Overview of the Fifth Circuit’s Decision
The United States Court of Appeals for the Fifth Circuit (“Fifth Circuit”) handed certain partners in limited partnerships within its jurisdiction a huge win regarding self-employment tax. In Sirius Solutions, L.L.L.P. v. Commissioner,[1] a divided Court of Appeals held that a limited partner for purposes of the self-employment tax exception under Internal Revenue Code (“IRC” or “Code”) Section 1402(a)(13) means a partner in a limited partnership with limited liability, i.e., a limited partner under state law. In so holding, the Fifth Circuit rejected the Tax Court’s application of the Renkemeyer[2] “functional analysis test” and the government’s arguments that “limited partner” only refers to “passive investors” in a limited partnership.
The Code imposes a tax on “self-employment income,” which is defined as “the net earnings from self-employment.”[3] The tax is imposed on self-employed individuals, including individuals that are partners in a partnership. However, IRC Section 1402(a)(13) excludes the distributive share of income of a “limited partner, as such,” from the net earnings from self-employment (the “1402(a)(13) exception”). The term “limited partner” is not defined in the statute. As expected, the Social Security law also contains an identical exception for purposes of computing Social Security benefits to maintain symmetry between the taxes an individual pays and the benefits an individual is entitled to receive.[4]
Background of the Sirius Solutions Dispute
Based on the 1402(a)(13) exception, Sirius Solutions L.L.L.P., a Delaware limited liability limited partnership, excluded its limited partners’ distributive share of partnership income from its calculation of net earnings from self-employment for the 2014 through 2016 tax years. On audit, the Internal Revenue Service (“IRS”) determined that Sirius Solutions’ state law limited partners did not qualify as limited partners for purposes of the 1402(a)(13) exception because the exception only applies to passive investors.
Sirius Solutions contested the IRS’s determination and asserted that the meaning of the term “limited partner, as such” meant a limited partner under state law with limited liability. Relying on its decision in Soroban Capital Partners, LP v. Commissioner,[5] the United States Tax Court held that “limited partner, as such,” for purposes of the 1402(a)(13) exception, only refers to passive investors. Sirius Solutions appealed.
The Fifth Circuit’s Textual Analysis
Judge Oldham, writing for the majority, began by reviewing the statute’s text and dictionary definitions of “limited partner” to ascertain the ordinary meaning of the term “limited partner” at the time the statute was enacted. These 1977-era definitions convinced the majority that the “touchstone” for the term “limited partner” was limited liability.[6] The majority also held that the words “as such” following “limited partner” did not detract from that meaning but were intended to clarify how individuals who serve as both a limited and general partner are to be taxed. In addition, the majority noted that if Congress wished to only exclude passive investors from the tax, it could have easily written the exception to do so, just as it had used the term “passive investor” in other provisions of the Code.
Agency Interpretations Support Limited Liability Meaning
The majority opinion then turned to interpretations of “limited partner” by two federal agencies—the Social Security Administration (“SSA”) and the IRS. With respect to the agency determinations, the court found that the IRS and SSA have “contemporaneous, longstanding, and consistent” interpretations of the term “limited partner,” including in the IRS’s instructions to its Form 1065, U.S. Return of Partnership Income, as well as the SSA’s rules related to the identical exception for computing Social Security benefits, to mean a partner with limited liability in a limited partnership. Together with the dictionary definitions, the majority held that the term’s “single, best meaning” is a partner in a limited partnership that has limited liability.
