For people earning tens of millions a year, one label used to do a lot of work. Be a limited partner, the argument went, and a 1977 law kept you out of self-employment tax — including the Medicare piece, which runs as high as 3.8% with no income cap. After an eight-year IRS campaign, that argument has now lost in two federal appeals courts, the Journal’s Richard Rubin reports. “The limited partner gambit is dead,” says University of Baltimore law professor Walter Schwidetzky.
The 2nd and 5th Circuits both sided with the government, and the 2nd’s September ruling carries extra weight because it covers New York, where many funds are based. Its test ignores titles: a limited partner who runs, manages or controls the business owes the tax. That case went against Soroban Capital Partners, whose three main partners now owe more on $141.5 million earned in 2016 and 2017. Mets owner Steve Cohen, who has an IRS case pending, will likely owe more for past years; Point72 declined to comment. Treasury Secretary Scott Bessent used the approach at Key Square Group. At his 2025 confirmation hearing he disputed Democrats’ claim that it saved him more than $900,000 and said he’d kept money in reserve for a possible bill. He settled with the government this summer, according to a person familiar with the matter; throughout his tenure, the government kept pressing its case against fund managers in court.
What you do, not what you’re called
The rulings could still be appealed, and the logic cuts both ways. Law and accounting partners with no management role, many of whom pay the tax today, might now argue they’re exempt, and attorneys expect more fights over what running a business really means. The stakes: the 12.4% Social Security portion stops at $184,500 of earnings, but the Medicare portion, which tops out at 3.8%, has no cap, and a parallel 3.8% tax reaches investment income in high-income households. “Even roughly 4% is quite a large amount for some people,” says EY’s Dianne Mehany. Some owners use closely held S corporations to keep part of their income out of the tax’s reach.
Our read
This is a Tax story, and it isn’t only about Greenwich. Plenty of readers own a practice, an agency or a family business through a partnership or an LLC, and some were told years ago that their ownership label kept part of their income out of self-employment tax. These cases involved limited partnerships, but the principle — function over form — is worth applying to your own setup. If you help run the place, it’s prudent to plan as though the tax applies until your CPA tells you otherwise — and below the $184,500 wage base, that means the 12.4% Social Security piece as well as Medicare — and to remember the lines are still being argued.
So, as general principles: have your CPA look at how your share of the income is classified before the year closes. Revisit the entity itself — whether an S corporation, with a reasonable salary, still fits — because structure is a decision you review, not a form you filed once. And if you’ve leaned on the exemption, check your estimated payments now and hold a reserve for open years, the way Bessent said he did. Better to find the umbrella while it’s still only clouds over the courthouse.