Fifth Circuit withdraws and replaces January 2026 Sirius Solutions opinion
Executive summary: Fifth Circuit changes reasoning, loses certainty
The Fifth Circuit has withdrawn its January 2026 opinion in Sirius Solutions L.L.L.P. v. Commissioner of Internal Revenue and replaced it with a completely different interpretation of the "limited partner" exception from self-employment tax. Rather than having the exception apply strictly to any state-law limited partner with limited liability, as in the original opinion, the court now holds that a "limited partner" is someone who plays no significant role in managing or running a business.
The court still rejects the “functional analysis” test previously upheld by the Tax Court in Soroban (161 TC 310), which focused on whether a partner was functioning as a passive investor, but it also abandons the bright-line limited-liability approach it adopted earlier this year.
The opinion leaves taxpayers with a number of new questions, particularly how the limited partner exception may apply to dual-capacity partners who simultaneously hold both limited partner and general partner interests.
Background on the section 1402(a)(13) limited partner exception
Generally, section 1402(a) requires partners to include their distributive shares of partnership trade or business income in net earnings from self-employment. However, section 1402(a)(13) contains an exception to the imposition of self-employment tax for “the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments described in section 707(c) to that partner. ...” (Emphasis added.)
In January 2026, the Fifth Circuit in Sirius Solutions held that the "limited partner" under that exception meant a state-law limited partner with limited liability. In doing so, the Fifth Circuit rejected the Tax Court’s functional analysis test in Soroban, where the Tax Court had upheld self-employment tax on a passive investor, deeming the investor’s level of activity to be relevant.
New Sirius Solutions holding focuses on management and control
On Aug. 12, 2026, the Fifth Circuit granted rehearing, withdrew the January opinion in its entirety, and issued a substitute opinion. While the new opinion continues to reject the Tax Court's functional analysis test, it abandons the limited-liability standard that drove the original decision—meaning that limited liability itself does not determine whether a limited partner qualifies for the exception.
The court concluded that the original public meaning of a "limited partner" is a partner who plays "no significant role in managing or running a business," and that this is the correct standard for determining whether a partner is exempt from self-employment tax on their distributive share of income from the partnership under the limited partner exception.
In reaching that conclusion, the court relied primarily on:
- Contemporary legal dictionary definitions
- The Uniform Limited Partnership Act of 1916 and the Revised Uniform Limited Partnership Act of 1976
- Contemporary treatises describing limited partners as investors who do not manage or control the business
Notably, the court still rejected the Tax Court's “functional analysis” test from Soroban in the new holding. In the Fifth Circuit's view, Soroban improperly equated limited partner status with being a passive investor, while historical sources suggested a more nuanced distinction was required, centered on management and control.
Key implications of the revised Sirius Solutions opinion
The court's formal holding asks whether a partner plays a "significant role in managing or running a business."
Later in the opinion, however, the court suggests that a limited partner may participate in certain "non-managerial" aspects of the business and describes the inquiry as a managerial versus non-managerial distinction.
It is not clear whether those formulations are identical. For example, it may be possible for a partner to have a substantial operational role while still arguing that those activities are “non-managerial”; it is unclear how the distinction between the holding and the later reasoning will affect a limited partner analysis under the Fifth Circuit’s definition.
The January opinion treated the phrase "limited partner, as such" as significant statutory text and relied on the possibility that a person may act in multiple partnership capacities to explain the function of that phrase. The substituted opinion removes that discussion and does not otherwise address how the limited partner exception may apply when a person simultaneously holds both limited partner and general partner interests.
As a result, the new opinion does not explicitly resolve what significance should be given to the phrase "as such," and how the limited partner determination under the Fifth Circuit's new holding may be treated when a partner holds both general and limited partner interests in a partnership.
The withdrawn opinion expressly stated that it was not addressing whether LLC members or LLP partners could qualify for the section 1402(a)(13) exception.
The substituted opinion contains no similar limitation. Instead, the court focuses on management and control rather than state-law limited partner status and limited liability. While the court did not hold that LLC members qualify for the exception, its reasoning is no longer tied to state-law entity form and may therefore extend beyond traditional limited partnerships.
Key takeaway: Fifth Circuit replaces certainty with a new management-and-control test
While the Fifth Circuit continues to reject the Tax Court's passive-investor approach, it no longer provides the relative certainty of the strict limited-liability test applied in its original holding.
Instead, taxpayers are left with a management-and-control standard that creates a new set of questions, including defining the line between managerial and non-managerial activities, the treatment of dual-capacity partners, and how this holding interacts with other self-employment tax cases specific to LLCs and other non-LP entities.
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