The opinion
Case: 24-60240 Document: 137-2 Page: 1 Date Filed: 08/12/2026
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
____________ FILED
August 12, 2026
No. 24-60240
Lyle W. Cayce
____________ Clerk
K Alain, L.L.L.P.; K Alain GP, L.L.C.; Tax Matters
Partner,
Petitioners—Appellants,
versus
Commissioner of Internal Revenue,
Respondent—Appellee.
______________________________
Appeal from the United States Tax Court
Nos. 11587-20, 30118-21
______________________________
Before Graves, Engelhardt, and Oldham, Circuit Judges.
Per Curiam:
The petition for rehearing en banc is DENIED. Treating the petition
for rehearing en banc as a petition for rehearing, the petition for rehearing is
GRANTED. We withdraw our prior opinion, Sirius Solutions, L.L.L.P. v.
Commissioner of Internal Revenue, 165 F.4th 374 (5th Cir. 2026), and
substitute the following.
This case concerns the meaning of the term “limited partner” in 26
U.S.C. § 1402(1)(13). Today, we hold its original public meaning is a partner
who plays no significant role in managing or running a business. Thus, we
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VACATE and REMAND so the Commissioner may consider whether the
partners at issue fall within that meaning of § 1402(1)(13).
I
A
The Internal Revenue Code imposes a Social Security and Medicare
tax based on every individual’s earnings. Social Security Admin-
istration, Understanding the Benefits 3 (2025). This applies
to the income of those who are employed by another, see 26 U.S.C. § 3101, as
well as “the self-employment income of every individual,” id. § 1401(a).
This case concerns the self-employment tax liability of limited partners.
The term “self-employment income” is defined as “the net earnings
from self-employment derived by an individual . . . during any taxable year.”
Id. § 1402(b). And “net earnings from self-employment” includes, as rele-
vant here, an individual’s “distributive share (whether or not distributed) of
income or loss described in section 702(a)(8) from any trade or business car-
ried on by a partnership of which he is a member.” Id. § 1402(a).
This case turns on an exception “in computing . . . such distributive
share” for limited partners. Ibid. The Code provides:
[T]here shall be excluded the distributive share of any item of
income or loss of a limited partner, as such, other than guaran-
teed payments described in section 707(c) to that partner for
services actually rendered to or on behalf of the partnership to
the extent that those payments are established to be in the na-
ture of remuneration for those services.
Id. § 1402(a)(13). Putting these provisions together, a limited partner’s pass-
through share of partnership income (or loss) is exempt from the Social Se-
curity and Medicare tax imposed in § 1401. This tax exception for limited
partners has remained unchanged since its adoption as part of the Social
2
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Security Amendments of 1977. See An Act to Amend the Social Security Act
and the Internal Revenue Code of 1954 to Strengthen the Financing of the
Social Security System, and for Other Purposes, Pub. L. No. 95-216, § 313(b),
91 Stat. 1509, 1536.
So, to review, payments to limited partners for “services actually
rendered” to the partnership are subject to Social Security and Medicare
taxation. But the pass-through share of partnership income of a “limited
partner, as such” is not.
B
Sirius Solutions, L.L.L.P. (“Sirius”) is a limited liability limited
partnership formed under Delaware state law. 1 Sirius operates a business
consulting firm based in Houston, Texas, with additional offices in Dallas,
Texas, and London, England. Sirius Solutions GP, L.L.C. (“Sirius GP”),
also formed under Delaware law, is the tax matters partner (“TMP”) of
Sirius. See 26 U.S.C. § 6231(a)(7) (defining tax matters partner).
This appeal concerns Sirius’s federal tax returns from 2014, 2015, and
2016. In 2014, Sirius was owned by nine limited partners and one general
partner, Sirius GP. At the time, Sirius GP held a .6457% interest in the
partnership. Four limited partners sold their partnership interests in 2014, so
in 2015 and 2016, there were five limited partners alongside Sirius GP, the
general partner. During those latter two years, Sirius GP held a .7529%
interest in the partnership.
Sirius reported ordinary business income of $5,829,402 in 2014,
$7,242,984 in 2015, and –$490,291 in 2016. Sirius allocated all that income
_____________________
1
Sirius Solutions, L.L.L.P. is now called K Alain L.L.L.P. For the sake of clarity,
we refer to the K Alain entities by their prior names.
3
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to its limited partners. Relying on the limited partnership tax exception,
Sirius excluded the limited partners’s distributive shares of partnership
income (or loss) from its calculation of net earnings from self-employment
during those years. So it reported $0 of net earnings from self-employment.
In June 2020, following an audit of Sirius’s 2014 tax returns, the Com-
missioner of Internal Revenue issued to Sirius GP a Notice of Final Partner-
ship Administrative Adjustment (“FPAA”) concerning the 2014 return.
