16 January 2026 BREAKING TAX NEWS | Fifth Circuit Court of Appeals rules 2-1 in favor of taxpayer in Sirius Solutions On January 16, 2026, the United States Court of Appeals for the Fifth Circuit ruled in favor of the taxpayer, Sirius Solutions, in its appeal from the United States Tax Court. This long-awaited decision deals with the meaning of the term "limited partner" in IRC Section 1402(a)(13) and its impact on a partner’s net earnings from self-employment. The Fifth Circuit held that a “limited partner” is a limited partner in a state-law limited partnership that is afforded limited liability, thus rejecting the Tax Court’s “passive investor” rule and “functional analysis” test. The Tax Court’s decision is vacated and remanded for further proceedings. While this is a welcome ruling for many taxpayers facing similar inquiries, several similar cases remain active in other Circuits. In addition, the Internal Revenue Service could further appeal this decision in Sirius. If you have any questions or an active matter in this area, please reach out to Kiara Rankin (kiara.rankin@ey.com), Dianne Mehany (dianne.mehany@ey.com) or Joe Bianco (joseph.bianco@ey.com). Document ID: 2026-0227 |
