In a re-issued opinion, the Fifth Circuit meaningfully changed its view on the standard by which limited partners are excluded from self-employment tax. In its initial opinion, the Fifth Circuit held that limited partners were eligible for the exclusion from self-employment tax merely based on their status as a limited partner. Sirius Solutions L.L.L.P. v. Commissioner, 165 F.4th 374, 382 (5th Cir. 2026). Under the re-issued opinion, limited partners within the jurisdiction of the Fifth Circuit must now show that they play "no significant role in managing or running the business" to qualify for the limited partner exception to self-employment tax under section 1402(a)(13). K Alain L.L.L.P. v. Commissioner, No. 24-60240 (5th Cir. Aug. 12, 2026).¹

After the government petitioned for rehearing en banc of the January 2026 opinion, the Fifth Circuit withdrew and reissued its decision, shifting from its prior bright-line test that a "limited partner, as such" under section 1402(a)(13) is "a partner in a limited partnership that has limited liability" to this factually intensive determination that narrows the scope of limited partners eligible for the exception. This reissued opinion is binding only on state law limited partnerships within the Fifth Circuit, leaving continued uncertainty for limited partnerships outside the Fifth Circuit and for limited liability companies and other legal entities classified as partnerships for U.S. federal income tax purposes writ large.

Under section 1402(a)(13), net earnings from self-employment (NESE) do not include "the distributive share of any item of income or loss of a limited partner, as such[.]" Any earnings qualifying under this exception are not subject to self-employment tax. While "limited partner" is not defined in the statute or regulations, the Tax Court considered this limited partner exception in 2023, holding that the exception applies only to limited partners who "function" as a limited partner (i.e., passive investors), not those who are limited in name only. See Soroban Capital Partners LP v. Commissioner, 161 T.C. 310 (2023) (Soroban I). In January, the Fifth Circuit's 2-1 decision in Sirius Solutions struck down the functional analysis test under Soroban I, holding that "[a] 'limited partner' is a partner in a limited partnership that has limited liability." Here is our prior coverage of Soroban I and the January Sirius Solutions decision.

Following the January decision, the United States petitioned for rehearing en banc. The Fifth Circuit considered this a petition for rehearing, granted the petition, withdrew the January opinion, and reissued its opinion on August 12. The August opinion, reissued by the same panel of judges reaching the same 2-1 split as in January, still vacates and remands the matter to the Tax Court and rejects the passive investor test in Soroban I. Despite the continuity in ultimate results, the August opinion meaningfully departs from the January opinion's analysis and hews more closely to the government's "functional" position. The January opinion directed taxpayers to look solely to whether a partner in a limited partnership has limited liability under state law, whereas taxpayers in the Fifth Circuit must now engage in a fact intensive determination as to whether a partner "did not play a significant role in managing or running the business" when considering eligibility for the limited partner exception. The Fifth Circuit did not further opine upon what constitutes a significant role in managing or running a business such that a partner would not qualify for the exception. However, it did indicate that "some participation is allowed, so long as the partners do not exercise control over the business."

This is not the final word on the meaning of section 1402(a)(13), as the interpretation of the limited partner exception remains an open question before the First Circuit in Denham Capital and the Second Circuit in Soroban, and the government has urged these courts to follow the reissued Sirius Solutions opinion. See Denham Capital Management LP v. Commissioner, No. 25-1349 (1st Cir.); Soroban Capital Partners LP v. Commissioner, No. 25-2079 (2d Cir.). Limited partnerships, their partners, and their advisors should continue to watch whether the First and Second Circuits create a circuit split and should prepare for factually intensive Internal Revenue Service (IRS) audits in the meantime. 

For more information, please contact:

George A. Hani, ghani@milchev.com, 202-626-5953

Katherine Chace, kchace@milchev.com, 202-626-5894

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¹ Sirius Solutions, LLLP is now K Alain LLLP. While the caption of the opinion used the new name, the Fifth Circuit continued to refer to the taxpayer as Sirius Solutions. We do the same here.

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