On Aug. 12, the Court of Appeals for the Fifth Circuit withdrew and replaced its January 2026 taxpayer-friendly opinion in Sirius Solutions, L.L.L.P. v. Commissioner, 165 F.4th 374 (5th Cir. 2026) dealing with the scope of the limited partner exception for purposes of the Self-Employed Contributions Act (SECA) self-employment tax.
The court’s January 2026 opinion broadly defined a limited partner to include any partner in a state law limited partnership with limited liability (see our prior coverage here). But the new opinion (K Alain, L.L.L.P. v. Commissioner, 5th Cir. No. 24-60240 (PDF - 239.38KB)) holds that the “ordinary public meaning” of the phrase “limited partner” is a partner who plays no significant role in managing or running a business.
The August opinion removes a significant pillar of support for taxpayers who have sought to apply the SECA limited partner exception based solely on a partner’s status as a limited partner under state law. However, other ongoing cases, or an appeal of the August decision, could again change the scope of the limited partner exception set out here.
The new opinion also explicitly rejects the passive investor standard for limited partner status described by the Tax Court in Soroban Capital Partners LP v. Commissioner, 161 T.C. 310 (2023). The Fifth Circuit’s August opinion leans on the concept of not exercising control over the business and notes that while “some participation” is allowed, it must fall short of participating in management or controlling the business.
However, the opinion does not shed light on the types or degree of services that can be performed before an individual crosses over into playing a significant role in managing or running the business. This issue appears to be left to the Tax Court to address on remand. In the meantime, taxpayers applying the Fifth Circuit test will have to use their judgment in assessing whether their level of participation in management or control over the partnership’s business exceeds that permitted to still qualify as a limited partner for SECA purposes.
Grant Thornton insight:
Even though the Fifth Circuit did not adopt the Tax Court’s passive investor test, the August decision in Sirius likely represents a victory for the IRS in its longstanding efforts to prevent active participants in a partnership’s business from applying the SECA limited partner exception. The January opinion in Sirius represented the first appellate decision discussing the exemption since the Tax Court held in Soroban that a functional analysis of whether a partner is akin to a passive investor is required for all taxpayers (including state law limited partners) to evaluate eligibility under Section 1402(a)(13).
Both the January and August Fifth Circuit opinions in Sirius defined the scope of Section 1402(a)(13) based on the common meaning of the term “limited partner” at the time the limited partner exception was enacted in 1977. The August opinion derives this meaning from contemporaneous dictionaries and treatises defining a limited partner around that time, as well as the text of both the 1916 and 1976 Uniform Limited Partnership Acts.
The January opinion held that while states might have imposed some limitations on the activities performed by limited partners, the essence of a limited partner was limited liability for partnership debts. The August opinion does not provide insight into why the court changed its view of the common 1977 understanding of what it meant to be a limited partner.
Grant Thornton insight:
The new Fifth Circuit decision presumably eliminates the comfort provided for taxpayers who relied on limited partner status under state law and the Fifth Circuit’s January opinion in applying the Section 1402(a)(13) exclusion. The less taxpayer-friendly reissued opinion also introduces significant new authority contrary to the idea that state law status alone can qualify a taxpayer for the limited partner exception.
The interpretation of the scope of the limited partner exception for SECA purposes looks likely to evolve further. In addition to possible appeal of this reissued opinion, cases that could impact the scope of the limited partner exception are currently pending in other circuits. Those include Soroban Capital Partners (Second Circuit) and Denham Capital Management (First Circuit).
Next steps
Taxpayers should evaluate the impact of the Fifth Circuit’s most recent opinion in Sirius when considering whether the Section 1402(a)(13) exclusion applies to a particular partner. In some cases — in particular where taxpayers were relying on state law status to apply the limited partner exception — it may be obvious that service-providing partners do not qualify as limited partners under the new Fifth Circuit standard.
For partners whose status may be a closer call, taxpayers will have to navigate a degree of uncertainty while perhaps considering the extent of the services provided and whether the partner participates in firm management or runs the business.
Contacts:
National Tax Leader, Partnership Tax Solutions
Grant Thornton Advisors LLC
Julie is a partner in Partnership Tax Services with Grant Thornton’s Chicago office. She focuses on partnership compliance and consulting services and has provided tax services to a variety of clients over her nearly 20 years of public accounting experience.
Partner
Washington National Tax Office
Grant Thornton Advisors LLC
Grace Kim has more than 20 years of experience in the area of partnership taxation, which includes IRS, law firm and accounting firm positions. Her diversified experience includes working on a broad range of structuring and operational issues in a variety of industries and areas.
Washington DC, Washington DC
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