Circuit Courts Split on Limited Partner Self-Employment Tax Test
The Fifth and Second Circuits both held that state-law limited partner status alone does not qualify for the Section 1402(a)(13) self-employment tax exception, but they adopted different tests for when management activity defeats it.
In August 2026 the Fifth Circuit withdrew its original Sirius Solutions opinion and substituted K Alain, L.L.P. v. Commissioner, 184 F.4th 766, holding that a "limited partner" for Section 1402(a)(13) purposes is one who "plays no significant role in managing or running a business," rejecting the Tax Court's detailed functional analysis in favor of a broader no-significant-management-control test that tolerates some participation short of control. In September the Second Circuit affirmed the Tax Court in Soroban Capital Partners LP v. Commissioner, holding that state-law limited partner designation is not sufficient and that fund principals who worked full time, managed portfolio investments, sat on governing committees and participated in hiring were not "passive investors," so their distributive shares were subject to self-employment tax. The Second Circuit said there was "little daylight" between the two definitions, but the Fifth Circuit expressly rejected the Tax Court's approach, leaving the operative threshold unsettled. Fund partners, family offices and individual investors should reassess guaranteed payments, two-tier structures and S-corp holds with counsel; a First Circuit ruling in the pending Denham appeal may resolve or deepen the divide.