Fifth Circuit Creates New Standard for “Limited Partner” Definition in Updated Sirius Opinion

Key Takeaways

• The Fifth Circuit’s updated Sirius opinion creates a new “management and control” standard for determining whether a partner qualifies as a limited partner under IRC Sec. 1402(a)(13).
• Under the new standard, limited partners may participate in some non-managerial business activities, but they cannot play a significant role in managing or controlling the partnership.
• The decision is less taxpayer-friendly than the Fifth Circuit’s prior opinion, which focused on limited liability under state law rather than a partner’s level of activity.
• Because related cases remain pending in other circuits, taxpayers should continue monitoring developments around the SECA exception and limited partner treatment.

Fifth Circuit Establishes New Limited Partner Standard Under IRC Sec. 1402(a)(13)

On August 12, 2026, the Fifth Circuit released a new opinion for the case Sirius Solutions LLLP v. Commissioner (Sirius), which replaces the Court’s previous decision from January 16, 2026. The new opinion is in response to a petition for rehearing en banc filed by the government. Under the new decision, the Fifth Circuit held that under IRC Sec. 1402(a)(13), a “limited partner” is one who “play(s) no significant role in managing or running a business.”

Management and Control Become Key Factors in Limited Partner Status

Per the opinion, while a limited partner cannot manage the partnership, they can “perhaps participate in certain non-managerial aspects of the business.” The determining factor in this opinion seems to be whether the limited partner participates in the management or control of the partnership. The Court did not expand further on what should be considered managerial or non-managerial for purposes of what a limited partner can and cannot do, or what constitutes control.

The Fifth Circuit reversed the Tax Court’s holding in the case, which held that a limited partner must be akin to a passive investor, and remanded the case to the Tax Court for further proceedings under this new “management and control” standard.

How the New Sirius Decision Differs from the Fifth Circuit’s Prior Opinion

The previous decision was decidedly more taxpayer friendly. That decision held that IRC Sec. 1402(a)(13) does not impose any kind of functional or activity-based limitation. Instead, the Court held that a partner who has limited liability in a limited partnership under state law qualifies as a limited partner under IRC Sec. 1402(a)(13). The Court also previously explicitly rejected the idea that performance of services for the partnership results in a limited partner’s distributive share becoming subject to self-employment tax, which is not discussed in the new decision.

SECA Exception Cases Continue Across Federal Circuits

Sirius is one of several cases dealing with the SECA exception under IRC Sec. 1402(a)(13). Two others, Soroban Capital Partners LP v. Commissioner and Denham Capital Management LP v. Commissioner, are currently before the Second and the First Circuit Courts, respectively. Both cases have had oral arguments, but no decision has been released in either case as of publication.

Who Is Affected by the Fifth Circuit’s Updated Sirius Decision?

The Sirius decision is only binding on taxpayers and federal courts located in Mississippi, Louisiana, and Texas. For others, the Tax Court’s holding in Soroban is currently the controlling case law.

Our team is experienced in helping clients navigate this issue as the court saga unfolds. If you have questions about how this decision will impact your situation, reach out to a member of our team below.