Tax Insight

Second Circuit affirms treatment of limited partners for self-employment tax purposes

Insight
5 minute read
September 25, 2026

What happened?

The US Court of Appeals for the Second Circuit issued an opinion in Soroban v. Comm’r (No. 25-2079) on September 17 holding that a limited partner for purposes of Section 1402(a)(13) (the SECA limited partner exclusion) is a partner who has limited liability and who does not run, manage, or control the partnership's business. The opinion affirmed the Tax Court’s 2023 determination (Soroban I) that status as a limited partner under state law is not dispositive and that Section 1402(a)(13) requires a functional inquiry into the partner’s role in the partnership. The Second Circuit, however, did not adopt the Tax Court’s formulation that the exclusion is limited to “passive investors.” Instead, the Second Circuit held that a partner may provide some services to the partnership and still qualify as a limited partner, provided those activities do not constitute controlling, managing, or running the business. Applying that standard, the Second Circuit affirmed the Tax Court’s 2025 determination (Soroban II) that Soroban’s limited partners did not qualify for the SECA limited partner exclusion based on the Tax Court’s factual findings that the Soroban limited partners exercised managerial control over the partnership and played an essential role in generating its income.

Why is it relevant?

The decision is the latest in extensive and ongoing litigation between the IRS and taxpayers addressing the meaning of the term “limited partner” for purposes of the SECA limited partner exclusion. The opinion upholds the IRS position that status as a state law limited partner is not determinative in applying the SECA limited partner exclusion. Instead, an inquiry must be made into the limited partner’s activities related to running, managing, or controlling the partnership.

Actions to consider

Limited partners, including those in state law limited partnerships, who participate in the managing or running the partnership’s business or who otherwise control the partnership should continue to monitor developments in this area and discuss tax reporting implications with their advisors.

Limited partners who have no significant role in management or control of the partnership also should monitor developments in this area and consider the applicability of the SECA limited partner exclusion in consultation with their advisors.