litigants like Brian Swanson. This May the Eleventh Circuit denied him relief from a $25,000 Tax Court frivolity penalty. You have to work your way up to that amount. Usually the Tax Court starts off with a warning. And that is what happened with Mr. Swanson, for whom I have a grudging admiration. Judge Buch's warning, on the other hand, is going out to some of the best represented taxpayers currently in the Tax Court dockets and the attorneys themselves, but let's look at the case that it came up in - Veribest Vesta, LLC. About Veribest Veribest owned 55 acres of land in Oglethorpe County, Georgia near the city of Elberton. The parcel was referred to as the old Grimes quarry site. Elberton is known as the Granite Capital of the World as it sits on a granite belt that is approximately 35 miles long, 6 miles wide and 2 to 3 miles deep. By my reckoning that would make for over 130,000 acres where you know that if you dig deep enough you will hit granite. As Judge Buch observes, in order to mine granite as a business you need access to acres like that. You also need an experienced crew with a capable leader, capital to acquire the necessary equipment and to operate the business, and a market into which to sell the granite. A man carrying a block of granite as he prepares the blocks for hand tooling at a granite quarry in ... More Elberton, Georgia, circa 1950. So central to the economy of Elberton is granite that the city is known as the 'Granite Capital of the World'. (Photo by Herbert C. Lanks/Keystone View Company/FPG/) When Veribest donated a conservation easement on the old Grimes quarry site, all it had of the several requirements was the site. Since there is not a lot of buying and selling of easements, they are generally valued by taking the value of the land before the easement and subtracting from it the value of the land as encumbered by the easement. The argument is usually about the before value. Veribest valued the land at over $20,000,000 which after subtracting an after value of $100,000 yielded a charitable contribution of $20,310,000. According to Judge Buch locals understand quarry properties to be worth around $2,000 per acre. Contemporaneous sales records in the surrounding region reflect a range of values from $1,999 to $2,840 per acre. The old Grimes quarry according to evidence at trial was subpar, having been quarried and abandoned. Two years before the donation it had changed hands for $1,818 per acre. Nonetheless the IRS expert went wild and crazy and came in with a $3,000 per acre value, which Judge Buch views as a concession. All that made for a donation value of $111,000. The difference between that and the $20,310,000 claimed by Veribest is according to Judge Buch "a vast difference. It is vast enough to qualify for the gross valuation misstatement penalty. I guess "vast" is a few steps up from "gross" even though it sounds a little classier. The Valuation At trial, Veribest presented two experts. One argued for a before valuation somewhere between $23 and $33.5 million and the other came up with $15,460,000. These were based on the present value of the cash flow from a hypothetical mining operation. As a backup, one of the appraisers computed a valuation based on hypothetical royalty income which came in at $12,170,000. The IRS before valuation based on comparable sales was $165,000. Judge Buch went with the IRS. This result follows along with the recent Tax Court decisions in similar cases. The thinking is that a mining operation on the land is not inherent in the value of the land and that that is not how real estate changes hands. The principle is reinforced in this case by the fact that there had been quarrying going on and it was abandoned because the granite coming out was not of very high Warning This case is from the 2018 tax year so there is an actual assessment against the partnership of an "imputed underpayment" of $7,514,000 and valuation penalty of $3,005,880. This was based on a total disallowance of the charitable contribution. The result of the decision will pare that back very slightly. Assuming, as is likely, that the partnership will not be able to pay, the underpayment will get pushed out to the partners, but we really don't have experience with how well that is going to work out in practice. 2018 is the first year that these new rules are in effect. What really stands out about this case is the warning that Judge Buch issued. He pointed out that Code Section 6673(a)(1) which allows for a penalty of up to $25,000 where it appears that Tax Court proceedings have been instituted or maintained primarily for delay, the taxpayer's position is frivolous or groundless or the taxpayer unreasonably failed to pursue administrative remedies. Frankly with the numbers floating around in this case and others $25,000 doesn't seem like much a concern. But there is more. Code Section 6673(a)(2) provides that when it appears to the Tax Court that an attorney has multiplied the proceedings unreasonably and vexatiously that such attorney may be required to personally pay the excess costs,expenses and attorneys' fees reasonably incurred because of such conduct. Judge Buch states that valuing a property at more than 100 times its actual value is patently frivolous. The