Fifth Circuit Changes Partnership Tax Case Ruling, Raises Questions for Partners

The Fifth Circuit Court of Appeals has withdrawn its previous ruling on a partnership tax case and replaced it with a new interpretation that could have significant implications for partners.

The court's decision in Sirius Solutions, L.L.L.P. v. Commissioner affects how the self-employment tax exception is applied to limited partners.

In its original January opinion, the court ruled that a limited partner was defined

The new ruling, issued on August 12, 2026, takes a different approach. According to the court, a limited partner is someone who plays 'no significant role in managing or running a business.'

This change could impact how partners are treated under section 1402(a)(13) of the tax code.

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The IRS has generally argued that the exception should not shelter earnings attributable to a partner's services, but the Tax Court had adopted a different approach in a previous case. The Fifth Circuit's new ruling rejects this approach and instead looks at the partner's role in managing the business.

This raises questions for partners who act in multiple capacities, such as holding both general and limited partner interests. The court's decision also leaves it unclear how the exception applies to income received

The Fifth Circuit's ruling is binding precedent for federal courts within that circuit, but the broader dispute over section 1402(a)(13) remains unsettled in other circuits.

As a result, partners and tax practitioners will need to carefully consider how this new interpretation affects their clients' situations. The Tax Court will also need to apply the new test on remand.