“Limited Partner” in § 1402(a)(13) Means Limited Liability Status, Not Passive-Investor Function

I. Introduction

In Sirius Solutions, L.L.L.P. v. Commissioner of Internal Revenue (5th Cir. Jan. 16, 2026), the United States Court of Appeals for the Fifth Circuit confronted a high-stakes question in self-employment taxation: what does “limited partner” mean in the self-employment tax exclusion in 26 U.S.C. § 1402(a)(13)?

Parties and posture. The petitioners were Sirius Solutions, L.L.L.P. and its tax matters partner, Sirius Solutions GP, L.L.C. The respondent was the Commissioner of Internal Revenue. The IRS issued Notices of Final Partnership Administrative Adjustment (FPAAs) for 2014–2016, increasing (or adjusting) partnership “net earnings from self-employment” by treating Sirius’s purported limited partners as not qualifying for the § 1402(a)(13) exclusion. The Tax Court upheld the IRS’s adjustments, reasoning it was bound by Soroban Capital Partners LP v. Commissioner, which construed “limited partner” (for § 1402(a)(13)) to mean only passive investors.

Core issue. Whether “limited partner” in § 1402(a)(13) is a status-based term (a partner with limited liability in a limited partnership) or a function-based term (a passive investor), such that active service partners could be denied the exclusion.

II. Summary of the Opinion

The Fifth Circuit vacated the Tax Court’s decisions and remanded. It held that:

A “limited partner” in § 1402(a)(13) means a partner in a limited partnership who has limited liability.
The Tax Court’s and IRS’s “passive investor” reading is inconsistent with the statutory text and creates administrability and notice problems.
Contemporary dictionary definitions and the contemporaneous, longstanding interpretations of the IRS and SSA strongly confirm the limited-liability meaning.

The court emphasized that, under § 1402(a)(13), limited partners generally exclude their distributive share from self-employment tax, but guaranteed payments for services remain included—showing Congress contemplated that some limited partners might render services.

III. Analysis

A. Precedents Cited

1. Text-first methodology and ordinary meaning

Seville Indus., LLC v. SBA, 144 F.4th 740 (5th Cir. 2025): cited for the “begin with the text” principle. The Sirius panel followed this sequencing and treated the dispute as one of statutory meaning, not tax policy.
Helvering v. William Flaccus Oak Leather Co., 313 U.S. 247 (1941): used for the proposition that tax terms are given their ordinary meaning at enactment—anchoring the court’s reliance on 1970s-era dictionary definitions.
Belt v. EmCare, Inc., 444 F.3d 403 (5th Cir. 2006) and Wis. Cent. Ltd. v. United States, 585 U.S. 274 (2018): cited to justify dictionary consultation as a “principal source” of ordinary meaning. This supported the court’s move to define “limited partner” as a liability-status concept rather than a behavioral “passivity” concept.

2. Post-Chevron landscape: agency views as “useful,” not binding

Loper Bright Enters. v. Raimondo, 603 U.S. 369 (2024): central to the opinion’s interpretive framework. The court invoked Loper Bright to (i) confirm independent judicial judgment and (ii) explain why contemporaneous and consistent agency interpretations can be “especially useful.” The panel used this to credit decades of IRS form instructions and SSA regulations defining “limited partner” by limited liability, while also rejecting the IRS’s more recent, litigation-driven “passive investor” stance.
Bittner v. United States, 598 U.S. 85 (2023): cited for skepticism when the government’s current litigation position conflicts with longstanding public guidance. The Fifth Circuit treated the IRS’s decades-long instructions as undermining the IRS’s later “functional analysis” arguments.
Snyder v. United States, 603 U.S. 1 (2024): used to emphasize “fair notice” concerns—supporting the court’s criticism that the IRS’s multi-factor, ex post functional test would make ex ante compliance difficult.