value was arrived at not by valuing the property but by valuing a hypothetical business to be situated on the property. Judge Buch quotes from some recent cases. "It is not credible to posit that a buyer would pay -for the easement property alone- the entire NPV of a hypothetical business on the property." He notes that the Tax Court has written that valuing land based on the going concern value of a business operating on the land "defies economic logic and common sense." He also has older appellate opinions that support the same notion. The Fourth Circuit when faced with a situation where the deduction was eight times what was paid a year earlier does not pass any reasonable smell test. And now he is facing a situation where 200 times was claimed. Judge Buch then notes all the time and aggravation involved in the two week trial. He notes that True North Resources, the partnership representative in the case, has ten other cases before the Tax Court and provides warning that 'continuing to pursue similarly incredible, nonsensical, and quite frankly, smelly arguments may result in sanctions on petitioner or its counsel'. Other Tax Court Action The case of Paul-Adams Quarry Trust LLC is scheduled for trial this week. Judge Emin Toro has ordered that the parties be prepared to discuss their views on Veribest and Rock Cliff Reserve, another syndicated conservation easement decision that did not go well for the taxpayers. There is an intriguing footnote Rock Cliff Reserve: "Mr. Collins understood the valuation method for a conservation easement (the value of the land before the easement minus the value of the land after the easement) but repeatedly balked on the stand at admitting that the value of a conservation easement could not exceed the value of a fee simple interest in the land." Is The Industry Based On Nonsense? When I first heard about the idea of buying land and then selling it to people who would take deduction for donated conservation easements, I thought it was one of the stupidest ideas I had ever heard. That's because I believed that an easement could not be worth more than the fee simple interest in the land and that the market for unimproved land, while imperfect, is not full of a lot of stupid people. Although the notion that an easement can be worth more than the land was floating around, I had not seen it being argued in court until recently. Jones Day made the argument in Beaverdam Creek Holdings. Judge Goeke was not impressed. Jones Day is representing Paul-Adams Quarry Trust. It is difficult to give the Jones Day argument justice without going longer than I care to here. Basically the idea is that only sales between fully knowledgeable and capable parties count as comparable sales. So when the syndicator buys land from a farmer for $1,000 per acre, it is possible that the land can really be worth $100,000 per acre. Here is an article in Bloomberg Tax written by Jones Day people that explains it more fully. Reaction Lew Taishoff has a piece titled Judge Buch Says It All Here where he quotes more extensively than I do. Jack Townsend has a passionate piece - Tax Court Rejects a ******** Tax Shelter False Valuation Claim with Warning of Sanctions for Taxpayers, their Counsel, and Expert Witness Proffering the ******* (7/16/25; 7/18/25). I bowdlerized his title based on my understanding of the standards of this platform. The ******* represent Townsend's characterization of abusive tax shelters. The poetic reference is to bovine excrement. Kirsten A. Parillo has Tax Court Warns of Frivolous Argument Penalties in Easement Cases behind the Tax Notes paywall. In that piece she quotes Frank Agostino, who represents taxpayers - 'Having an expert testify that in his or her professional opinion DCF produces the most accurate value is within the province of the expert. The trial attorney has an obligation to represent the taxpayer zealously. It should be a rare case where damages under section 6673 are appropriate. Those cases are resolved by summary judgement.' I followed up with Mr. Agostino and he wrote me the following: "The Veribest Vesta decision is a stark warning for attorneys and taxpayers who rely on non-cash charitable contribution deductions, especially in the context of conservation easements. The Tax Court made clear that even a 'qualified appraisal' by a credentialed expert will not protect taxpayers from severe penalties if the Tax Court judge concludes that underlying assumptions are speculative or unsupported by the facts. For practitioners, the message is clear: formal compliance with appraisal requirements is not enough if the Tax Court judge concludes that the facts do not support the claimed value. As the legal landscape evolves, especially in light of recent Supreme Court decisions on administrative penalties, there may be growing calls to expand taxpayer and tax practitioner access to jury trials in valuation penalty based cases to ensure procedural fairness and maintain trust in the tax system." I also heard from Steve Small, an authority on private land protection, who has probably done more than anyone to expose abusive conservation easements in the interest of preserving the legitimate use of the technique. "The rule for valuing federal income tax charitable