Why So Sirius: Fifth Circuit Rejects Functional Analysis Test in Sirius Solutions LLP

On January 26, 2026, the Fifth Circuit’s released its decision in Sirius Solutions LLP v. Commissioner. The decision marks a significant departure from the Tax Court’s recent treatment of the limited partner exception to self-employment tax under IRC Sec. 1402(a)(13) in cases such as Soroban and Denham. While the Tax Court applied a functional analysis focusing on what a limited partner does in the business, such as the services performed, authority exercised, or role played in day-to-day operations, the Fifth Circuit’s analysis looked only to a partner’s legal classification under state law. 

IRC Sec. 1402(a)(13) 

IRC Sec. 1402(a) generally defines net earnings from self-employment as income derived from a trade or business carried on by an individual. IRC Sec. 1402(a)(13) provides a specific exception, excluding a limited partner’s distributive share of partnership income or loss from self-employment tax, while expressly including guaranteed payments for services. 

The statute does not define the term “limited partner,” nor does it specify how a partner’s involvement in the partnership’s business should affect the availability of the exception. As a result, courts have taken different approaches to determining when a partner qualifies as a “limited partner, as such” for purposes of IRC Sec. 1402(a)(13). 

What Is the Functional Analysis Test? 

The Tax Court’s functional analysis approach to IRC Sec. 1402(a)(13) traces back to Renkemeyer, Campbell & Weaver, LLP v. Commissioner.  In Renkemeyer, the Tax Court held that the partners in a law firm formed as an LLP did not qualify for the limited partner exception because their income arose from the legal services they personally performed. 

Building on Renkemeyer, the Tax Court applied a more explicit functional framework in Soroban Capital Partners, L.P. v. Commissioner and Denham Capital. In both cases, the court treated state-law limited partner status as only a starting point and examined factors such as the partners’ services, management authority, and whether their distributive shares resembled compensation for labor rather than a return on capital. 

Under that framework, the limited partner exception effectively applies only to partners viewed as economically passive, even when they are classified as limited partners under state law.  

Background of Sirius Solutions 

The dispute in Sirius centered on how IRC Sec.1402(a)(13) applied to the partnership’s structure. Sirius Solutions LLP was organized as a limited liability limited partnership under state law. Its partners held limited liability interests and performed services for the partnership. These limited partners took the position on their returns that under IRC Sec. 1402(a)(13), their distributive shares of partnership income can be excluded from self-employment tax (SECA). The IRS disagreed and assessed tax.  

After the Tax Court issued its decision in Soroban Capital, Sirius Solutions requested judgment be entered against the company. Procedurally, this allowed Sirius Solutions to appeal its case to the Fifth Circuit much faster than if the case had worked through the Tax Court first.   

The Fifth Circuit’s Holding  

In Sirius Solutions LLP, the Fifth Circuit held that IRC Sec. 1402(a)(13) does not impose a functional or activity-based limitation on the limited partner exception. According to the decision, a partner who is legally classified as a limited partner under applicable state law qualifies as a “limited partner, as such” under the plain language of the statute. 

The court also addressed the treatment of services. It rejected the position that a limited partner’s distributive share becomes subject to self-employment tax simply because the partner performs services for the partnership. Instead, the court emphasized that Congress directly addressed service compensation by including guaranteed payments for services in net earnings from self-employment. The Fifth Circuit’s majority felt that reading additional service-based limitations into IRC Sec. 1402(a)(13) would move the policy judgment from Congress to the courts, which it declined to do. 

Next Steps in the Case 

The decision in Sirius is only binding on federal courts in the Fifth Circuit, which includes Texas, Louisiana, and Mississippi.  The IRS may choose to appeal Sirius further, or it may wait to see how the First and Second Circuits decide Soroban and Denham. It is possible that one or both of these courts agree with the Tax Court’s functional analysis test, thereby creating a Circuit split. In this case, the Supreme Court would likely step in to resolve the matter.  

With different standards potentially in place depending on where you are located, it is imperative that you know and understand which standards apply to your situation. EisnerAmper can help; contact us (see below) today for assistance.