Billionaire Steve Cohen is challenging an IRS self-employment tax assessment on $344 million of earnings from 2015 and 2016 from his asset management firm, Point72 Capital Holdings, Bloomberg and other news organizations reported.

Cohen, who is also the owner of the New York Mets, petitioned the U.S. Tax Court earlier this month over the IRS’s current interpretation of the Self-Employment Contributions Act (SECA) of 1954. The interpretation would cause hundreds of money managers to pay self-employment tax on net earnings. Point72 would owe  between $7 million and $10 in taxes if his petition is unsuccessful, sources told Bloomberg.

Limited partnerships pass through their income directly to their owners, and Cohen has already paid income taxes on the $344 million earnings total from 2015 and 2016, the sources told Bloomberg. The self-employment tax, 15.3 percent, includes 12.4 percent for Social Security and 2.9 percent for Medicare.

The source of the dispute is a campaign begun by the IRS in 2018 to ensure compliance with the SECA tax by determining whether people who own their businesses through traditional state limited partnerships continue to qualify for a longstanding exemption from the self-employment tax.

Cohen and others like him are exempt from paying self-employment taxes on business profits under the Internal Revenue Code because limited partners have traditionally been passive investors in a venture, as opposed to active members of management. As more states have allowed limited partners to provide services to the businesses in which they have invested, the IRS has challenged the idea that they’re still “limited partners.”  

Opponents of the IRS campaign say the self-employment tax applies only to guaranteed payments, such as salaries. They consider their allocated share of net earnings akin to a return on invested capital, not a payment for services.

Bloomberg noted that if the IRS’s current interpretation of SECA became became precedent, it could become increasingly costly to asset management companies. Anthony Daddino, a managing partner at Meadows Collier, a law firm that specializes in tax issues, said to Bloomberg, “Since it’s an ongoing charge year after year after year, it will be a meaningful drain” for money managers.

Hundreds of limited partnerships in the asset management space have been audited in the past five years, Miri Forster, a tax partner at Eisner Advisory Group, told Bloomberg. “Some people may have resolved the issue without going to litigation if the dollars were small enough.”