Overview of the Fifth Circuit’s Decision
The Fifth Circuit Court of Appeals ruled in favor of limited partners who are more than passive investors in a limited partnership. The ruling, issued January 16, 2026, Sirius Solutions, LLLP v. Commissioner, Fifth Circuit, No. 24-60240, 1/16/26, is the first of three circuit court cases to be decided. The other two cases are Denham Capital Management LP v. Commissioner, which is appealed to the First Circuit and Soroban Capital Partners LP v. Commissioner, which is appealed to the Second Circuit.
IRS and Tax Court’s Interpretation: Passive vs. Active Limited Partners
The question at issue in these three cases is whether or not Section 1402(a)(13) excludes the share of partnership income distributed to a limited partner from earnings subject to tax under the Self-Employment Contributions Act (SECA), i.e., self-employment tax. Section 1402(a)(13) operates to exclude from SECA the income from a “limited partner, as such.”
The Internal Revenue Service (IRS) and Tax Court both determined that the phrase “limited partner, as such” calls for a limited partner to act in a limited, passive investor only capacity to qualify for the exclusion. The three taxpayers hold that the phrase means a limited partner as designated under state law, regardless of the level of participation or activities the “limited partner” engages in.
The Fifth Circuit’s ruling sides with the taxpayer, Sirius Solutions, LLLP, that a state law designation of a partner as a limited partner determines when the exclusion under Section 1402(a)(13) applies.
This case turns on the meaning of “limited partner” in 26 U.S.C. § 1402(a)(13). The Tax Court interpreted “limited partner” to refer only to passive investors in a limited partnership. It therefore upheld the IRS’s up-ward adjustment of Sirius Solutions’s net earnings from self-employment. We disagree. A “limited partner” is a partner in a limited partnership that has limited liability. So we vacate and remand.
Impact of the Decision: No Activity-based Testing for SECA
The ruling eliminates the testing of active or passive investor determination as applied by the IRS and upheld by the Tax Court.
Under the Golson rule, this decision applies to taxpayers in the Fifth Circuit. For all other taxpayers, the question is less settled. Taxpayers can expect the IRS will continue to apply an activity-based test to determine if a limited partner is playing an active role in the partnership’s business or if the limited partner is a passive investor. Taxpayers and their advisors will be watching for the next rulings to come on this issue.
Your Guide Forward
If you are a partnership with one or more limited partners who play an active role in the business of the partnership, our Cherry Bekaert Tax advisors are here to discuss this case and its potential implications with you.
