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The Supreme Court later today will hear arguments in a landmark case that could shape Congress’s ability to levy taxes on unrealized investment gains — including a hypothetical wealth tax. But that’s hardly the only tax case that’s threatening wallets on Wall Street.

A recent ruling in a federal case involving Soroban Capital Management, a New York hedge fund led by Eric Mandelblatt, could spell doom for a tactic that top executives at investment firms use to avoid paying self-employment taxes.

Here’s how: Outside investors in private funds — known as limited partners — are exempted by law from having to pay self-employment taxes that help fund Social Security and Medicare. LPs aren’t involved with the fund’s day-to-day operations and they typically don’t have much say in how the fund manager ultimately invests their capital.

The fund managers pay self-employment taxes on their salaries. But they often claim that those executives are also LPs, and are therefore eligible for the same exemption when it comes to fund profits generated on top of their guaranteed income.

In the Soroban ruling, Judge Ronald Buch of the U.S. Tax Court wrote that Congress’s phrasing made it clear that the LP exception does not apply to a partner “who is limited in name only.” That would open the door to self-employment taxes on hundreds of millions of dollars for certain fund managers.

The IRS is already seeking self-employment taxes on a combined $486 million from Soroban and Steve Cohen’s Point72 Asset Management in separate cases, the WSJ’s Richard Rubin and Peter Rudegeair report. Self-employment taxes can be as high as 3.8 percent.

It’s unknown how many other firms could face a similar bill, but “any trade or business operated as a limited partnership with ‘active’ limited partners are implicated,” Raj Tanden, a tax partner at Foley & Lardner, told MM.

In an alert published last week, Tanden wrote that the safest course for some fund managers may be to pay taxes on whatever distributive share of income they generate from their partnership.

The IRS’ push is raising the hackles of hedge fund lobbyists and Wall Streeters who view the agency’s legal strategy — and attempt to curtail use of the “limited partnership” exemption — as overreach. Three sources told MM that they expect Soroban to appeal.

“Right now, there’s no definition of what qualifies as a limited partner,” said one source familiar with the cases who was granted anonymity to discuss litigation. “At the end of the day, the federal tax law doesn’t provide that definition. The IRS can’t change the law.”

Representatives for Soroban did not respond to a request for comment. The IRS declined to comment.

IT’S TUESDAY — It’s going to be a very busy couple of days in both D.C. and New York. Your host will be at the Goldman Sachs Financial Services Conference today and tomorrow — reach out if you want to gossip. And as always, send tips and suggestions to Sam at [email protected] and Zach at [email protected].

The FDIC holds a meeting of its Systemic Resolution Advisory Committee at 9 a.m. … The House Financial Services Digital Assets, Financial Technology and Inclusion Subcommittee holds a hearing on fostering financial innovation at 10 a.m. … Job openings for October will be out at 10 a.m. … The Brookings Institution holds a virtual discussion on bank capital at 11 a.m.

Schumer’s warning — Senate Majority Leader Chuck Schumer said House Republicans are “dangerously close” to stripping bipartisan finance provisions — including fentanyl crackdowns — from this year’s annual defense bill, our Jasper Goodman reports. House GOP members “talk a big game on China” but “are actually sabotaging some of the best tough-on-Chinese-government accomplishments we’ve passed in the NDAA,” Schumer said.

— Fighting fentanyl distribution networks and illicit finance will be on Secretary Janet Yellen’s agenda on a trip to Mexico this week, according to the Treasury. She will also discuss supply chains and “friend-shoring.”

— Meanwhile the House’s China Committee is considering drafting recommendations that would repeal permanent normal trade relations with China, our Doug Palmer reports.

FIRST IN MM: Iranian steel — Sen. Katie Britt of Alabama is leading some 30 GOP senators, including Senate Banking ranking member Tim Scott of South Carolina, in calling on the Biden administration to fully enforce steel sanctions against Iran and its trade partners, Eleanor Mueller reports.

“Iranian steel exports rebounded to 10 million tons in 2022,” the lawmakers wrote in a letter to the White House Monday. “In this instance, relaxing sanctions enforcement resulted in economic enrichment for the world’s largest state sponsor of terrorism.”

The White House did not respond to a request for comment.

Tighter, tighter tighter — Moody’s on Monday announced a negative outlook for the banking sector amid slowing global growth and greater likelihoods of defaults, according to Reuters. Apollo Global Management’s Chief Economist Torsten Slok has a similar outlook for the sector.

— Meanwhile, the Bank for International Settlements said emerging markets are poised to suffer as central bank rate hikes constrict credit availability, our Geoffrey Smith reports.

Watch this space — The WSJ’s Oyin Adedoyin report s that as the wealth of white and Asian households expanded during the pandemic, “for many Black and Hispanic families, the boost wasn’t enough to lift them fully out of debt. One in four Black households and one in seven Hispanic households had zero wealth at the end of 2021, though they did manage to make a dent in their debt.”

Energy Markets — Saudi Energy Minister Prince Abdulaziz bin Salman told Bloomberg that OPEC’s recently announced oil production cuts can “absolutely” continue past the first quarter if needed. Markets have been skeptical of the cuts.

Tech layoffs — Spotify announced it was slashing 17 percent of its staff, writes The WSJ’s Anne Steele. It’s a sign of Wall Street’s growing focus on profits rather than growth.

Slow down — Markets cooled on Monday after surging earlier in the month, Bloomberg’s Rita Nazareth reports. “We’ve had the great rally and now it’s just kind of a ‘chillax,’” Tony Dwyer at Canaccord Genuity told Bloomberg Television.

— The “chillax” has not extended to crypto markets. Reuters reports the price of Bitcoin climbed above $42,000, levels that haven’t been seen since before the Terraform Labs collapse last spring.

Sitdown at the SBA — House Small Business Chair Roger Williams (R-Texas) will lead a GOP visit to the Small Business Administration in connection with his committee’s investigations into the agency. The members will discuss the SBA’s work-from-home policy, the capital access lending program — known as 7(a) — and other topics with SBA Administrator Isabel Casillas Guzman at 3 p.m.

Carbon Markets — The Commodity Futures Trading Commission on Monday issued a request for comment on proposed guidance that will help shape markets for investments linked to carbon offsets, our Allison Prang and Declan Harty report.

Dylan Riddle has been promoted to head of communications for the Americas at Deutsche Bank. The Institute of International Finance and Hamilton Place Strategies alum was previously Deutsche’s head of media relations in the region.