Passive or not, a limited partner is a limited partner under section 1402(a)(13), so distributions to a "limited partner, as such" are excepted from self-employment taxes, the Fifth Circuit ruled in Sirius Solutions on January 16, 2026, reversing the Tax Court. As background, net earnings from self-employment do not include "the distributive share of any item of income or loss of a limited partner, as such[.]" Section 1402(a)(13). Any earnings qualifying under this exception are not subject to Self-Employed Contributions Act (SECA) tax. Notwithstanding withdrawn proposed regulations from the 1990s, neither Congress nor the Internal Revenue Service (IRS) clarified the definition of a "limited partner" since the exception's enactment in 1977. On January 16, 2026, the Fifth Circuit considered this exception and held that, for a limited partner in a limited partnership, eligibility turned on limited liability – providing relief in the Fifth Circuit from the Tax Court's multifactor functional analysis test under Soroban I. See Sirius Solutions LLLP v. Commissioner, 165 F.4th 374 (5th Cir. 2026); Soroban Capital Partners LP v. Commissioner, 161 T.C. 310 (2023) (Soroban I).

In 2018, the Large Business & International (LB&I) unit of the IRS announced a compliance campaign focusing on this limited partner exception. In 2023, the Tax Court evaluated this limited partner exception in the context of a limited partnership and held that the exception does not apply to a limited partner who is limited in name only. See Soroban I. Rather, a taxpayer must tango with a multi-factor functional analysis test to determine eligibility for the limited partner exception; only those partners who function as a limited partner qualify. Our original coverage of this opinion is here. 

Following the Soroban I decision, three other Tax Court cases were all decided under the Soroban I functional analysis test, and all three concluded that the relevant partners were limited in name only and ineligible for the exception: Denham Capital Management LP v. Commissioner, T.C. Memo 2024-114, Sirius Solutions, No. 30118-21 (T.C. Feb. 20, 2024), Order and Decision, and Soroban Capital Partners LP v. Commissioner, T.C. Memo 2025-52 (Soroban II). Our original coverage of the Soroban II opinion applying the functional analysis test is available here. All three Tax Court decisions were appealed. The Fifth Circuit spoke first in Sirius Solutions, and decisions in the First and Second circuits should follow. The First Circuit heard oral arguments in Denham Capital on February 5, 2026, and the Second Circuit is considering Soroban II.

In Sirius Solutions, the Fifth Circuit's 2-1 decision struck down the functional analysis test under Soroban I. It held that "[a] 'limited partner' is a partner in a limited partnership that has limited liability" 165 F.4th at 376 (emphasis added). Finding that the touchstone characteristic of a limited partner turns on limited liability, the Fifth Circuit interpreted the statutory language "as such" as clarifying instances in which a partner holds a dual role as both a general and limited partner, disagreeing with Soroban I's interpretation of "as such" as requiring a functional analysis test.

The government has until March 2, 2026, to petition the Fifth Circuit for en banc review or petition the Supreme Court for a writ of certiorari. Supreme Court review at this point is unlikely. If these requests are denied (or no requests are made), then the Sirius Solutions decision will become final. Once that occurs, we would expect that the IRS would issue a nonacquiescence stating its disagreement with the holding and its intention to not follow it in cases outside the Fifth Circuit. The First and Second Circuits could create a circuit split with the Fifth Circuit's decision – and thus increase the chances of Supreme Court review. Alternatively, a circuit split may never arise: the oral arguments in Denham Capital focused on a jurisdictional question in Soroban I, not considered at all in Sirius Solutions. Soroban I concluded that a functional inquiry into limited partners' roles and activities in the partnership involves factual determinations that are necessary to determine the partnership's aggregate net earnings from self-employment, a "partnership item" under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). Accordingly, the court held that such a factual inquiry is a partnership item appropriately determined in a partnership-level proceeding. The taxpayer challenges the conclusion that this is a partnership item that may be adjusted in a partnership-level proceeding, thus presenting the possibility that the circuit decisions fracture beyond a binary circuit split on the functional analysis test issue. 

Limited partnerships, their partners, and their advisors should stay tuned for the decisions from the First and Second Circuits, anticipated later this year.
 

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