Tax News
Sands Capital NOPA creates self-employment tax confusion
May 19, 2015
Administrative Actions
A few months ago, in March, Frank Sands (the principal and owner behind Sands Capital) filed a complaint in the Tax Court (Docket No. 5650-15) arguing that the IRS erroneously assessed close to half a million of self-employment tax with respect to certain income derived from Sands Capital Management, LP. The NOPA did not actually specify that the assessment was with respect to self-employment taxes but the taxpayer assumed so by crunching its own numbers. Under this presumption, the taxpayer proceeded to make an argument that under Sec. 1402(a)(13), there should be no self-employment tax assessment because the taxpayer  was a “limited partner.”  This of course is the quint-essential argument that continues to be prevalent in the investment fund context and is espoused by many tax partners. We reasoned here that this type of argument stands on some shaky grounds as of late.

That said, a few days ago the IRS came with its answer in this case and lo and behold, the IRS appears to be noncommittal that it actually assessed self-employment tax. Not only that, the IRS stated that it erred in the assessment and prayed that the relief sought by the taxpayer be granted and the notice of deficiency be denied.

It is difficult to draw any conclusions from this and we would not go that far as to say that this is some sort of tacit affirmation from the IRS that investment fund GPs who also have LP interest are golden for self-employment tax purposes, but we thought that this was sufficiently curious docket that was worth noting. And by golly, a half a million dollar assessment mistake is something to talk about. 
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