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Steve Cohen, the billionaire owner of the New York Mets and Point72 Asset Management, has launched a legal challenge against the Internal Revenue Service (IRS) over an ongoing campaign to impose self-employment taxes on money managers. On August 11, Point72 petitioned the U.S. Tax Court to dispute a tax assessment affecting $344 million in earnings for 2015 and 2016. According to the court filing, these earnings and expenses are almost entirely funneled through Point72 Capital Holdings, a limited partnership that Cohen owns.

Although the disputed amount may initially seem inconsequential for a billionaire—less than $10 million if the IRS wins—the stakes are higher than they appear. If the IRS's interpretation of a tax law dating back 69 years stands, it could set a precedent with wide-reaching financial implications, especially now that Point72 manages capital from outside investors and Cohen's funds. As Anthony Daddino, a managing partner at Meadows Collier law firm, noted, the issue "will be a meaningful drain" for asset managers if it becomes an annual charge.

Cohen has already paid income taxes on the $344 million in question, and the current disagreement centers around the self-employment tax. This distinct 15.3% levy includes 12.4% for Social Security and 2.9% for Medicare. Point72 declined to comment on the ongoing litigation, but its petition blasted the IRS's proposed tax adjustments as "erroneous, unreasonable, arbitrary, and capricious."

This conflict traces back to 2018 when the IRS initiated a Self-Employment Contributions Act compliance campaign. The IRS began probing whether owners of businesses structured as traditional state limited partnerships—a popular model for hedge funds and healthcare companies—still qualified for an enduring exemption from self-employment taxes. According to the U.S. tax code, limited partners have always been responsible for self-employment taxes on so-called "guaranteed payments" like wages but were exempt from such taxes on business profits.

The IRS's scrutiny stems from an evolving understanding of what constitutes a "limited partner." Traditionally, limited partners were viewed as passive investors rather than active management members. However, in recent years, various states have allowed limited partners to provide services to the businesses they invest in, thus blurring the lines and prompting the IRS to question their status.

Opponents argue that the self-employment tax should only apply to guaranteed payments like salaries, not their share of net earnings, which they consider a return on capital. Miri Forster, a tax partner at Eisner Advisory Group, disclosed that hundreds of similar partnerships have been audited over the past five years. She added that some might have resolved the matter without legal action if the amounts were insignificant.

Should Point72 lose, it would owe between $7 and $10 million, capped primarily due to the maximum income subject to the Social Security component of the self-employment tax being $118,500 during the years under dispute. The Managed Funds Association, representing the alternative asset management sector, closely monitors the situation, as is a separate case involving Soroban Capital Partners. The IRS, newly invigorated by billions in additional funding from the Inflation Reduction Act, has signaled an intent to intensify audits on wealthy taxpayers, further heightening the tension in this case.

Talley's team of tax professionals provides comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.


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