Limited Partner Status Now Depends on Your Role in Running the Business
The Fifth Circuit withdrew its own January 2026 opinion in this case on August 12, 2026, and replaced the test it had announced. The withdrawn opinion said that state-law limited partner status with limited liability settled the question by itself. The substituted opinion asks a different question: whether the partner plays a significant role in managing or running the business. The court vacated the Tax Court’s judgment and remanded the case, so no one has won it yet.
Three things follow for anyone holding limited partner units in a partnership they also work for:
- The bright line is gone: A label in the partnership agreement no longer answers the question on its own inside the Fifth Circuit.
- Soroban’s rule was rejected too: The court declined to adopt the Tax Court’s passive-investor standard, so neither pole survives in that circuit.
- The stakes are unchanged: Self-employment tax applies at 15.3% to net earnings up to the Social Security wage base, though most passive investors will continue filing as before.
Here is what the court held, how the three positions now compare, and what to do while the remand plays out.
What Changed on August 12
The court denied en banc rehearing, treated the petition as one for panel rehearing, and granted it; it withdrew Sirius Solutions, LLLP v. Commissioner, 165 F.4th 374 (5th Cir. 2026), and substituted a new opinion. The substituted opinion carries a different caption, K Alain, LLLP v. Commissioner, No. 24-60240, though it is the same appeal from the same docket.
That means the holding this page previously described is no longer law anywhere. The January opinion held that the limited partner exception in Internal Revenue Code Section 1402(a)(13) applied to a state-law limited partner with limited liability, without further inquiry into day-to-day activities. If you relied on that reading between January and August, it was a reasonable position at the time, because it was binding law in the Fifth Circuit until August 12. The withdrawn opinion should not be cited now, and a filed position that rested on it should be reviewed with your adviser.
For a partner drawing a meaningful distributive share, the money at stake each year is enough to be worth getting right rather than settling quickly. Our guide to self-employment tax for Americans abroad covers how the charge works before any of this litigation is applied.
What the Court Now Asks
The panel read Section 1402(a)(13) against the meaning its words carried in 1977, when the exception was written. On that reading, a limited partner is “a partner who plays no significant role in managing or running a business.”
The court drew the line between managing and not managing. An informed reader in 1977 would have understood that a limited partner “could not manage the partnership, but perhaps could participate in certain non-managerial aspects of the business.” So some involvement falls within the exception, but managing the partnership does not.
The court gave this standard no name and applied no factor list, leaving the Tax Court to work out on remand what counts as a significant role. Two points are settled enough to plan around. A partner who contributes capital and does no work for the partnership sits comfortably inside the exception. A partner who manages the business does not, whatever the paperwork says.
The panel also declined to adopt the Tax Court’s approach, describing Soroban as choosing “a rule divorced from statutory text” that “appears to prohibit even the most minor involvement in corporate affairs.” The opinion was per curiam, with Judge Graves dissenting.
The Tax Court’s Position in Soroban
The original Soroban Capital Partners LP v. Commissioner decision came down on May 28, 2025, as T.C. Memo. 2025-52. The Tax Court held that three Soroban hedge fund partners labeled “limited partners” on paper were not limited partners “as such” for purposes of Section 1402(a)(13).
The court applied a functional analysis that asked what those partners did day-to-day. It found that they worked full-time managing the fund, oversaw daily operations, were essential to the firm’s services, were held out to the public as essential, and contributed insignificant capital relative to the fees they earned. Because they functioned as active managers rather than passive investors, the Tax Court ruled their distributive shares of partnership income were subject to self-employment tax.
The Tax Court has reaffirmed that approach in subsequent cases.
Limited Partner on Paper, Manager in Practice
How the Three Standards Compare
| Standard | What it asks | Status |
|---|---|---|
| Tax Court (Soroban) | Functional analysis of activity: day-to-day role, hours, capital contributed, public-facing position | Applied in Tax Court cases outside the Fifth Circuit |
| Fifth Circuit, January 2026 | State-law limited partner status with limited liability, nothing further | Withdrawn on rehearing, no longer law |
| Fifth Circuit, August 2026 | Whether the partner plays a significant role in managing or running the business | Controls in the Fifth Circuit, applied on remand |
Which standard reaches you follows where your own appeal would lie, based on your residence or principal place of business, rather than where the fund was formed. If that is the Fifth Circuit (Texas, Louisiana, Mississippi), the August standard applies, and the Tax Court must apply it as well. For everyone else, the Tax Court’s functional test is the prevailing approach unless and until another circuit weighs in.
What’s Coming Next
Two more appeals are pending, and neither has been decided.
- Soroban Capital Partners itself is on appeal at the Second Circuit. If the Second Circuit affirms, the Tax Court’s standard holds for taxpayers whose appeals lie there. If it lands near the Fifth Circuit’s managerial reading, the disagreement between circuits becomes one of degree, about how much involvement is too much, rather than the all-or-nothing split the January opinion created.
- Denham Capital Management is pending at the First Circuit.
Either ruling could reshape the analysis, and the FAQ below covers what a split would mean for Supreme Court review.
Who This Affects
The litigation is most relevant to two reader groups.
