NY Mets Owner Steve Cohen Challenges IRS Campaign to Tax Self-Employed Earnings

By: Serach Nissim

Billionaire Steve Cohen, founder and owner of hedge fund Point72 Asset Management, is contesting a campaign by the Internal Revenue Service that will put hundreds of money managers on the hook to pay self-employment taxes in addition to income taxes.

As reported by Crain’s NY, Cohen, famed as the owner of the NY Mets baseball team, is fighting a roughly $7 to $10 million tax assessment for earnings his hedge fund company made managing capital some years back.  Point72 made the legal petition in U.S. Tax Court on Aug. 11, challenging a tax assessment on $344 million of earnings made from 2015 and 2016.

The tax assessment on the limited partnership company is based on the IRS’s current interpretation of a 69-year-old tax law. Limited partnerships pass their income on directly to their owners, and Cohen contests that he already paid income taxes on the $344 million earnings total from 2015 and 2016, per Crain’s. The self-employment tax is an extra 15.3% levy which includes 12.4% for Social Security and 2.9% for Medicare. If the extra tax becomes a precedent, it would become increasingly costly for Point72 to manage outside capital.  Previously, in 2015 and 2016, the company was only investing on behalf of Cohen and other members inside his firm.

Cohen, 67, boasts a net worth of roughly $17.5 billion in 2023, per Forbes.  From Cohen’s standpoint, it may be worthwhile to fight the tax assessment now, rather than allow it to become a precedent which he and other money managers will need to face annually.  “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 which has its expertise in tax issues.  The petition filed by Point72 called the IRS’s proposed tax adjustments “erroneous, unreasonable, arbitrary and capricious.”

Per the NY Post, in 2018, the IRS started a campaign to dig deeper into businesses to see whether they really qualify as “limited partnerships”, questioning their exemption from the self-employment tax. The tax agency claims that in recent years more limited partners have passed the scope of their class, by providing services to the business in which they invested — thereby making them responsible for self-employment taxes on profits.

Money managers have countered that self-employment tax as defined in the statute only pertains to guaranteed payments, like salaries—not earnings or profit.  Similar to Point72, other asset managers including Soroban Capital Partners have also fought the IRS assessments.  Hundreds of limited partnerships among money managers have been audited in the past five years, Miri Forster, a tax partner at Eisner Advisory Group, told Bloomberg.  “Some people may have resolved the issue without going to litigation if the dollars were small enough,” Forster noted.

The IRS replied saying it does not comment on ongoing litigation.