{"database": "openregs", "table": "crs_reports", "rows": [["LSB11425", "Sirius Solutions, L.L.L.P. v. Commissioner: The Fifth Circuit\u2019s Decision Interpreting the Limited Partner Exception to Self-Employment Taxes", "2026-04-30T04:00:00Z", "2026-05-01T15:08:06Z", "Active", "Posts", "Milan N. Ball", "Business & Corporate Tax, Individual Tax, Jurisprudence, Medicare, Self-Employment Contributions Act (SECA) Taxes, Social Security, Pass-Through Businesses", "On January 16, 2026, in Sirius Solutions, L.L.L.P. v. Commissioner, a divided three-judge panel for the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit) rejected the Tax Court\u2019s interpretation of the limited partner exception to self-employment taxes. Under Internal Revenue Code (IRC) \u00a7 1402(a)(13), taxpayers who are \u201climited partners\u201d can qualify to exclude their distributive share of partnership income (or loss) from self-employment income. The term \u201climited partner\u201d for purposes of the limited partner exception is not defined in the IRC. As a result, there are multiple cases discussing the application of self-employment taxes to partners that turn on the meaning of limited partner. \nIn Sirius Solutions, the Fifth Circuit majority interpreted limited partner for purposes of the limited partner exception to mean \u201ca partner in a limited partnership that has limited liability\u201d and rejected the Tax Court\u2019s functional analysis and \u201cpassive investor\u201d interpretation. The Fifth Circuit vacated the Tax Court\u2019s ruling and sent the case back to the Tax Court for \u201cfurther proceedings consistent\u201d with its limited liability interpretation. As a consequence, state-law limited partners who have limited liability under state law and are acting in a partner capacity might not be subject to federal self-employment taxes even when they actively participate in limited partnership business. \nOn April 1, 2026, the government petitioned the Fifth Circuit for a rehearing en banc in Sirius Solutions. Challenges to the Tax Court\u2019s functional analysis and limited partner interpretation are pending before the U.S. Courts of Appeals for the First and Second Circuits. \nPast attempts by the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) to restrict eligibility for the limited partner exception have been unsuccessful.\nThis Legal Sidebar provides an overview of how self-employment taxes and Social Security benefits apply to limited partners, summarizes the Fifth Circuit\u2019s decision in Sirius Solutions, and discusses considerations for Congress.\nSelf-Employment Taxes and Social Security Benefits\nIn general, self-employed individuals must pay Social Security taxes and Medicare taxes funding Medicare Part A or Hospital Insurance (collectively, Self-Employed Contributions Act [SECA] taxes). These self-employment taxes are determined using an individual\u2019s \u201cself-employment income,\u201d which is defined in IRC \u00a7 1402(b) as \u201cnet earnings from self-employment.\u201d The Social Security tax rate is 12.4% on self-employment income up to an annual limit adjusted by average wage growth ($184,500 in 2026). The Medicare tax rate is 2.9% on all self-employment income. A 0.9% additional Medicare tax applies to self-employment income above thresholds that vary based on filing status (i.e., $250,000 for joint returns; $125,000 for married filing separately; and $200,000 for others). As part of the Social Security Amendments of 1977 (P.L. 95-216), Congress amended IRC \u00a7 1402(a) to exclude a limited partner\u2019s partnership share of income or loss from Social Security and Medicare taxes, subject to exceptions. In the same section of the Social Security Amendments of 1977, Congress amended Section 211 of the Social Security Act to exclude a limited partner\u2019s partnership share of income or loss from net earnings from self-employment for Social Security purposes.\nIRC \u00a7 1402 contains special rules applicable to partners in a partnership when calculating their self-employment tax liability. Under IRC \u00a7 1402(a), net earnings from self-employment expressly includes a partner\u2019s \u201cdistributive share (whether or not distributed) of income or loss described in section 702(a)(8) from any trade or business carried on by a partnership of which he is a member.\u201d IRC \u00a7 1402(a)(13) expressly excludes a limited partner\u2019s distributive share from net earnings from self-employment. Specifically, IRC \u00a7 1402(a)(13) provides an exclusion for \nthe 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 for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services. \n\u201cGuaranteed payments,\u201d as described in IRC \u00a7 707(c), are \u201cpayments to a partner for services or the use of capital\u201d that are paid without regard to partnership income. Because of the guaranteed payment for services carveout in IRC \u00a7 1402(a)(13), a limited partner can have self-employment income subject to self-employment taxes when a limited partner receives a guaranteed payment for services rendered to the partnership and that payment is in the nature of remuneration for services. \nAdditionally, the amount of Social Security benefits an individual receives depends, in part, on an individual\u2019s net earnings from self-employment. Parallel to IRC \u00a7 1402(a)(13), under Section 211(a)(12) of the Social Security Act, net earnings from self-employment are similarly excluded from a limited partner\u2019s distributive share.