Fifth Circuit Rehearing Narrows Limited Partner Self-Employment Tax Exception
Limited partners and their tax advisors must review partnership agreements and income allocations to ensure self-employment tax exemption compliance following the Fifth Circuit's narrowed ruling on rehearing.
On August 12, 2026, the U.S. Court of Appeals for the Fifth Circuit issued an opinion on rehearing in a case addressing the limited partner exception to self-employment tax under Internal Revenue Code §1402(a)(13). The court narrowed its prior taxpayer-friendly ruling but preserved the core holding that certain limited partner interests can still qualify for the self-employment tax exemption. The rehearing opinion clarified the scope of the exception, emphasizing that limited partners must still meet specific requirements regarding their partnership role and the nature of their income. Tax practitioners should carefully review partnership agreements, allocation provisions, and the specific activities of limited partners to ensure compliance with the court's refined standard. The ruling provides continued taxpayer benefit but introduces additional scrutiny on how limited partner status is documented and operationalized within partnership structures.