The Internal Revenue Service scored a significant win over the hedge-fund and asset-management industries this week in a case that could bring higher taxes for many fund managers, the Wall Street Journal reported. The U.S. Tax Court’s ruling could require managers to pay self-employment taxes of more than 3% on much of their income. If the opinion survives additional legal battles and is applied broadly, it would close off a popular technique that lets them exclude millions of dollars in income from self-employment taxes and related levies that others must pay. Even though many fund managers are considered “limited partners” under state laws, that doesn’t automatically mean they qualify for an exception that limited partners get from federal self-employment taxes, ruled Judge Ronald Buch. The ruling was a loss for Soroban Capital Partners, a roughly $10 billion New York-based hedge-fund firm. The government has made similar arguments in other cases, including one against Point72 Asset Management, run by New York Mets owner Steve Cohen. “This is what the government is trying to argue all along,” said Karen Burke, a tax-law professor at the University of Florida. “Potentially, it’s quite big, but there’s going to be more litigation obviously.”
