The core of the dispute revolves around the application of the limited-partner exception found in 26 U.S.C. § 1402(a)(13) and 42 U.S.C. § 411(a)(12). This exception generally excludes the distributive share of income or loss of a limited partner from net earnings from self-employment, with a specific carveout for "guaranteed payments . . . for services actually rendered". Denham contends that the Tax Court erred by distorting the meaning of "limited partner" through the imposition of a "functional analysis test" and by inappropriately allowing this partner-level determination to occur in a partnership-level proceeding under the TEFRA regime.

The Definition of "Limited Partner" and Agency Interpretations

Denham’s primary argument is that the term "limited partner" in the statute has a well-established legal meaning that should be respected: a partner of a limited partnership whose liability for partnership obligations is limited to their investment. Denham supports this definition by referencing:

Customary Legal Meaning:
- General principles of statutory construction that legal terms are presumed to carry their customary legal meaning, citing United Techs. Corp. v. Browning-Ferris Indus., Inc., 33 F.3d 96, 99 (1st Cir. 1994) and Morissette v. United States, 342 U.S. 246, 263 (1952).
- The historical understanding and essential features of limited partnerships as creatures of statute, as described in William Draper Lewis, The Uniform Limited Partnership Act, 65 U. Penn. L. Rev. 715, 716-17 (1917).
- Provisions from the Uniform Limited Partnership Act (§ 1, 8 U.L.A. 1, 2 (1922)) and the Revised Uniform Limited Partnership Act (§ 101(7), 303(a) (1976)), emphasizing that limited partners have liability limited to their contributions.
- Legal dictionaries such as Black’s Law Dictionary (4th ed. 1951, 1957 prtg. and 5th ed. 1979, 1986 prtg.) which define limited partners by their limited liability, citing Lackey v. Stinnie, 145 S. Ct. 659, 667 (2025) and United States v. Nason, 269 F.3d 10, 16 (1st Cir. 2001) for the use of legal dictionaries in statutory interpretation.
Agency Interpretations:
- The Social Security Administration (SSA), in 1978, defined "limited partner" consistent with limited financial liability in its regulations (43 Fed. Reg. 25422, 25422 (June 13, 1978) and 20 C.F.R. § 404.1080(b)(3)), which remains in effect today. The SSA’s internal handbook also reiterates this definition (Social Sec. Admin., Program Operation Manual System (POMS): RS 01802.302 (rev. Mar. 6, 1991)).
- The IRS has also consistently provided guidance in its partnership tax return instructions (e.g., 2024 Instructions for Form 1065) that a "limited partner’s share of partnership income (loss) isn’t included in net earnings (loss) from self-employment" except for guaranteed payments for services. Denham highlights that the Commissioner’s current position in litigation marks a departure from this long-standing guidance, citing Bittner v. United States, 598 U.S. 85, 97 (2023).
Congressional Actions and Failed Regulatory Attempts:
- In 1997, the Treasury Department proposed a regulation (62 Fed. Reg. 1702, 1704 (Jan. 13, 1997)) to redefine "limited partner" using a "functional approach".
- Congress swiftly responded by passing a resolution expressing concern that this change exceeded regulatory authority (143 Cong. Rec. 13168 (June 27, 1997)) and enacted a law preventing new regulations on the definition of a limited partner until July 1998 (Taxpayer Relief Act of 1997, Pub. L. No. 105-34, § 935, 111 Stat. 788, 882). Since then, Treasury has not proposed new regulations.
- A later attempt by the IRS to include functional analysis language in draft partnership return instructions for 2021 also failed to make it into the final version. This history, Denham argues, solidifies that "limited partner" retains its settled legal meaning.

Denham’s limited partners, being partners of a Delaware limited partnership with statutorily limited liability, undisputedly fit this well-understood definition.

Navigating the Phrase "As Such" and its Statutory Context

The Tax Court, in its Soroban decision, relied heavily on the words "as such" in 26 U.S.C. § 1402(a)(13) to impose a "functional analysis" test, arguing that it meant a limited partner "functioning as a limited partner". Denham argues this interpretation is flawed:

The phrase "as such" refers to the antecedent, which is "limited partner," meaning "as a limited partner". Denham cites Bryan A. Garner, Garner’s Modern English Usage 873 (4th ed. 2016) for this grammatical interpretation, and Sebelius v. Cloer, 569 U.S. 369, 381 (2013) for the principle of respecting plain meaning.
The distinction implied by "as such" is crucial when a person holds multiple capacities within the same partnership, such as being both a general and a limited partner. In such cases, only the distributive share received as a limited partner would qualify for the exception. Legislative history from H.R. Rep. No. 95-702, pt. 1, at 40 (1977) supports this interpretation, noting that a distributive share received as a general partner would not be excluded.

