On January 16, 2026, in Sirius Solutions, L.L.L.P. v. Commissioner,[1] No. 24-60240 (5th Cir. Jan. 16, 2026), the U.S. Court of Appeals for the Fifth Circuit reversed the Tax Court and held that, for self-employment tax purposes, a “limited partner” means “a partner in a limited partnership that has limited liability.” Accordingly, it rejected the Tax Court’s “functional analysis” test and allowed the limited partners that have limited liability in a consulting firm (and who also worked for the firm) to avoid self-employment tax on the income allocated to them as limited partners, except with respect to guaranteed payments.[2] The Fifth Circuit’s holding is particularly relevant to fund managers who hold their interests in the manager as limited partners. However, there are additional cases pending before the First Circuit (covering Massachusetts) and the Second Circuit (covering New York).

Section 1402(a)(13)[3] generally excludes from self-employment tax the distributive share of any item of income or loss apart from guaranteed payments of a limited partner, as such (the “limited partner exception”). Prior to the appeal to the Fifth Circuit, the Tax Court had held that the limited partners in Sirius Solutions were not “limited partners, as such” because they were actively involved in the partnership’s business.[4]

The Fifth Circuit disagreed. It looked to the dictionary meaning of the term “limited partner” at the time that section 1402(a)(13) was enacted, as well as the definition in IRS forms and instructions. It concluded that, in each place, a “limited partner” is referred to as a member of a limited partnership whose liability is limited.[5] The Fifth Circuit further reasoned that the phrase “as such” in section 1402(a)(13) clarifies that, where a partner holds multiple roles in a partnership, the limited partner exception applies only to income earned in the partner’s legal capacity as a limited partner. Because the partners in Sirius Solutions were limited partners under applicable state law, the Fifth Circuit held that their distributive shares could qualify for the limited partner exception and remanded the case to the Tax Court for further proceedings.[6]

Judge Graves dissented, reasoning that the statutory phrase “limited partner, as such” permits a functional inquiry into whether a partner is acting in the capacity of a limited partner, rather than as a general partner or service provider. The dissent would have affirmed the Tax Court’s application of the Soroban framework.[7]

Other Active Cases and Outlook

The Sirius Solutions decision conflicts with the Tax Court’s recent line of cases beginning with Soroban. The Tax Court’s decision in Soroban is currently on appeal to the Second Circuit, and Denham Capital Management LP v. Commissioner, another Tax Court case applying the same functional analysis test, is on appeal to the First Circuit.[8] The Denham case is expected this year; Soroban has yet to be briefed.

The Tax Court’s decision (and its functional analysis test) remains the law in all of the Circuits, other than the Fifth. The Fifth Circuit’s decision is potentially subject to en banc review and appeal to the Supreme Court. Finally, the Fifth Circuit specifically reserved opinion on whether its holding would extend to LLPs and LLCs.

[1] Sirius Solutions, L.L.L.P. v. Commissioner, No. 24-60240 (5th Cir. Jan. 16, 2026).

[2] Technically, the Fifth Circuit remanded the case to the Tax Court for further proceedings consistent with the opinion. However, in light of the opinion, there is very little left to resolve.

[3] References to section are to the Internal Revenue Code.

[4] Sirius Solutions, LLLP v. Commissioner, No. 11587-20 (T.C. Feb. 20, 2024), vacated and remanded.

[5] The Sirius entity was a “limited liability limited partnership”. The general partner of a limited liability limited partnership has limited liability. One issue that is potentially open under the Fifth Circuit’s opinion is whether the owners of the general partner of a limited liability limited partnership are subject to self-employment tax. Because the general partner has limited liability, it is potentially a limited partner under the Fifth Circuit’s definition.

[6] Sirius Solutions, supra note 1, at 24.

[7] See generally Soroban Capital Partners LP v. Commissioner, 161 T.C. 310 (2023).

[8] Soroban Capital Partners LP v. Commissioner, Nos. 25-2079, 25-2250 (2nd Cir. filed Aug. 25, 2025); Denham Capital Management LP v. Bessent, No. 25-1349 (1st Cir. filed Apr. 11, 2025).