Fifth Circuit Rejects ‘Passive Investor’ Test, Holding State-Law Limited Partners Qualify for SECA Exemption

The 2–1 Sirius Solutions decision vacates the Tax Court, leaving pending First and Second Circuit appeals to determine whether a split develops.

Overview

The court held that a “limited partner” under Section 1402(a)(13) means a partner in a state-law limited partnership who is afforded limited liability, without a fact-intensive inquiry into activity levels.
The ruling vacates and remands the Tax Court’s contrary decision in Sirius Solutions, marking the first appellate rejection of the Tax Court’s functional ‘passive investor’ approach.
The precedent is binding only within the Fifth Circuit, covering Texas, Louisiana and Mississippi, while the IRS and Tax Court may continue applying the functional test elsewhere under Golsen.
The opinion focuses on limited partnerships, including LLLPs, and does not resolve whether members of LLCs or owners of other entity types qualify for the exception.
The government may seek rehearing en banc by early March 2026 or petition the Supreme Court, as related Denham (First Circuit, argument Feb. 5) and Soroban (Second Circuit) appeals advance.