\nPursuant to these sections, when a limited partner\u2019s distributive share of partnership income is not subject to SECA taxes, that income typically does not count toward Social Security benefits. \nSirius Solutions\nCase History\nBefore the Fifth Circuit\u2019s 2-1 decision in Sirius Solutions, in multiple cases, the Tax Court employed a functional analysis to determine when a limited partner under state law was a limited partner under IRC \u00a7 1402(a)(13). In 2023, in Soroban Capital Partners LP v. Commissioner, the Tax Court determined that Congress intended the limited partner exception to apply to state-law limited partners who were \u201cpassive investors\u201d and held that a functional analysis test should be used to decide whether the limited partner exception applied. In 2024, when the matter in Sirius Solutions was before the Tax Court, the Tax Court explained that stare decisis principles obligated it to follow its limited partner interpretation in Soroban. In response, Sirius Solutions requested, and the Tax Court granted, a decision for the government, so that Sirius Solutions could challenge the Tax Court\u2019s holding in Soroban in the Fifth Circuit.  \nFacts\nSirius Solutions, L.L.L.P., a limited liability limited partnership formed in Delaware and based in Texas, operated a business consulting firm. In the 2014-2016 tax years, the firm was owned by several individual limited partners and one general partner\u2014a limited liability company (LLC). The LLC general partner\u2019s interest in the limited partnership was less than 1%. On the firm\u2019s 2014, 2015, and 2016 tax returns, the firm allocated all of its ordinary business income to its limited partners. The firm \u201creported ordinary business income of $5,829,402 in 2014, $7,242,984 in 2015, and \u2013$490,291 in 2016.\u201d Pursuant to the limited partner exception in IRC \u00a7 1402(a)(13), the firm \u201cdid not report any net earnings from self-employment to any of the individual partners.\u201d The IRS audited the firm\u2019s returns and adjusted the firm\u2019s net earnings from self-employment\u2014an increase of $5,915,918 for 2014; an increase of $7,372,756 for 2015; and a decrease of $490,291 for 2016. \nOpinion\nApplying the Supreme Court\u2019s framework in Loper Bright Enterprises v. Raimondo to determine the meaning of a statute, the 2-1 majority held that the \u201csingle, best meaning\u201d of limited partner in IRC \u00a7 1402(a)(13) was \u201ca partner in a limited partnership that has limited liability.\u201d The majority began its analysis by studying contemporaneous dictionary definitions, then looked to the IRS\u2019s long-standing definition in partnership return instructions, and the Social Security Administration\u2019s (SSA\u2019s) long-standing rule defining limited partner for the purpose of Section 211(a)(12) of the Social Security Act. After reviewing multiple dictionaries, the majority announced that \u201climited liability\u201d was the \u201ctouchstone\u201d of a \u201climited partner\u201d at the time of the exception\u2019s enactment. \nThe majority observed that the definition of limited partner used by the IRS in its partnership return instructions remained consistent for more than 40 years. It explained that the 1978 partnership return instructions defined a limited partner as \u201cone whose potential personal liability for partnership debts is limited to the amount of money or other property that the partner contributed or is required to contribute to the partnership\u201d and did not refer to a \u201cpassive investor.\u201d Quoting Loper Bright, the majority considered this particular contemporaneous and consistent agency interpretation \u201cespecially useful\u2019 in determining the meaning of the phrase limited partner.\u2019\u201d In the majority\u2019s view, the IRS\u2019s partnership return instructions definition was even more useful because it provided information \u201cto the public\u201d in an effort to \u201chelp taxpayers comply with the law.\u201d\nSimilarly, the majority found support for its statutory interpretation in the SSA\u2019s long-standing rule defining limited partner for the purpose of Section 211(a)(12) of the Social Security Act. The majority explained that the SSA\u2019s interpretation should be given \u201cdue respect\u201d in interpreting limited partner under IRC \u00a7 1402(a)(13) because \u201c[b]oth Social Security taxes and benefits depend on an individual\u2019s net earnings from self-employment.\u201d The 1980 SSA rule provided that a person is a \u201climited partner\u2019 if [the person\u2019s] financial liability for the obligations of the partnership is limited to the amount of [the person\u2019s] financial investment in the partnership.\u201d In the majority\u2019s view, the SSA rule confirmed that limited liability was \u201cthe touchstone\u201d of the term limited partner at the time of the exception\u2019s enactment.