On August 12, 2026, the Fifth Circuit withdrew and replaced its prior opinion in Sirius Solutions L.L.L.P. v. Commissioner, now captioned K Alain, L.L.L.P. v. Commissioner, and adopted a new framework for applying the limited partner exception to self-employment tax. The court held in a 2-1 decision that a “limited partner” for purposes of the self-employment tax exception is a partner who plays no significant role in managing or running the business. In doing so, the court rejected both a pure state-law limited partner status approach and the Tax Court’s passive-investor standard, vacated the Tax Court’s decision, and remanded for further proceedings.

The Statutory Question

Section 1402 generally includes a partner’s distributive share of partnership trade or business income in net earnings from self-employment. Section 1402(a)(13), however, excludes the distributive share of a “limited partner, as such,” other than guaranteed payments for services actually rendered to or on behalf of the partnership. The statute does not define "limited partner," and courts have spent years debating whether the exception turns on state-law status, passive-investor characteristics, or some other standard. The distinction matters because qualifying distributive shares are excluded from self-employment tax, while nonqualifying shares generally are not. The Fifth Circuit’s substituted opinion in Sirius is the latest chapter in that debate.

The Fifth Circuit Rejects Both Competing Approaches

Sirius involved a Delaware limited liability limited partnership engaged in management consulting activities. The partnership took the position that its limited partners qualified for the section 1402(a)(13) exception and therefore excluded their distributive shares from self-employment income. The IRS disagreed, and the Tax Court sided with the government under Soroban, which held that the limited partner exception applies only to passive investors. In its substituted opinion, the Fifth Circuit vacated and remanded, but it did not adopt the taxpayer's alternative state-law-status argument.

Rather than choosing between state-law status and passive-investor status, the court identified a new fault line: whether the partner plays a significant role in managing or running the business. The Fifth Circuit rejected the view that state-law limited partner status or limited liability alone resolves the analysis, reasoning that state law may create legal interests, but federal law determines the meaning of an undefined federal tax term. At the same time, the court rejected the Tax Court's view that the limited partner exception is available only to passive investors.

Importantly, the Fifth Circuit did not hold that the Sirius partners qualified for the section 1402(a)(13) exception. Instead, it adopted a new legal standard and remanded the case for further proceedings. The opinion changes the framework of the debate, but leaves open where the line will ultimately be drawn. Judge Graves dissented and would have affirmed the Tax Court. In his view, section 1402(a)(13) applies only to partners functioning as passive investors.

Significant Questions Remain

That disagreement highlights the central question left unanswered by the Fifth Circuit: how much participation is too much, and where should the line be drawn? While the court rejected the passive-investor standard, it did not provide a detailed framework for distinguishing partners who merely work in a business from those who help manage or run it.

The opinion’s immediate reach is also limited. For now, the Fifth Circuit’s new standard governs cases appealable to the Fifth Circuit, which covers Texas, Louisiana, and Mississippi. Related appeals, including Soroban in the Second Circuit and Denham in the First Circuit, may further shape this area of the law, increase the likelihood of divergent appellate approaches, and potentially attract Supreme Court review.

The Sirius opinion also arose in the context of a Delaware limited liability limited partnership and did not specifically address how its reasoning applies to LLPs, LLCs, or other entities that do not use the traditional limited and general partner framework.

A&M Tax Says

The Fifth Circuit’s substituted opinion represents both an opportunity and a caution for taxpayers. The Fifth Circuit rejected the Tax Court’s view that section 1402(a)(13) is limited to passive investors, but it also rejected the notion that state-law limited partner status alone resolves the issue. Instead, the court focused on whether a partner plays a significant role in managing or running the business.

Accordingly, taxpayers seeking to rely on the Fifth Circuit's revised framework should ensure that contemporaneous documentation reflects how management authority is allocated and exercised in practice, not simply how it is described in organizational documents.

Taxpayers that filed protective refund claims based on the withdrawn Fifth Circuit opinion should also revisit those claims. The substituted opinion no longer supports a pure state-law-status theory and instead requires a more fact-intensive inquiry into management authority and operational control. Taxpayers pursuing refund opportunities should consider whether the factual record supporting those claims aligns with the Fifth Circuit's revised framework and whether additional factual development may be warranted as those claims move forward.

Finally, taxpayers should remember that section 1402(a)(13) does not apply to guaranteed payments for services. Even where a partner otherwise qualifies for the limited partner exception, guaranteed payments generally remain subject to self-employment tax.

A&M Tax advisors can help partnerships assess self-employment tax risk, evaluate limited partner classifications, and develop practical support for section 1402(a)(13) positions as the courts continue to refine the limited partner standard.