The Fifth Circuit Court of Appeals has withdrawn and reissued its prior opinion in Sirius Solutions LLLP v. Comm. (165 F. 4th 374 (5th Cir. 2026)). Sirius Solutions, LLLP is now called K Alain, LLLP, so the reissued opinion was released as K Alain, LLLP v. Comm.((5th Cir. 2026) Case No. 24-60240; 2026-23170).
At issue in the case is the meaning of the term “limited partner” for purposes of applying the limited partner exception under IRC §1402(a)(13). Limited partners are not subject to self-employment tax on their distributive share of partnership income.
In its original opinion, issued January 16, 2026, the Fifth Circuit Court of Appeals rejected the Tax Court’s holding in Soroban Capital Partners, LP v. Comm. ((November 28, 2023) 161 TC 12). Sorobanrequires a partner’s earnings to be of an investment nature for the partner to qualify for the limited partner exception. Stated otherwise, even a partner who is defined as a limited partner under state law is still subject to self-employment tax on all their partnership income unless they are a passive investor in the partnership.
The Fifth Circuit’s reissued option under K Alain still rejects the Soroban decision but backs off its black-and-white dictionary definition of a limited partner. Now, the Fifth Circuit holds that a limited partner is a partner who is defined as a limited partner under state law and “who plays no significant role in managing or running [the partnership].” The case has been remanded back to the Tax Court where the facts of the case will be applied to the Fifth Circuit’s renewed definition of a limited partner.
We will keep you informed of any further developments.
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