Update on Limited Partner Exception to Self-Employment Tax Liability: Fifth Circuit Decision Revives the Issue
In the summer of 2025, we issued an alert on this subject, U.S. Tax Court Issues Ruling on Self-Employment Tax Exception for Limited Partners (06.11.2025). The case discussed in that alert was the third of a series of decisions from the U.S. Tax Court since 2022 on the same issue, albeit on different facts in each case. The 2025 decision was styled Soroban Capital Partners LP v. Commissioner. The 2025 Tax Court decision followed their two earlier decisions, finding limited partners were subject to self-employment tax on all the income allocated to them. The Tax Court has consistently applied the language in IRC Section 1402(a)(13) that the exception to the self-employment tax which applies to a "limited partner, as such," required, in the absence of a statutory definition, a functional analysis of what the limited partner did for the entity that generated the income. In the Tax Court's view, if the partner acted as a passive investor, that partner met the quoted phrase; otherwise, the exception under Section 1402(a)(13) did not apply, and the income allocated to the partner would be subject to the self-employment tax.
At the start of 2026, three cases were pending in three different courts of appeal that challenge the Tax Court's decisions described above. On January 16, 2026, in Sirius Solutions, L.L.L.P. v. Commissioner, the Fifth Circuit Court of Appeals rejected the functional analysis view of the Tax Court, instead finding that a limited partner's status under the relevant state law determined whether the income allocated to that partner was subject to self-employment tax, thereby rejecting the Tax Court's view that passive investor status was required. Simply put, in Sirius, the taxpayer/partner was a limited partner under state law, so the exception under Section 1402(a)(13) applied.
Two other circuit courts are expected to soon decide the cases appealed to them on this issue. Should one of those courts agree with the IRS and the Tax Court, a split among the circuit courts would exist and the U.S. Supreme Court may decide to resolve the split.
Meanwhile, taxpayers in the Fifth Circuit, which includes the states of Mississippi, Louisiana and Texas, should consider filing protective claims for refund with the IRS on this issue. If a taxpayer contends that he or she qualifies for limited partner status on this issue, however, this could impact other aspects of the taxpayer's tax return. Thus, a claim for refund should only be filed after careful consideration.
For more information on the application of the self-employment tax exception for limited partners following recent federal court decisions, please contact Charley Jensen, Thomas Molins, Jay Simpson, Harry Teichman, Molly Maurin, Charles Hutchison or the Stinson LLP contact with whom you regularly work.