\nThe majority acknowledged and discounted the latter part of the SSA\u2019s long-standing rule, which provides that limited partners generally \u201cwill not have to perform services.\u201d It reasoned that the latter part of the rule did not mean a limited partner was prohibited from, \u201cor generally d[id] not[,] perform services for the partnership.\u201d The prevailing opinion determined that the latter part of the SSA rule did not change the focus of the limited partner definition from the limited liability component. The majority also concluded that the latter part of the SSA rule did not support a definition of limited partner that only applied to passive investors. \nNext, the 2-1 majority addressed the Tax Court\u2019s, the IRS\u2019s, and the dissent\u2019s counterarguments. The majority reasoned that interpreting the limited partner exception to apply only to \u201cpassive investors\u201d was \u201cwrong\u201d because the interpretation was undermined by IRC \u00a7 1402(a)(13)\u2019s guaranteed payment clause, Congress had shown its ability to write laws addressing \u201cpassive\u201d activities, and the interpretation required a functional analysis that produced taxpayer uncertainty. The majority responded to arguments that a limited liability interpretation conflicted with federal tax principles\u2014\u201c[f]ederal law, not state law, controls the interpretation of federal tax statutes\u201d; \u201c[f]ederal tax law is concerned with economic reality, not labels\u201d; and \u201cfederal tax law should be uniform nationwide.\u201d The majority explained that it had to look to state law to determine whether the state-controlled preconditions to the federal definition of limited partner were met. The majority expressed that it looked beyond state labels because it looked to the \u201csubstantive interests\u2019 that state law creates\u201d\u2014whether a taxpayer had \u201cthe rights and duties associated with a limited partnership or whether that individual ha[d] limited liability.\u201d The prevailing view determined that there was \u201cno serious risk\u201d to federal law uniformity as differences in state law did not equate to \u201cdisuniformity\u201d and most states had adopted uniform limited partnership acts.\nAn analysis of the Tax Court\u2019s textual argument in Soroban that the limited partner exception in IRC \u00a7 1402(a)(13) only applies to a subset of limited partners is included in the majority\u2019s opinion. In Soroban, the Tax Court decided that Congress\u2019s addition of \u201cas such\u2019 . . . made clear that the limited partner exception applies only to a limited partner who is functioning as a limited partner.\u201d From there, the Tax Court looked to IRC \u00a7 1402(a)(13)\u2019s legislative history and \u201cconfirmed [its] conclusion\u201d that \u201cCongress enacted section 1402(a)(13) to exclude earnings from a mere investment\u201d and intended the provision \u201cto apply to partners that are passive investors.\u201d The 2-1 majority in Sirius Solutions did not reach the same conclusion because it did not construe \u201cas such\u201d to \u201crestrict or narrow the class of limited partners, []or . . . upset the term\u2019s ordinary meaning.\u201d To the majority, \u201cas such\u201d was added to \u201cclarif[y]\u201d how dual status partners are taxed. It explained \u201c[a]t the time the statute was enacted, just as today, an individual could serve as both a limited partner and a general partner\u201d and limited partners could have \u201cmultiple functions or capacities.\u201d As follows, the majority determined that when a taxpayer is \u201cfunctioning as a limited partner, [the] taxpayer\u2019s distributive share of partnership income (or loss) is excluded from net earnings from self-employment,\u201d \u201c[b]ut when functioning as a general partner, [the taxpayer\u2019s] distributive share is included in net earnings from self-employment.\u201d \nIn the majority\u2019s view, the history of limited partnership law and the legislative history of IRC \u00a7 1402(a)(13) did not strengthen the government\u2019s case. The majority found that state laws on limited partnerships were in \u201cconstant flux\u201d and the \u201conly clear rule derivable from that ever-changing patchwork [wa]s . . . a limited partner had limited liability.\u201d It was not enough that the \u201cRevised Uniform Limited Partnership Act of 1976 [(RULPA)] set some . . . limits on the ability of limited partners to participate in the control of [a] limited partnership,\u201d as that did not \u201cchange the core of what it mean[t] to be a limited partner.\u201d The majority was reluctant to \u201cprobe the legislative history,\u201d but did examine House Ways and Means Committee Report 95-702, which was, in the majority\u2019s view, the \u201cbest evidence\u201d supporting the government\u2019s position that the limited partner exception in IRC \u00a7 1402(a)(13) only applied to passive investors. The majority discussed the language in the House report that revealed the committee\u2019s \u201cconcern[] about situations in which certain business organizations solicit investments in limited partnerships as a means for an investor to become insured for social security benefits.