New Fifth Circuit Opinion Creates Sirius Ambiguity

Key Takeaways

• The Fifth Circuit withdrew its earlier Sirius Solutions decision and issued a new opinion that shifts the analysis from state-law limited liability to a partner’s role in managing or controlling the business.
• The new decision creates additional uncertainty around who qualifies as a “limited partner” for purposes of the self-employment tax exception under IRC Sec. 1402(a)(13).
• The Fifth Circuit rejected both a purely state-law test and a “passive investor” standard, instead creating a “management and control” test, to be applied by the Tax Court on remand.
• The decision currently applies only to taxpayers in Mississippi, Louisiana, and Texas, while the Tax Court’s functional analysis remains controlling elsewhere.
• Given the evolving case law, partnerships should review partner roles, responsibilities, and income allocations to assess potential SECA tax exposure.

In a surprise move, on August 12, 2026, the Fifth Circuit withdrew its January 2026 decision in Sirius Solutions LLP v. Commissioner. That earlier decision held that the term “limited partner” was to be interpreted by state-law limited liability statutes, meaning that an individual partner whose liability was limited to the amount of their investment was a limited partner. In a new opinion, the Fifth Circuit focuses instead on the “original public meaning” of a limited partner as a partner who does not take a significant part in managing or running business operations. According to the new Fifth Circuit decision and function, not liability, is the appropriate test to determine whether an individual was a limited partner.

Background of Sirius Solutions LLP v. Commissioner

Formed under Delaware law, Sirius Solutions, LLLP (which recently changed their name to K Alain, LLLP) is a limited liability limited partnership that conducts business consulting services. For tax years 2014 through 2016, Sirius excluded its limited partners’ distributive share of partnership income from the calculation of net earnings from self-employment tax on the basis that those individuals were considered limited partners under state law.

The IRS challenged, asserting the limited partners were not akin to passive investors, that the determination of limited partner is based on functions performed and thus, the exception from self-employment tax afforded under IRC Sec. 1402(a)(13) did not apply. Sirius petitioned the Tax Court for further consideration.

Following the Tax Court’s prior decision in Soroban Capital Partners LP v. Commissioner, the parties in Sirius Solutions agreed that the decision in Soroban Capital was applicable and that the limited partners in Sirius were not limited partners for purposes of IRC Sec. 1402(a)(13) under the functional analysis set forth by the Soroban Capital court. Sirius then appealed the determination to the Fifth Circuit on the basis that the proper test to determine whether IRC Sec. 1402(a)(13) applies is whether the partner constitutes a limited partner under state law.

What is the SECA Tax Exemption?

IRC Sec. 1401 of the Code imposes Social Security and Medicaid taxes (referred to as the “SECA” tax) on an individual’s net earnings from self-employment. Net earnings from self-employment are defined in IRC Sec. 1402(a) as income derived from any trade or business carried on by such individual, subject to various exclusions. One such exclusion is IRC Sec. 1402(a)(13), which excludes from self-employment income the distributive share of income, loss, or other items allocated from a partnership to a limited partner, other than guaranteed payments for services actually rendered. IRC Sect. 1402 does not define a limited partner. When an individual who owns a limited partnership interest in a partnership is also an active participant who plays a significant role in managing the partnership, the line becomes blurred.

SECA Tax Campaign and Related Caselaw

This is not a new issue. In March 2018, the IRS launched an official SECA tax compliance campaign, and, for many years before that, the IRS had been actively targeting partners to determine if they have properly reported and paid SECA tax. The IRS’s position is based on the 2011 case Renkemeyer, Campbell, & Weaver, LLP v. Commissioner, wherein the Tax Court held that attorneys who operated through a Kansas LLP could not claim the limited partner tax exception on their share of the LLP’s attorneys’ fees because those fees were active earnings from a trade or business, as opposed to merely passive investment income.

The Tax Court has agreed, applying a strict “functional analysis” test to determine whether an individual was a limited partner. Under this test, if income is tied to active labor as opposed to passive investments, the individual’s distributive shares were fully subject to SECA tax.

The Tax Court was firm in its position across several cases, and it seemed like that may be the end of the controversy. But the taxpayer in Sirius seemingly won in their appeal to the Fifth Circuit. That Court rejected the functional analysis test previously applied by the Tax Court and instead applied the concepts of state-law limited partner status and limited liability to determine an individual’s status. The original decision essentially held that to the extent that an individual’s liability is limited to their investment, they are a limited partner. The test became one of an individual’s liability in the partnership and not the individual’s level of control or management of the partnership.

What Changed in the K Alain LLP Decision?

In the new decision, K Alain LLP (previously Sirius Solutions), the Fifth Circuit reversed its previous decision and reverted to the narrower definition of a limited partner. It reasoned that the plain text of IRC Secs. 1401 and 1402 are consistent with the legal definition of limited partnership, which is a “partnership with general partners who manage business’ and limited partners who ‘contribute capital and share in profits but… take no part in running business.’”

Under the decision, the test comes down to whether the limited partner participates in “management and control.” The Court still rejected the Tax Court’s ruling that the limited partners needed to be akin to a “passive investor.” However, the Court did not define what exactly is allowed or not allowed under the “management and control” test and instead remanded the case back to the Tax Court to effectively fill in the blanks.

What Happens After the New Decision?

Following the Fifth Circuit’s reversal, the case will be remanded to the Tax Court to provide guidance on what “management and control” means. In the meantime, 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. (Note: the Second Circuit released its opinion in Soroban on September 17, 2026, affirming the Tax Court’s functional analysis test.) The different standards once again leave taxpayers without meaningful clarity on who qualifies for the IRC Sec. 1402(a)(13) exception from self-employment tax.

At EisnerAmper, we can analyze your unique situation and help you understand the best position you should take when clarity is lacking. Contact us below to see how we can assist you.