Fifth Circuit Overturns Tax Court

On January 16, the 5th Circuit issued a long-awaited decision in Sirius Solutions, L.L.L.P. v. Commissioner (2026 WL 125600, 1/16/2026). The decision overturns the Tax Court and rejects the IRS’ test for determining whether a partner is a “limited partner” for purposes of the exception to self-employment tax under IRC § 1402(a)(13).

The IRS had advanced a functional analysis test that required looking at a partner’s level of participation in the business to determine whether they were a “limited partner.” The agency contended that the § 1402(a)(13) exception only applied where partners are passive investors, regardless of their official designation under state law. The Tax Court, following its own precedent in Soroban Capital Partners LP v. Commissioner (161 T.C. 310 (2023)), sided with the IRS.

To dig deeper, visit the original article on the Thomson Reuters blog.