On September 29, 2023, Treasury released the 2023-2024 Priority Guidance Plan, which included “Guidance under section 1402(a)(13),” signaling the government’s intention to finally clarify the confusion surrounding the limited partner exception.

Section 1402(a)(13) of the Internal Revenue Code was enacted in 1977 to generally exclude a limited partner’s distributive share of partnership income or loss from the Self-Employment Contributions Act (SECA) tax. Because Treasury has not defined “limited partner” for purposes of the SECA tax, the scope of the limited partnership exception has become a source of contention between the IRS and taxpayers after states began to introduce new types of passthrough entities such as S corporations and limited liability companies. In 2011, Tax Court held that attorney partners who actively participated in a Kansas limited liability partnership were not limited partners. Relying on this win, the IRS has been increasingly scrutinizing taxpayers’ SECA tax exemption claims and taxpayers have been pushing back in litigation, most recently in Point 72 Asset Management, LP v. Commissioner, which we covered here, and Denham Capital Management LP v. Commissioner.

Although the priority guidance plan does not specify the scope or form of its forthcoming guidance on Section 1402(a)(13), it is noteworthy that previous mentions of Section 1402(a)(13) in priority guidance plans were specific to LLCs, whereas the current priority guidance plan suggests a broader scope. Any additional clarity from Treasury will be helpful to taxpayers while Tax Court continues to grapple with this issue.