Tax Insight

Fifth Circuit creates new definition of “limited partner” for self-employment tax purposes

Insight
5 minute read
August 14, 2026

What happened?

The US Court of Appeals for the Fifth Circuit issued a new opinion in Sirius Solutions, L.L.L.P. v. Commissioner of Internal Revenue, No. 24-60240, holding that the meaning of “limited partner” in Section 1402(a)(13) is “a partner who plays no significant role in managing or running a business,” thus establishing a new test that requires a factual examination into a limited partner’s role in the partnership. The Fifth Circuit withdrew its prior opinion (165 F.4th 374 (5th Cir. 2026)), which had established a bright-line rule that partners in state law limited partnerships who have limited liability are entitled to apply the limited partner exception in Section 1402(a)(13) (the “SECA limited partner exception”) to exclude their distributive shares of partnership earnings from net earnings from self-employment, and issued a new opinion. The new opinion does not provide a standard for determining significance, instead remanding the case to the Tax Court to interpret and apply the new test.

Why is it relevant?

The new opinion injects additional uncertainty into the long-standing debate regarding the application of the SECA limited partner exception. While the Fifth Circuit continues to reject the functional analysis test established by the Tax Court in Soroban v. Commissioner, 161 T.C. 310 (2023), the “no significant role” standard created in the new opinion appears to be closer to the Soroban line of inquiry than the original Fifth Circuit opinion, which limited the examination solely to whether a limited partner had limited liability. Under the new opinion, the SECA limited partner exception can apply to limited partners beyond those who are purely passive investors, but only after an inquiry into the limited partner’s management or operational activities with respect to the partnership and a determination that those activities are not significant.

Actions to consider

Limited partners in a state law limited partnership who participate in the managing or running of the business of the partnership should continue to monitor developments in this area and discuss tax reporting, including potential disclosure, with their advisors.