The "Passive Investor" Test: Statutory Harmony and Practicality

Denham further argues that the Tax Court’s adopted "passive investor" test, which requires a factual inquiry into whether a partner’s relationship with the partnership is "more akin to those of passive investors or employees", is inconsistent with the statutory scheme and unworkable:

Incompatibility with Statutory Scheme:
- The guaranteed payments carveout within 26 U.S.C. § 1402(a)(13) explicitly contemplates that limited partners can provide services to the partnership and receive remuneration for them, which is treated as self-employment income. This directly contradicts the idea that a limited partner must be "passive" for their distributive share to be excluded.
- The statute’s recognition of dual-status partners (who can be active as general partners) also indicates that limited partners need not be entirely passive.
Contrast with Other Statutory Provisions:
- Congress knew how to impose a "no services" requirement. The retired-partner exception (26 U.S.C. § 1402(a)(10) and 42 U.S.C. § 411(a)(9)), enacted prior to the limited-partner exception, specifically excludes amounts received by a partner only if the partner "rendered no services" to the partnership. The absence of such a provision in the limited-partner exception is telling.
- Similarly, the Tax Reform Act of 1976 added rules for "farming syndicates" where it explicitly provided that certain active participation by a "limited partner" would alter their tax treatment for that specific purpose (26 U.S.C. § 461(j)). This demonstrates Congress’s ability to define and impose activity tests when it intended them, citing Ali v. Federal Bureau of Prisons, 552 U.S. 214, 227 (2008).
Unworkability of the Test:
- Denham argues the "passive investor" test is an "indeterminate and unworkable" multifactor totality-of-the-circumstances test. The Tax Court’s factors (e.g., time, skills, roles, advertising, capital contributions) and its acknowledgment that "the test ’is not dictated by any set number of factors’" leads to a lack of tax certainty. Denham compares this to concerns raised in Commissioner v. Soliman, 506 U.S. 168, 183-84 (1993) (Thomas, J., concurring in judgment).
Misplaced Reliance on Precedent:
- Denham asserts the Tax Court’s reliance on Renkemeyer, Campbell & Weaver, LLP v. Commissioner, 136 T.C. 137 (2011) and similar cases (e.g., Hardy v. Commissioner, T.C. Memo. 2017-16, Castigliola v. Commissioner, T.C. Memo. 2017-62) is flawed because those cases involved limited liability partnerships (LLPs) or limited liability companies (LLCs), not state-law limited partnerships. LLPs and LLCs arose after the limited-partner exception was enacted and grant limited liability to all partners, who may also have management powers, unlike traditional limited partnerships where limited partners lack control. Denham points to pre- and post-Renkemeyer cases that rejected or clarified the functional test’s applicability to de jure limited partners (Perry v. Commissioner, T.C. Memo. 1994-215; Johnson v. Commissioner, T.C. Memo. 1990-461; Joseph v. Commissioner, T.C. Memo. 2020-65; Duffy v. Commissioner, T.C. Memo. 2020-108).
Misinterpretation of Legislative History:
- Denham counters the Tax Court’s citation of H.R. Rep. No. 95-702, pt. 1, at 11 (1977) to support a "passive investment" nature. Denham points out that the very next sentence in the report discusses guaranteed payments for services, contradicting a purely passive view. Ultimately, Denham emphasizes that "legislative history is not the law," citing Epic Systems Corp. v. Lewis, 584 U.S. 497, 523 (2018).

The Procedural Challenge: Partnership-Level Determination of Net Earnings from Self-Employment

As an additional, independent basis for reversal, Denham argues that the Tax Court erred by determining net earnings from self-employment in a TEFRA partnership-level proceeding. Denham asserts that this determination is not a "partnership item" under TEFRA for the following reasons:

Definition of "Partnership Item": For an item to be a "partnership item" under TEFRA, it must be "required to be taken into account for the partnership’s taxable year under any provision of subtitle A" of the Internal Revenue Code, and Treasury Regulations must "provide that . . . such item is more appropriately determined at the partnership level than at the partner level" (26 U.S.C. § 6231(a)(3)).
Individual-Centric Nature of NESE:
- Net earnings from self-employment (NESE) are computed by individuals, not partnerships, based on their individual income and taxable year (26 U.S.C. § 1402(a)).
- The relevant Treasury Regulations (26 C.F.R. § 301.6231(a)(3)-1) do not list NESE as an item "more appropriately determined at the partnership level". A temporary regulation also indicates NESE is determined "with respect to a partner" and is not a "partnership item" (26 C.F.R. § 1.702-3T(f)).
- NESE determinations are based on partner-specific facts (e.g., identity of the partner, applicability of exceptions like the limited-partner exception) and affect only that individual partner’s SECA tax liability, not the partnership or other partners. Denham cites Estate of Quick v. Commissioner, 110 T.C. 172, 186-87 (1998) and Grigoraci v. Commissioner, T.C. Memo. 2002-202, 84 T.C.M. (CCH) 186, 190-91 (2002) to support this.
IRS Forms vs. Law: The Tax Court’s conclusion regarding an "aggregate amount of net earnings from self-employment" appears to stem from IRS forms and instructions, which are not "provisions of subtitle A" or legally binding regulations for TEFRA purposes (26 U.S.C. § 6231(a)(3)). Denham points to Green Rock LLC v. IRS, 104 F.4th 220, 229 (11th Cir. 2024) as an example of IRS notices not being legally binding.
TEFRA’s Purpose: Allowing partner-specific determinations like NESE in a partnership-level proceeding would "obliterate the wall" between partnership-level proceedings (for items affecting the whole partnership) and partner-level proceedings (for individual determinations), contrary to TEFRA’s design and precedent (United States v. Woods, 571 U.S. 31, 39 (2013)).

In summary, Denham asserts that its limited partners’ distributive shares should be excluded from net earnings from self-employment because they meet the traditional definition of a limited partner with limited liability, and the Tax Court’s "functional analysis" is an erroneous judicial imposition that contradicts statutory text, legislative intent, and long-standing agency interpretations. Furthermore, even if such a test were valid, its application is a partner-level determination and thus outside the scope of a TEFRA partnership-level proceeding.

Prepared with assistance from NotebookLM.