contribution donations has been the same for decades, in both easement cases and any other valuation of charitable gift cases: willing buyer, willing seller, comparable sales in the relevant marketplace. The price you recently paid for the property is the best evidence of fair market value. There are no other acceptable methods. In very limited circumstances a DCF can be ok but only in situations that are not based on fanciful assumptions. A 'correct' value determined by a 'correct' DCF should be substantially close to a value determination by comparable sales. The problem is that counsel for well bankrolled syndicators have been trying to convince people that the rule is something different. It's not. They keep blowing smoke, with claims and arguments that are nothing more than red herrings. They are bluffing, the wizard is still behind the curtain, all of these efforts are a totally valid attempt, under the American judicial system, to convince the IRS and the courts that the rule is something different – it is not something different. They are simply representing what they believe to be the best interests of their clients, that's all. But enough is enough. The courts are FINALLY starting to say 'what part of 'willing buyer willing seller based on comparable sales in the relevant marketplace' don't you understand?'"
Yahoo
19-06-2025
- Business
- Yahoo
Jamie Golombek lays out everything you need to know about the new Canada Disability Benefit
Applications for the new, much anticipated Canada Disability Benefit (CDB) open on June 20. The tax-free monthly CDB payments are meant to provide financial support to qualifying people with disabilities. The program is administered by Service Canada and the first month of eligibility is June, with the first payments beginning in July for applications received and approved by June 30. To qualify for the CDB, you must be between 18 and 64 years old and be approved for the disability tax credit (DTC). The DTC is a non-refundable tax credit that's intended to recognize the impact of various non-itemizable, disability-related costs. For 2025, the value of the federal credit is 14.5 per cent of $10,138, or $1,470. But add the provincial or territorial tax savings and the combined annual value can be worth up to $3,200, depending on where you live. To qualify for the DTC, you must complete the Canada Revenue Agency's Form T2201, Disability Tax Credit Certificate, upon which a medical practitioner must certify that you have a 'severe and prolonged impairment in physical or mental function.' This form can be completed online or in paper format. Once the form is completed and sent in, the Canada Revenue Agency will either approve the DTC or deny it. If your application is denied, you can appeal the CRA's decision to the Tax Court. If you're still under 18, you can apply for the CDB as early as age 17 1/2, but your application won't be processed until your 18th birthday. This means that you won't get an eligibility decision or any payments until after you turn 18. Assuming you qualify, you'll begin receiving CDB payments the month after your application is received and approved. But don't panic if you don't get approved right away. If you only find out about the CDB well after July 2025, you can get back payments for past months that you were eligible for, but only for up to 24 months from when the government gets your application (and only for months from July 2025 onwards). Individuals who have been approved for the DTC and who meet most of the eligibility criteria will likely have already received a letter this month that includes a unique application code and instructions on how to apply. To complete the application, you'll need your social insurance number and your direct deposit information, as Service Canada is encouraging all applicants to sign up for direct deposit for the 'fastest and most reliable way to get your payments.' If you didn't receive a letter from the government with an application code but you still think you're eligible for the CDB, you can still apply, but you will also need to provide your mailing address and your net income from line 23600 of your recent 2024 notice of assessment. Applications for the CDB can be submitted on the web via the application portal, by phone and in person at a Service Canada Centre as of June 20. To apply for the CDB, you and your spouse or common-law partner (if applicable) must have filed your 2024 federal income tax return(s), and you must be a Canadian resident for income tax filing purposes, among other criteria. Benefit amounts for the July 2025 to June 2026 payment period are calculated using your adjusted family net income for the 2024 tax year. The maximum amount you could receive from July 2025 to June 2026 is $2,400 ($200 per month). This amount will be adjusted upwards for inflation each year to reflect changes in the cost of living. Because the CDB is an income-tested benefit, the benefit amount you will receive will start to decrease after your 'adjusted family net income' reaches a certain threshold. This is basically equal to your combined family net income as reported on line 23600 of both you and your spouse or partner's returns. If your adjusted family net income is considerably above