3. Consistent-meaning canon for the 1977 Social Security Amendments

Taniguchi v. Kan Pac. Saipan, Ltd., 566 U.S. 560 (2012) and Monsalvo Velázquez v. Bondi, 604 U.S. 712 (2025): invoked for the proposition that identical words in the same Act (indeed the same section of the same public law) carry the same meaning. That mattered because the 1977 Act created parallel limited-partner exclusions for (i) self-employment tax and (ii) Social Security benefits calculations. The SSA’s definition in its regulation thus became interpretive evidence for the tax provision as well.

4. State-law interests vs. federal tax consequences

United States v. Craft, 535 U.S. 274 (2002): cited for the formulation that federal tax questions are federal law, but answers often depend on state law-defined property or entity interests.
Burnet v. Harmel, 287 U.S. 103 (1932) and Morgan v. Comm'r, 309 U.S. 78 (1940): cited for the canonical tax principle that state law creates legal interests, while federal law determines tax treatment. The Sirius court used these cases to defend its position that looking to state law for the existence of limited partnership status and limited liability does not surrender federal interpretive control.
United States v. Bestfoods, 524 U.S. 51 (1998): used to caution against upsetting “bedrock” state-law entity principles absent clear congressional intent. This supported the court’s refusal to adopt a federal, judge-made “federal common law of partnerships” in which “limited partner” status would morph based on functional behavior.

5. Legislative history caution and interpretive stopping rules

Deanda v. Becerra, 96 F.4th 750 (5th Cir. 2024): cited for the proposition that legislative history is generally dubious.
Food Mktg. Inst. v. Argus Leader Media, 588 U.S. 427 (2019): cited for the “where text yields a clear answer, judges must stop” principle.
Milner v. Dep't of Navy, 562 U.S. 562 (2011): cited for the rule that ambiguous legislative history cannot muddy clear text.

6. Tax-specific tie-breaker in favor of taxpayers

United States v. Marshall, 798 F.3d 296 (5th Cir. 2015): invoked for the canon that doubtful tax statutes are construed against the government and in favor of the taxpayer. The court framed this as an additional reason the IRS’s passive-investor reading would fail even if ambiguity remained.

7. The Tax Court precedent rejected

Soroban Capital Partners LP v. Commissioner, 161 T.C. 310 (2023): the central Tax Court decision the Fifth Circuit rejected. Soroban treated “limited partners, as such” as limited to passive investors and endorsed a functional inquiry. Sirius holds Soroban’s premise incorrect as a matter of statutory meaning in § 1402(a)(13).
Additional Tax Court decisions appear in the dissent (and thus in the opinion text), including Renkemeyer, Campbell & Weaver v. Commissioner, Hardy v. Commissioner, Castigliola v. Commissioner, and Denham Capital Management LP v. Commissioner. The majority expressly discounted reliance on these “pre-Soroban” lines of authority to override what it viewed as the statute’s plain text.

B. Legal Reasoning

1. The court’s definition: “limited partner” is a liability-status term

The court derived the ordinary meaning of “limited partner” at the time of enactment (1977) from contemporaneous dictionaries and legal dictionaries. Across sources, it identified the “touchstone” as limited liability, contrasting limited partners with general partners who have unlimited liability.

Importantly, the court treated “passivity” or non-participation references found in some materials as not displacing the core definitional feature: the limited partner is defined by liability limitation, not by the extent of services rendered.

2. The “guaranteed payments” clause defeats a strict passivity definition

Section 1402(a)(13) excludes a limited partner’s distributive share “other than guaranteed payments described in section 707(c) … for services actually rendered.” The Fifth Circuit reasoned that Congress’s express carve-out for service-related guaranteed payments presupposes that a “limited partner” may, at least in some cases, render services. A reading that “limited partner” means one who cannot render services would risk making the carve-out superfluous.

3. The phrase “limited partner, as such” does not justify a passive-investor test

The Tax Court (in Soroban) relied heavily on “as such” to limit the exclusion to limited partners “functioning as” limited partners—equated with passive investors. The Fifth Circuit countered that “as such” is naturally read as a capacity clarifier (“limited partner, as a limited partner”) rather than a hidden narrowing device.

The majority also offered a concrete function for “as such”: it helps address dual-capacity partners (individuals who could be both limited and general partners), clarifying that exclusion applies to their limited-partner capacity but not to their general-partner capacity.

