A report in The New York Times has brought new attention to a tax planning strategy involving limited partnerships that many investment firms and other pass-through businesses have employed for years. The technique centers on how federal tax law treats limited partnerships, specifically when it comes to self-employment taxes that fund Medicare. 

Under a 1977 law, income attributed to a “limited partner” is exempt from self-employment taxes unless it is characterized as a guaranteed payment. Since the Medicare tax has no ceiling on the amount of income subject to tax, this exemption can result in significant savings for individuals generating high amounts of partnerships income.

In practice, many firms have set up compensation arrangements in the form of limited partnerships such that large portions of earnings are not considered self-employment income. 

The IRS has tried to limit the use of this strategy in recent years, contending that active participants who manage or run a business cannot treat themselves as passive limited partners.

In one pivotal Tax Court case involving a hedge fund called Soroban Capital Partners., the court sided with the government in a  May 2025 memorandum opinion, reasoning that a person “is not functioning as a limited partner regardless of the label placed on that partner” when he works full time and his activities are crucial to producing the firm’s income. 

Despite that ruling, corporate tax advisers have kept a watch on sustained legal challenges and the lack of new regulations. Many firms have viewed the question as unsettled until appellate courts weigh in, with compliance positions continuing to diverge.