that threshold, your benefit amount could be zero. How exactly your income affects your benefit amount is complicated and will depend on three factors: your marital status; whether you and/or your spouse or partner have income from employment or self-employment and whether you and your spouse or are both receiving the CDB. Note that a certain amount of income from employment or self-employment is excluded when calculating your benefit amount. This is called the 'working income exemption.' If you are single, up to $10,000 of working income will be exempt, and if you're married or living common-law, up to $14,000 of combined working income will be exempt. The government has provided an estimator to find out how much money you could get from the CDB. To get an accurate estimate, start with your and your spouse's or partner's 2024 notices of assessment to input the exact numbers from various lines on the assessments. Finally, keep in mind that the DTC not only entitles you to the new CDB, but it's also the gateway credit to opening up a registered disability savings plan (RDSP). These plans are designed to help build long-term savings for individuals with disabilities. Individuals may contribute up to $200,000 on behalf of a beneficiary who qualifies for the DTC. There is no tax on earnings or growth while in the plan. In addition to the power of tax-deferred compounding, Canada Disability Savings Grants (CDSGs), with a lifetime maximum of $70,000 per beneficiary, and Canada Disability Savings Bonds (CDSBs), with a lifetime maximum of $20,000 per beneficiary, may be received up until the end of the year in which the beneficiary turns 49, depending on family income. Jamie Golombek: July brings a greater opportunity for income splitting Lack of documentation can be fatal when claiming expenses on taxes Original contributions are not taxed when disability assistance payments are ultimately made to the beneficiary, but earnings, growth and government assistance are included in the beneficiary's income. If the beneficiary has zero or minimal other income, the basic personal amount combined with the DTC may allow most or all of the funds to come out of the RDSP tax-free. Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. If you liked this story, in the FP Investor newsletter. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Forbes
18-06-2025
- Business
- Forbes
New Self-Employment Tax Risks For U.S. Investors In Global Funds
A new Tax Court ruling is a warning for U.S. limited partners in global funds, imposing new ... More self-employment (SECA) tax risks. U.S. limited partners in foreign funds like Cayman or Luxembourg partnerships must ensure passive roles to avoid costly SECA tax liabilities. The U.S. Tax Court decided Soroban Capital Partners LP v. Commissioner (T.C. Memo 2025-52) in May 2025 leaving financial, tax and legal advisors concerned. The court upended assumptions about the self-employment tax exemption for limited partners in hedge funds, and by analogy to venture capital, and private equity partnerships both in the U.S. and abroad. U.S. citizens and green card holders who are limited partners in hedge funds or similar businesses, including those in foreign countries, should understand the effects of this decision. The case signals a shift away from a state or local law definition of a 'limited partner' toward a more comprehensive evaluation of the partner's actual role to determine if the 'limited partner' exclusion from Self-Employment Contributions Act taxes should apply. The Soroban court applied a 'functional analysis test' to determine whether limited partners' distributive share of partnership income is subject to SECA taxes. The decision has far-reaching SECA implications for how limited partners will structure their roles and manage their tax obligations. This article explores the Soroban ruling, what it means for U.S. limited partners, especially for those working with hedge funds or other businesses abroad that use a limited partnership structure. First, it is helpful to understand generally why funds often use a limited partnership vehicle. A limited partnership for U.S. purposes is comprised of both general and limited partners. General partners manage the fund and have unlimited liability. Limited partners contribute capital, and their liability is limited to their investment. The limited partnership structure is tax transparent for U.S. tax purposes, meaning it provides pass-through taxation of income, credits and deductions to its partners. The partnership entity itself is not subject to U.S. income tax, and the partners report their distributive shares on their individual U.S. tax returns. The structure also provides significant flexibility in governance. For all these reasons, the limited partnership is often ideal for private funds. Self-employment income is taxed at a rate of 15.3% (12.4% for Social Security and 2.9% for Medicare). A SECA exclusion exists under Internal Revenue Code Section 1402(a)(13) for a limited partner's distributive share of partnership income. The Tax Court rejected the notion that state law classifications of limited partners should be determinative for purposes of this exclusion. Instead, it applied a functional analysis test to