4. Agency guidance: longstanding consistency matters, especially post-Loper Bright

The court treated IRS partnership instructions (1976–2022) as consistently defining “limited partner” in limited-liability terms, and treated SSA regulations (codified at 20 C.F.R. § 404.1080(b)(3)) as adopting the same liability-centric definition soon after enactment. Under Loper Bright, such consistent, contemporaneous interpretive materials can be “especially useful,” even if they are not binding.

5. Rebutting federal-tax “principles” objections

The IRS argued that federal law controls, economic reality matters, and tax law should be uniform nationwide. The court agreed with those principles in the abstract, but held they do not compel a passive-investor test here because:

limited partnerships and liability limitations are state-law creatures whose existence is a predicate fact;
federal law still supplies the tax consequence once that state-law interest exists;
a multi-factor functional test could produce greater uncertainty and disuniformity through litigation and inconsistent applications.

C. Impact

1. A clear Fifth Circuit rule and an open conflict with the Tax Court’s functional approach

Sirius establishes, within the Fifth Circuit, a bright-line interpretive rule: the § 1402(a)(13) exclusion turns on limited partnership limited-liability status, not on a judicially constructed “passive investor” functional test. Because the Tax Court has applied Soroban’s functional analysis in multiple cases (noted in the dissent), the decision sets up a significant interpretive divergence between at least one circuit court and the Tax Court’s preferred framework—raising the stakes for forum selection, future appeals, and potential Supreme Court review if other circuits weigh in.

2. Compliance, planning, and audit dynamics

The opinion’s administrability concerns are likely to resonate in future disputes: a status-based rule offers ex ante predictability; a functional test invites fact-intensive disputes about “how much participation is too much.” Sirius suggests courts should be skeptical of agency litigation positions that replace clear entity-status markers with multi-factor tests absent statutory text directing such a transformation.

3. Limits of the holding

The court included an explicit caveat: it did “not discuss whether members of another entity, such as an LLP or LLC, may also qualify for the limited partner exception.” Future cases in the Fifth Circuit may therefore involve (i) the boundary between “limited partner” and other limited-liability entity participants and (ii) how to treat hybrid or modern partnership forms under § 1402(a)(13).

IV. Complex Concepts Simplified

Self-employment tax (SE tax). A Social Security and Medicare tax imposed on “net earnings from self-employment” (separate from income tax).
Distributive share. A partner’s allocated share of partnership income/loss, whether or not actually distributed in cash.
§ 1402(a)(13) limited partner exclusion. If you are a “limited partner, as such,” your distributive share is generally excluded from SE tax— but you still pay SE tax on certain service-like payments.
Guaranteed payments (26 U.S.C. § 707(c)). Payments to a partner determined without regard to partnership income (often akin to salary); § 1402(a)(13) keeps these subject to SE tax when they remunerate services actually rendered.
Tax Matters Partner (TMP) and FPAA. In partnership audit procedures, the TMP represents the partnership; an FPAA is the IRS’s formal partnership-level adjustment notice that can be challenged in Tax Court.
“As such.” A phrase often used to indicate “in that capacity.” Sirius reads it as a capacity clarifier, not an invitation to a broad functional test.

V. Conclusion

Sirius Solutions, L.L.L.P. v. Commissioner of Internal Revenue announces a consequential rule of statutory meaning: for purposes of 26 U.S.C. § 1402(a)(13), a “limited partner” is defined by limited-liability status in a limited partnership, not by whether the partner is a “passive investor.”

The Fifth Circuit reached this result by prioritizing ordinary meaning at enactment, reading the “guaranteed payments” carve-out as evidence that limited partners may render services, and treating decades of IRS and SSA guidance as powerful confirmation under the interpretive approach emphasized in Loper Bright Enters. v. Raimondo. The decision rejects the Tax Court’s functional, passivity-based approach typified by Soroban Capital Partners LP v. Commissioner, and in doing so, reorients § 1402(a)(13) analysis—at least in the Fifth Circuit—toward predictable entity-status criteria rather than open-ended factual inquiries into investor “activity.”