In K Alain, LLLP v. Commissioner, Nos. 11587-20, 30118-21 (5th Cir. August 12, 2026) (originally referred to as Sirius), the United States Court of Appeals for the Fifth Circuit held that "limited partner" means a partner who does not play a significant role in the management or running of a business. The court withdrew its prior opinion in Sirius Solutions, L.L.L.P. v. Commissioner, 165 F.4th 374 (5th Cir. 2026), in which it defined "limited partner" for purposes of the Iimited-partner exception as one in a state-law limited partnership that is afforded limited liability. For more information on Sirius Solutions, see First Impressions 2026-0238.

Facts

Sirius Solutions LLLP (Sirius), a limited liability limited partnership, operates a business consulting firm with offices in Houston, Dallas and London. For tax years 2014 through 2016, Sirius reported ordinary income from its consulting business and allocated that income to its limited partners. For employment tax purposes, the firm reported no net earnings from self-employment (NESE) on the grounds that the income was excluded from NESE under the limited-partner exception in IRC Section 1402(a)(13).

On auditing Sirius's returns for 2014 through 2016, the IRS determined that none of Sirius's limited partners qualified as "limited partners" under the exception. As such, the distributed income qualified as NESE on which self-employment tax was owed.

Sirius petitioned the Tax Court, which agreed with the IRS, holding that, under Soroban Capital Partners LP vs. Commissioner, 161 T.C. 310 (2023), the limited-partner exception only applies to limited partners that are passive investors. Sirius appealed, and the Fifth Circuit Court of Appeals rejected the Tax Court's analysis in Soroban and Denham Capital Management LP, T.C. Memo. 2024-114 (2024). The Fifth Circuit held that a "limited partner" for purposes of the Iimited-partner exception means a limited partner in a state-law limited partnership that is afforded limited liability. A petition for rehearing en banc was filed. While denying the rehearing en banc petition, the Fifth Circuit instead treated the petition as one for a panel rehearing. The Fifth Circuit granted that petition, withdrew its earlier opinion in Sirius Solutions L.L.L.P., and substituted a new decision.

Law and analysis

The limited-partner exception in IRC Section 1402(a)(13) excludes from NESE:

[the] distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments described in IRC Section 707(c) to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration of those services …

In redetermining the definition of "limited partner," the Fifth Circuit looked to the term's ordinary meaning at the time Congress enacted IRC Section 1402(a)(13), including various legal dictionaries and treatises. It also considered Plasteel Prods. Corp. v. Helman, 271 F.2d 354, 356 (1st Cir. 1959), in which the First Circuit found "that if a partner controlled partnership affairs, the partner was no longer functioning as a limited partner." The First Circuit had suggested in the case, however, that a limited partner could have some involvement without jeopardizing the limited-partner status (e.g., signing a partnership agreement as a general partner).

Accordingly, the Fifth Circuit adopted what it called an ordinary public meaning of "limited partner" as in effect in 1977. It concluded that, under that definition, a limited partner is "a partner who did not play a significant role in managing or running the business." The court vacated its previous opinion and remanded the case to the Tax Court.

Implications

The Fifth Circuit essentially narrowed its prior opinion and held that limited liability under the relevant state law is no longer sufficient by itself for purposes of the IRC Section 1402(a)(13) exception from self-employment tax. Instead, the exception depends on a functional inquiry into the partner's management role. It remains to be seen whether, on remand, the Tax Court will apply something similar to the "functional analysis" test it employed in Soroban and Denham. The Tax Court could determine that such a test should still apply to determine whether a limited partner's role is "managerial" or "nonmanagerial." Companion appeals remain pending in Denham (First Circuit) and Soroban (Second Circuit), with decisions anticipated later this year. Taxpayers may want to consult with their tax advisors on any position they take on the IRC Section 1402(a)(13) exception.