An investment management firm founded and owned by legendary investor (and New York Mets owner) Steve Cohen on August 11 filed a petition in Tax Court contesting an IRS audit adjustment in the amount of $344,063,484 for tax years 2015 and 2016.  The adjustment relates to the IRS’s assertion that the taxpayer, Point72 Asset Management, LP (“Point72”), incorrectly reported $0 as its net earnings from self-employment.  At stake is over $13 million dollars in taxes, not counting interest and any potential penalties.

For the years in dispute, Point72 was owned .01% by Point72 Capital Advisors, Inc. (“Advisors”), an S corporation wholly owned by Mr. Cohen, and 99.99% by Point72 Capital Holdings, LP (“Holdings”), a limited partnership owned .01% by Advisors and 99.99% by Mr. Cohen.  The interest in Point72  owned by Advisors was a general partner interest and the interest owned by Holdings was a limited partnership interest.  Under Section 1402(a)(13) of the Internal Revenue Code, limited partners are excluded from paying self-employment tax.

Point72 is the latest of several asset managers to challenge the IRS’s view of what constitutes a limited partner for purposes of the self-employment tax exception for limited partners.  This is part of a long-running IRS battle to deny this exception to limited partners who also exercise management rights in separate capacities as general partners.  It is a classic dispute of substance versus form.

Point72, like most other asset managers, relies on the formal distinction between acting in one’s capacity as a general partner and acting in one’s capacity as a limited partner.  However, many asset managers who take advantage of the limited partner exception have multiple ultimate beneficial owners, as opposed to a single owner in this case, and have general partner interests at least equal to 1%, rather than Mr. Cohen’s .01%.  Many also pay their limited partners a “guaranteed payment,” which is subject to self-employment tax—there is no mention in the petition of whether Mr. Cohen received such a payment.

The IRS will presumably argue that Holdings was not a true limited partner of Point72 due to its majority ownership by Mr. Cohen, who, through his sole ownership of Advisors, exercised complete control over Point72.  They could also assert the partnership anti-abuse regulations.  In addition, given the low percentage interest of Advisors in Point72, they may argue that Advisors was not actually a partner of Holdings or Point72 for tax purposes, which would make the limited partner exception inapplicable.  Point72 will likely argue that Holdings’ status as a state law limited partner is all that the statute requires for the exception to apply.  The petition also mentions several other issues that would be a basis for a defense, among them that the statue of limitations has expired and that the amount of self-employment taxes allocated to a partner is not a partnership-level item that may be adjusted under a TEFRA audit. 

Given the high profile of the taxpayer and the somewhat unique structure, this will certainly be a case to watch as it makes its way through the Tax Court.