Fifth Circuit Says State-Law Limited Liability Defines “Limited Partner” for Self-Employment Tax

Overview

• The January 16 Sirius Solutions decision holds that a limited partner is a state-law limited partner with limited liability under Section 1402(a)(13).
• The court rejected the Tax Court’s functional, passive-investor test and remanded, allowing exclusion of distributive shares except for guaranteed payments.
• Judge Graves dissented, arguing the statute allows a functional inquiry consistent with the Tax Court’s Soroban framework.
• The decision is precedential in Texas, Louisiana and Mississippi, while Soroban and Denham appeals proceed in the Second and First Circuits with the prospect of Supreme Court review if a split emerges.
• The panel reserved whether its reasoning extends to LLCs or LLPs, and practitioners report that taxpayers in the Fifth Circuit are weighing protective refund claims.