Soroban's limited partners and concluded that these partners were 'limited in name only.' As such, the limited partners' distributive share did not qualify for the SECA exclusion. The court carefully examined the activities of the limited partners and found they were heavily involved in generating the partnership's income by overseeing day-to-day management, working full-time for the business, and that marketing material listed them as essential to the success of the partnership. In addition, the capital contributions made by the limited partners were viewed as insignificant when compared to the fees Soroban charged. This comparison suggested that the limited partner's distributive share was not a passive return on investment but rather compensation for active participation. The label 'limited partner' alone, is not enough to guarantee the SECA exclusion. Instead, the functional analysis test requires a thorough analysis of the facts and a careful examination of the partner's role in the enterprise. The factors include how integral the partner is in generating revenue, the degree of participation in the business, whether the partner is working full-time in the business, whether marketing materials indicate the partner plays a key role and whether the partner's capital investments truly reflect a passive investment. For U.S. limited partners, particularly those in hedge funds or other investment vehicles, the Soroban holding invites the IRS and courts to closely scrutinize the actual activities of limited partners to determine SECA liability. While the Soroban case focused on a U.S. hedge fund, its principles can apply to any partnership structure in which U.S. citizens or green card holders are limited partners. The holding can apply to a vast range of industries operating globally where U.S. partners are contributing expertise and management. Private equity firms, venture capital funds, and other businesses often use a limited partnership structure. A limited partner in an overseas real estate partnership or tech startup fund could face scrutiny if the role involves active management or income generation. Only truly passive investors are meant to benefit from the SECA exclusion and while local law will be important in the analysis, the IRS will be looking beyond any local law label of 'limited partner' to scrutinize eligibility. Various jurisdictions have limited partnership structures closely resembling the U.S. model. The most popular jurisdictions having limited liability for limited partners as well as generally having flow-through tax treatment include the Cayman Islands, British Virgin Islands, Luxembourg, Hong Kong and Ireland. While these jurisdictions appeal to global funds because of their tax and regulatory regimes which parallel the U.S. in important respects, limited partners should be ready to consider a heightened compliance burden given the holding in Soroban. Adding to the additional possible tax burden, the U.S. limited partner abroad will be unhappy to learn that self-employment income subject to SECA tax is not reduced by the foreign earned income exclusion. U.S. limited partners should reassess their involvement in the partnership to make sure they qualify as passive investors entitled to the SECA exclusion. This may mean a significant reduction of day-to-day management responsibilities or restructuring their roles to emphasize capital investment over active participation. For U.S. limited partners in foreign funds, the statute of limitations for SECA tax assessments is generally three years from the due date or actual filing date of the income tax return, whichever is later. However, the statute of limitations for tax matters can be extended several years and even indefinitely, depending on the facts. Crucially, if a U.S. partner fails to file a required foreign information return, such as Form 8938 (Statement of Specified Foreign Financial Assets) or Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships), the statute of limitations does not start for the entire tax return. This gives the IRS the ability to assess SECA tax at any time in the future. U.S. limited partners should be proactive and planning for a possible IRS challenge to a claimed exclusion from SECA. U.S. limited partners should first consult an experienced tax advisor to assess their involvement in the fund and optimize tax outcomes. Next, meticulously document management roles, time commitments, and public representation to ensure compliance with IRS scrutiny and minimize the risk of tax exposure. Partnership agreements should be examined. If feasible, partnership agreements may need to be amended to clarify the role of limited partners as passive investors, emphasizing capital contributions over operational involvement. Limited partners who blur the line between passive investment and active management could find a surprising increase in their U.S. tax liability with their distributive shares subject to SECA taxes. The Soroban case may be appealed, and staying informed on this topic is critical. Investors should be looking out for any future IRS guidance or legislation that might refine the functional analysis test. I help with tax matters around the globe. Reach me at vljeker@ Visit my US tax blog
