Billionaire Steve Cohen Fights a $10 Million Tax Bill to Derail an IRS Plan

(Bloomberg) - Steve Cohen is contesting an Internal Revenue Service campaign to compel hundreds of money managers — including his Point72 Asset Management — to pay self-employment taxes on a main source of earnings.

Point72 petitioned the US Tax Court on Aug. 11 to challenge a tax assessment on $344 million of earnings from 2015 and 2016. The asset manager allocates virtually all of its earnings and expenses to Point72 Capital Holdings, a limited partnership owned by Cohen, according to the petition.

The billionaire New York Mets owner would owe less than $10 million if the IRS prevails, according to people familiar with the situation who asked not to be identified discussing confidential matters. But allowing the IRS’s current interpretation of a 69-year-old tax law to become precedent could become increasingly costly now that Point72 is managing outside capital; it was only investing on behalf of Cohen and other members of his firm in 2015 and 2016.

“Since it’s an ongoing charge year after year after year, it will be a meaningful drain” for money managers, said Anthony Daddino, a managing partner at Meadows Collier, a law firm that specializes in tax issues.

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, according to the people familiar with the situation. The self-employment tax is a separate 15.3% levy that includes 12.4% for Social Security and 2.9% for Medicare.

Point72 declined to comment, and the IRS said it doesn’t comment on ongoing litigation. The Point72 petition described the IRS’s proposed tax adjustments as “erroneous, unreasonable, arbitrary and capricious.”

Compliance Campaign

In 2018 the IRS began a Self-Employment Contributions Act compliance campaign to determine whether people who owned their businesses through traditional state limited partnerships — a common arrangement for hedge fund managers and health care companies — continue to qualify for a longstanding exemption from the self-employment tax.

The limited partners of these businesses have always had to pay self-employment taxes on so-called guaranteed payments, such as wages, that they receive for providing services to the money management unit. However, the revenue code also says that limited partners are exempt from paying self-employment taxes on business profits.

The rationale behind the exemption is that limited partners have traditionally been passive investors in a venture, as opposed to active members of management. But as more states over the years have allowed limited partners to provide services to the businesses in which they have also invested, the IRS has challenged the idea that they’re still “limited partners,” even though this phrase isn’t defined in the applicable section of the tax code.

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.

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

Point72 would pay only between $7 million and $10 million in taxes should it lose to the IRS, according to the people familiar with the situation. That’s largely because the maximum amount of self-employment income subject to the Social Security portion of the tax was capped at $118,500 during the tax years in question.

The Managed Funds Association, which represents the alternative-asset management industry, is closely following this issue and awaiting a summary judgment ruling on a case with similar claims: Soroban Capital Partners.

For its part, the IRS is flush with billions in extra cash from the Inflation Reduction Act, and the agency has vowed to ramp up audits of wealthy taxpayers such as Cohen.

By Miles Weiss
With assistance from Allyson Versprille


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