\u201d The majority also acknowledged the House report\u2019s explanation that \u201cthe exclusion from coverage would not extend to guaranteed payments (as described in section 707(c) of the Internal Revenue Code), such as salary and professional fees, received for services actually performed by the limited partner for the partnership.\u201d Despite its review of the House report, the majority dismissed the government\u2019s legislative history argument because the legislative history \u201csa[id] nothing about how Congress sought to fix the perceived issue.\u201d The majority determined that the \u201cplain text of the statute d[id] not yield that result\u201d and \u201c[n]either d[id] the House Report.\u201d\nConsiderations for Congress\nSome tax commentators have expressed opinions that the majority\u2019s focus on \u201climited liability\u201d discounted the history of uniform limited partnership laws and how those laws initially took into account a limited partner\u2019s partnership activities to determine whether a limited partner retained limited liability and the history of entity classifications. For example, some tax commentators have observed that over time, uniform laws changed from prohibiting limited partners from participating in partnership business to permitting limited partners to participate in more partnership activities without losing liability protection. It is unclear whether U.S. Courts of Appeals outside the Fifth Circuit might be receptive to contentions that at the time of IRC \u00a7 1402(a)(13)\u2019s enactment state-law limited partners were generally not entitled to limited liability unless they \u201crefrain[ed]\u201d from partnership business. \nIn the past, Treasury and the IRS have attempted to restrict eligibility for the limited partner exception. In 1997, Treasury issued a proposed regulation defining limited partner for purposes of IRC \u00a7 1402(a)(13). Soon after, Congress enacted the Taxpayer Relief Act of 1997 (P.L. 105-34), which provided, \u201cNo temporary or final regulation with respect to the definition of a limited partner under section 1402(a)(13) of the Internal Revenue Code of 1986 may be issued or made effective before July 1, 1998.\u201d A \u201cSense of Senate resolution\u201d might offer some insight on the reasons for the moratorium: \u201cthe proposed regulations address and raise significant policy issues and the proposed definition of a limited partner may have a substantial impact on the tax liability of certain individuals and may also affect individuals\u2019 entitlement to social security benefits.\u201d Therefore, the Sense of Senate Resolution concluded that Treasury and the IRS should withdraw the proposed regulation and \u201cCongress . . . should determine the tax law governing self-employment income for limited partner.\u201d\nBecause this case turns on a statutory term, Congress could consider passing legislation clarifying the scope of the limited partnership exception to provide a consistent limited partner definition for purposes of IRC \u00a7 1402(a)(13). For example, to prevent active state-law limited partners with limited liability from circumventing SECA taxes, Congress may adopt statutory text like IRC \u00a7 1402(a)(10) or the 1997 proposed regulation. Alternatively, Congress could adopt language that clarifies that limited liability is all that is required to be a limited partner under IRC \u00a7 1402(a)(13). Congress may also consider clarifying the extent to which partners and members of other state-law entities, such as limited liability partnerships and limited liability companies, are eligible for the limited partner exception. Congress could also leave this matter for resolution in the courts.    \nIn the government\u2019s Sirius Solutions petition for rehearing en banc, the government contends that \u201cheavy losses in tax revenues\u201d would stem from the Fifth Circuit\u2019s 2-1 decision and those losses threaten \u201ccritical funding for Social Security and Medicare.\u201d The government asserts, \u201c[t]he IRS estimates that revenue at stake exceeds $500 million, just in pending matters.\u201d The government claims that these revenue losses are \u201cexpected to grow, as the majority\u2019s approach encourages more businesses to organize as limited partnerships and use distributive shares to compensate workers who already qualify for benefits.\u201d To the extent that Congress seeks to address the government\u2019s claims concerning Social Security and Medicare Part A funding, Congress could consider raising the earnings base for Social Security taxes and the additional 0.9% Medicare tax and increasing Social Security and Medicare tax rates. \n", "https://www.congress.gov/crs_external_products/LSB/PDF/LSB11425/LSB11425.1.pdf", "https://www.congress.gov/crs_external_products/LSB/HTML/LSB11425.html"]], "columns": ["id", "title", "publish_date", "update_date", "status", "content_type", "authors", "topics", "summary", "pdf_url", "html_url"], "primary_keys": ["id"], "primary_key_values": ["LSB11425"], "units": {}, "query_ms": 0.42237399611622095, "source": "Federal Register API & Regulations.gov API", "source_url": "https://www.federalregister.gov/developers/api/v1", "license": "Public Domain (U.S. Government data)", "license_url": "https://www.regulations.gov/faq"}