Second Circuit Affirms Tax Court’s Analysis in Soroban

The Second Circuit released its highly anticipated opinion in Soroban Partners, LP v. Commissioner on September 17, 2026, affirming the Tax Court’s decision that the limited partners in Soroban were not entitled to exclude their distributive shares from self-employment income taxes. This decision impacts taxpayers located in New York, Connecticut, and Vermont.

Key Takeaways

• The Second Circuit affirmed the Tax Court’s functional analysis test and found that the limited partners of Soroban were not “limited partners, as such.”
• Eligible limited partners can exclude distributed shares from their self-employment income under IRC Sec. 1402(a)(13), keeping it from being subject to self-employment (SECA) taxes.
• In affirming the Tax Court, the Second Circuit looked to how active the limited partners were in generating income, making employment decisions, managing investments, working for the company, and sitting on governing boards.
• The decision comes a little over a month after the Fifth Circuit issued a new opinion in Sirius, holding that a limited partner cannot play a “significant role in managing or running a business.”
• Individual taxpayers in New York, Vermont, and Connecticut who have not yet filed 2025 returns and receive K-1s for that tax year should consult a tax advisor on how to file their returns.

What Was at Issue in Soroban?

Distributive shares from a partnership are generally considered self-employment income subject to the self-employment (SECA) tax. However, IRC Sec. 1402(a)(13) creates an exception for distributive shares (other than guaranteed payments) for limited partners, “as such.” The statute does not further define limited partners, nor are there any regulations defining what a “limited partner, as such” means. Accordingly, some have taken the position that any limited partner might be able to exclude distributive shares from the SECA tax.

Soroban Capital Partners LP had three principals who were both limited partners and members of the general partner. These limited partners received $141.5 million in distributive shares over 2016 and 2017. Soroban did not include these amounts in its calculation of self-employment income due to the principals being considered limited partners. On examination, the IRS included the $141.5 million as self-employment income, arguing that the principals worked full time for Soroban managing the company and were not limited partners for purposes of the IRC Sec. 1402(a)(13) exception.

Soroban argued that the term “limited partner” under IRC Sec. 1402(a)(13) means any partner in a limited partnership that has limited liability. Additionally, the company argued that the limited partners did not manage or run the company as the partnership agreement stated that only the general partner could manage, operate, and control the partnership. Soroban also asserted that the self-employment income adjustment must be made at the partner level, not the partnership level, and the issue was not under the Tax Court’s jurisdiction.

The Tax Court’s Functional Analysis Test

The Tax Court held in December 2023 that the adjustment is a partnership level item, giving the court jurisdiction, and that the determination of whether a limited partner is eligible for the exception under IRC Sec. 1402(a)(13) requires a “functional analysis” of the partner’s role in the partnership.

In May of 2025, the Tax Court applied the functional analysis test to the facts of Soroban. In doing so, it referred to its 2011 opinion in Renkemeyer, Campbell & Weaver, LLP, and took into consideration the following factors:

1. The role the limited partners played in generating income,
2. How the partners’ expertise and roles were marketed,
3. The amount of the partners’ capital contributions compared to the fees and shares,
4. The amount of time the partners spent working for the business, and
5. The role of the partners in managing the company’s operations, included hiring, firing, promoting, and evaluating employees.

Under this analysis, the Tax Court held that the limited partners in Soroban were “limited in name only” and were not eligible for the exception under IRC Sec. 1402(a)(13).

What Was the Second Circuit’s Holding in Soroban?

To determine what IRC Sec. 1402(a)(13) means by “limited partner,” the Second Circuit took three things into consideration:

1. The language of the statute and its ordinary meaning at the time it became law,
2. The surrounding text and structure of the statute, and
3. The statute’s legislative history and historical context.

For the first point, the court looked at contemporaneous dictionaries and state laws and concluded that a limited partner in 1977 was understood to be one that had both limited liability and a lack of managerial control of the partnership. As for the surrounding text, the court focused on the words “as such” and the guaranteed payments carveout. For “as such,” the court found that it means “in that capacity,” and therefore limits the IRC Sec. 1402(a)(13) exclusion to the income earned in their capacity as a limited partner (i.e., income generated from their investment in the business).

The guaranteed payments carveout, according to the Second Circuit, “fortifies” this interpretation as it uses the phrase “for services actually rendered.” For the final point, the Court focused on the problem the exclusion was intended to solve — the concern that passive investors in limited partnerships were earning social security benefits that Congress felt they weren’t entitled to have.

The Court held that the Soroban principals were not qualified as limited partners under IRC Sec. 1402(a)(13) as they exercised “control and managerial authority over Soroban.” The Second Circuit highlighted the same factors as the Tax Court: The principals worked full-time for Soroban, sat on governing boards, managed investments, played critical roles in generating income, and were included in hiring, firing, promotion, and termination decisions.

What Are the Differences Between Soroban and Sirius?

This decision comes just over a month after the Fifth Circuit published a new decision in Sirius, holding that a limited partner is one who “plays no significant role in managing or running a business.” While both courts held that a limited partner is not automatically entitled to the exception merely by virtue of being a limited partner under state law, the decisions differ in a key area. While the Second Circuit affirmed the Tax Court’s “functional analysis” test, the Fifth Circuit overturned the functional analysis and introduced a new “management and control” test. That decision impacts taxpayers in Texas, Louisiana, and Mississippi.

One similarity that should be highlighted is the fact that both courts held that a limited partner “may perform some services for the partnership.” However, neither court enumerates what these services could look like.

How Does Soroban Complicate Individual Returns?

The timing of the decision in Soroban may complicate reporting for individual taxpayers. Many individuals choose to extend their filing due date to October 15. Limited partners may have received a K-1 for 2025 that does not include distributive shares in self-employment income. If those taxpayers are limited partners in funds, they might need to decide how to report their 2025 self-employment income after this decision and what to disclose.

If impacted taxpayers wish to report self-employment income not reflected on their K-1, they will need to file a Form 8082 (Notice of Inconsistent Treatment) with their return to notify the IRS that they are taking a position inconsistent with the K-1 received from the partnership. If they choose to report their self-employment income in a manner consistent with what is shown on their K-1, they instead may choose to file a Form 8275 (Disclosure Statement) with their return. This form is used to disclose information that may not otherwise be reflected on the return to mitigate certain penalties.

For 2026, taxpayers in both the Second and Fifth Circuits may need to increase their fourth quarter estimated payments to avoid penalties.

What Happens Next?

This is just one of several cases addressing when a limited partner is eligible for the IRC Sec. 1402(a)(13) exception. While Sirius has been remanded back to the Tax Court for an opinion consistent with the Fifth Circuit’s holding, a case in the First Circuit, Denham, has yet to be decided. Oral arguments in that case were heard in June of 2026.

Our team is monitoring the ongoing SECA cases carefully. If you have questions about how this decision could impact you or your reporting obligations, contact a member of our team below.