The court further explained that it is not the taxpayer’s label as “limited partner” that allows the taxpayer to qualify for the 1402(a)(13) exception but rather the substantive interests created under state law. Thus, a taxpayer in the “hypothetical State of West Carolina” labeled as a “limited partner” under state law even though he or she was a sole proprietor, would not be considered a “limited partner” for purposes of IRC Section 1402(a)(13); however, a taxpayer in the “hypothetical State of East Carolina” labeled as “schlimited bartner” under state law but nonetheless a member of a limited partnership with limited liability, would qualify for the 1402(a)(13) exception.[7]
Role of State Law in Federal Tax Interpretation
In response to the IRS’s assertions that federal law, not state law, controls the interpretation of federal tax statutes and that federal tax law should be interpreted uniformly nationwide, the majority noted that to determine the federal meaning of “limited partner” necessarily requires a review of state law to determine if the preconditions of the federal statutory definition are satisfied, because “limited partnerships are creatures of state law, not federal law.”[8]
Scope of the Decision
It should also be noted that in a footnote, the majority limited the scope of its decision to membership in a limited partnership, stating that its discussion did not extend to members of another entity such as a limited liability partnership or a limited liability company.[9]
Having so ruled, the Fifth Circuit vacated and remanded the case for further proceedings consistent with the opinion, holding that a “limited partner” under the 1402(a)(13) exception “is a limited partner in a state-law limited partnership that is afforded limited liability.”[10]
Implications and Practical Considerations
The implications of the Fifth’s Circuit’s decision in Sirius Solutions are unclear and it is likely the government will appeal the decision. At present, two cases with the same issue, Soroban Capital Partners LP v. Commissioner[11] (Second Circuit), and Denham Capital Management LP v. Commissioner[12] (First Circuit), are currently pending in other United States Circuit Courts of Appeals. Another case, Point72 Asset Management LP v. Commissioner[13] (Second Circuit) is currently pending before the Tax Court. If the event a circuit split occurs, a significant amount of uncertainty could arise absent action by Congress or the United States Supreme Court.
In light of this decision, taxpayers who are partners in a limited partnership with limited liability within the Fifth Circuit (states such as Texas and Louisiana) fall into the 1402(a)(13) exception and their distributive shares of income are excluded from the net earnings from self-employment, and thus from self-employment tax liability. As long as a partner retains their status as a limited partner under state law, it does not matter how active that partner is in the business of the partnership or how many services the partner performs for the partnership to be eligible for the 1402(a)(13) exception, which may lower the self-employment tax liability of any limited partner that included their distributive share in their net earnings from self-employment.
It is possible the Fifth’s Circuit’s decision in Sirius Solutions could correspondingly result in a reduction in Social Security benefits of any person residing in the Fifth Circuit who paid self-employment tax on their self-employment income from a limited partnership as a result of the identical exception in 42 U.S.C. 411(a)(12), which would seemingly result in the removal of a limited partners’ self-employment income from the benefits calculation. It is not clear if or when such a reduction would occur or how significant such a reduction would be given that the Fifth Circuit’s decision is restricted to limited partnerships and limited liability limited partnerships at present. Thus, any person residing in the Fifth Circuit that remitted self-employment tax on their distributive share from a limited partnership should consider whether it is appropriate to file protective refund claims for all open tax years.
In addition, a resident taxpayer that is a limited partner in a limited partnership should consider their filing options going forward, e.g., whether to pay the self-employment tax and file a protective refund claim, thereby mitigating interest risk but losing the potential returns on the funds used to pay the tax for a period of time, or whether to not pay self-employment tax on their distributive share from a limited partnership and accept the risk of additional liability in the event Congress or the Supreme Court overturns Sirius Solutions.
For additional information, please contact: Jaye Calhoun at (504) 293-5936, Willie Kolarik at (225) 382-3441, Divya Jeswant at (504) 293-5766, Kevin Baker at (713) 844-3007, or Derek Brondum at (337) 422-3667.
Jaye Calhoun, Willie Kolarik, Divya Jeswant, Kevin Baker, and Derek Brondum are members of Kean Miller’s Tax group, which advises a variety of clients on federal, state and local tax (SALT), and estate planning matters. The team works collaboratively to develop practical, multidisciplinary strategies that anticipate issues, minimize risk, and resolve complex tax issues efficiently, whether through negotiations or formal litigation proceedings.
[1] Sirius Solutions, L.L.L.P. v. Commissioner, No. 24-60240, slip op. (5th Cir. Jan. 16, 2026).
[2] Renkemeyer, Campbell & Weaver v. Commissioner, 136 T.C. 137 (2011).
[3] IRC §§ 1401(a), 1402(b).
[4] 42 U.S.C. 411(a)(12).
[5] Soroban Capital Partners LP v. Commissioner, 161 T.C. 310 (2023).
[6] Sirius Solutions, L.L.L.P. v. Commissioner, No. 24-60240, slip op. at 7 (5th Cir. Jan. 16, 2026).
[7] Id. at 17.
[8] Id. at 16-17.
[9] Id. at 5.
[10] Id. at 24.
[11] Soroban Capital Partners LP v. Commissioner; (T.C. Memo. 2025-52).
[12] Denham Capital Management LP v. Commissioner (T.C. Memo. 2024-114).
[13] Point72 Asset Management, L.P. v. Commissioner (T.C. Docket No. 12752-23).