Self-employed individuals must pay Social Security and Medicare tax on their net earnings from self-employment (NESE). The distributive share of partnership income of a limited partner (LP) is generally excluded from NESE, except to the extent it constitutes guaranteed payment for services rendered to the partnership. There is ongoing debate, however, over when that exception applies. In tax years 2016 and 2017, private fund manager Denham Capital Management, LP (Denham) reported less than one-tenth of its LPs’ distributive share of partnership income as NESE. The IRS subsequently issued final adjustments for both years characterizing all such income as NESE, which Denham challenged. On December 23, 2024, affirming a 2023 decision on the same issue, the U.S. Tax Court (Court) upheld the IRS’ determination, ruling that all of the LPs’ distributive share of Denham’s income constituted NESE. The fact that the individuals in question were LPs under state law was not dispositive. Instead, the Court applied a functional test to determine whether the LPs’ income was passive or employment-related. This article parses the Court’s decision. See “IRS Wins Round One Over Meaning of ‘Limited Partner’ for Self-Employment Income Purposes” (Feb. 15, 2024).