- Active fund principals and managers holding limited partner units in their own management entity, especially those drawing meaningful guaranteed payments or distributive shares of fee income. The 15.3% question lands directly on this group.
- U.S. expats and dual residents with stakes in foreign hedge funds, private equity partnerships, or venture funds that include a U.S. limited partnership tier. The foreign character of the underlying fund does not, in itself, change the SECA analysis. The U.S.-side feeder is where the rule applies.
Passive U.S. investors who do not work for the fund are largely outside the dispute, regardless of circuit. Separate reporting rules can still apply to the fund itself, which our guide to foreign partnerships covers.
What Active Limited Partners Need to Know
If you are a fund principal, a managing member who took limited partner status for liability reasons, or a partner who works full-time at the partnership, the question is narrower than it was in January, and still unsettled.
- Inside the Tax Court: The Soroban functional test is the law. A return that excludes your distributive share from self-employment tax may invite a challenge.
- Inside the Fifth Circuit: The August 2026 opinion controls, and the question is whether you play a significant role in managing or running the business. The January bright line is withdrawn, so a label in the agreement no longer carries the argument.
- Everywhere else: The Tax Court’s reasoning is persuasive but not binding on the federal courts of appeals. The Second Circuit’s coming decision will shape the analysis for taxpayers in New York, Connecticut, and Vermont.
The right answer depends on the partnership agreement, the state of formation, the relevant circuit, and what you do for the partnership. That last item now carries weight in every forum.
What You Should Do Now
If you are a passive U.S. investor in a foreign fund, confirm with your fund manager that your interest is structured as a passive limited-partner stake, and retain documentation of capital contributions and the absence of any management role. Most passive investors will continue filing as they did before.
If you are a fund principal or active limited partner in the Fifth Circuit, the January opinion that supported an exclusion from SECA has been withdrawn. The substituted opinion asks whether you play a significant role in managing or running the business, so build the record on that question. Talk it through with your adviser before relying on either reading, and expect the Tax Court to apply the new standard on remand.
If you are a fund principal or active limited partner outside the Fifth Circuit, the Tax Court’s functional analysis still applies in your circuit. Until those two rulings land, take the more conservative filing position and set money aside for the difference.
If you are a U.S. expat with a stake in a foreign-domiciled fund, look at how the U.S. tier of your investment is structured. Most foreign hedge funds and private equity vehicles have a U.S.-side feeder or general partner, which is where the SECA analysis lands. A direct interest in the foreign vehicle can also bring Form 8865 into the picture.
If the IRS has already opened an examination into this issue, get professional advice before you file or amend, because these audits span several years and involve many documents.
A cross-border tax adviser who works with fund principals and limited partners every day can read your structure against the right circuit standard and tell you which filing position you can defend. Greenback handles business and partnership filings for Americans abroad, and our page for foreign business owners outlines how we work.
Know Which Standard Applies to You
Frequently Asked Questions
It depends on what you do for the partnership and where you are located. If you are a passive investor who contributed capital and do not work for the fund, the answer is almost always no, regardless of circuit. If you work full-time managing the fund and hold limited partner status for liability reasons, the answer depends on your circuit. In the Fifth Circuit, the question is whether you play a significant role in managing or running the business. The Tax Court says yes under Soroban. Other circuits have not yet ruled.
Internal Revenue Code Section 1402(a)(13) excludes a limited partner’s distributive share of partnership income from net earnings from self-employment, unless that share consists of guaranteed payments for services. The exception was written in 1977, before modern LLPs and LLLPs existed, which is why the courts are still debating who counts as a “limited partner” and why the Fifth Circuit returned to the 1977 meaning of the term.
No, not as binding precedent. The Tax Court’s Soroban approach applies nationwide in U.S. Tax Court cases, and the federal courts of appeals outside the Fifth Circuit have not adopted its reading. The substituted opinion is still persuasive authority, and tax advisers in other circuits may cite it, but it is not binding outside the Fifth Circuit. The withdrawn January opinion should not be cited at all.
The combined SECA tax rate is 15.3% on net earnings from self-employment up to the Social Security wage base, made up of 12.4% for Social Security and 2.9% for Medicare. An additional 0.9% Medicare surtax applies to high earners. Above the Social Security wage base, only the Medicare portion (and surtax) continues to apply.
It might, though the rehearing narrows the gap between the two positions. A meaningful split between circuits is the usual predicate for review, and the pending Second Circuit and First Circuit decisions will shape whether either side petitions.
Subscription documents showing your initial capital contribution, your partnership agreement showing your limited partner status, K-1s from each year, and any communication confirming you do not provide management services. Funds where the same individuals serve as both managers and “limited partners” are most at risk, so a clear paper trail matters.
No decision has been issued. The Second Circuit’s ruling is the most consequential development still to come in this area, and it may prompt a petition for Supreme Court review from whichever side loses.
This article describes a substituted appellate opinion in litigation that is continuing on remand, and the standard it applies may be refined by the Tax Court or by other circuits. The information in this article is for general informational purposes only and does not constitute tax, legal, or financial advice. Tax rules are complex and change frequently. Consult a qualified tax professional regarding your specific situation before taking any action.
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