The IRS determined that the distributive share exception in § 1402(a)(13)
did not apply because none of Sirius’s limited partners counted as “limited
partners” for purposes of the statutory exception. So the IRS adjusted Sir-
ius’s net earnings from self-employment reported on the 2014 tax return
from $0 to $5,915,918. In September 2020, Sirius petitioned the Tax Court
for readjustment of its 2014 tax return.
The IRS also audited Sirius’s 2015 and 2016 tax returns. In June 2021,
the IRS issued more FPAAs to Sirius GP. These adjusted the net earnings
from self-employment from $0 to $7,372,756 and –$490,291 respectively. In
September 2021, Sirius filed a second petition to the Tax Court seeking re-
adjustment for the 2015 and 2016 tax returns. The two cases were consoli-
dated.
On February 20, 2024, the Tax Court rejected Sirius’s challenges and
upheld the adjustments. It reasoned that it was bound by a recent Tax Court
decision, Soroban Capital Partners LP v. Commissioner, 161 T.C. 310 (2023).
In that decision, the Tax Court held that for purposes of § 1402(a)(13), the
term “limited partners” only “refer[s] to passive investors.” Soroban, 161
T.C. at 320. Sirius timely appealed to this court.
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II
The sole question on appeal is what “limited partner” means in
§ 1402(a)(13). We hold the ordinary public meaning of this phrase is a partner
who plays no significant role in managing or running a business.
A
Two principles guide our inquiry. First, tax law is federal law. Once
“it has been determined that state law creates sufficient interests in the
[taxpayer] to satisfy the requirements of [the statute,] state law is
inoperative.” United States v. Bess, 357 U.S. 51, 55 (1958); see also Burnet v.
Harmel, 287 U.S. 103, 110 (1932). Second, the Tax Code’s phrase “limited
partner” is undefined. Thus, our job is determining what, as a matter of
federal law, the phrase “limited partner” in § 1402(a)(13) means. To do so,
we “interpret the words consistent with their ‘ordinary meaning . . . at the
time Congress enacted the statute.’” Wis. Cent. Ltd. v. United States, 585
U.S. 274, 277 (2018) (quoting Perrin v. United States, 444 U.S. 37, 42 (1979)).
Contemporaneous legal dictionaries defined a “limited partnership”
as a partnership with general partners “who manage business” and limited
partners who “contribute capital and share in profits but . . . take no part in
running business.” Limited Partnership, Black’s Law Dictionary (5th
ed. 1979); see also Limited Partnership, Black’s Law Dictionary (4th
ed. [rev.] 1968) (similar). Such definitions are probative of original meaning.
See Belt v. EmCare, Inc., 444 F.3d 403, 412 (5th Cir. 2006) (“[W]e routinely
consult dictionaries as a principal source of ordinary meaning . . . .”).
These dictionaries are not outliers. Indeed, for more than one hundred
years, lexicographers have captured similar definitions of “limited”
partnerships. See, e.g., S. Rapalje & R.L. Lawrence, Dictionary
of American and English Law 932 (1888) (explaining a “particular
(limited or special) partnership” features “general partners . . . by whom the
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business is conducted . . . and one or more special partners, who contribute
in cash a specific sum as capital . . . and who are not liable for the debts of the
partnership”); Limited Partnership, Black’s Law Dictionary (12th
ed. 2024) (defining a “limited partner” as “one or more persons who
contribute capital and share profits but who cannot manage the business and
are liable only for the amount of their contribution”). While such texts are
not dispositive of the original public meaning, they reveal a common,
mainstream definition of “limited partner” that turns on the role partners
played in the enterprise.
Dictionaries are not the only source from which we draw our
interpretation. Consider the context in which Congress enacted the relevant
provision. In 1916, the National Conference of Commissioners on Uniform
State Laws promulgated the Uniform Limited Partnership Act (“ULPA”),
which was adopted in various forms by nearly all American States. Leonard
Charles Schwartz, The Uniform Limited Partnership Act: Are the Recent
Changes Improvements?, 93 Dick. L. Rev. 555, 555–56 (1989). The ULPA
stated that a “limited partner shall not become liable as a general partner
unless, in addition to the exercise of his rights and powers as a limited
partner, he takes part in the control of the business.” Uniform Limited
Partnership Act: Drafted by the National Conference
of Commissioners on Uniform State Laws and by it
Approved and Recommended for Enactment in all the
States at its Conference at Chicago, Illinois 11 (1916). In
1976, the Conference’s revised version of that 1916 law, the Revised Uniform
Limited Partnership Act, carried over the same test. Uniform Limited
Partnership Act (1976), 85 Handbook of the National
Conference of Commissioners on Uniform State Laws
and Proceedings of the Annual Conference Meeting 171,
185 (1976). While States had not adopted the revised uniform law by the time
6
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Congress amended the relevant section of the Tax Code, the 1916 definition
and the ratification of that definition in the 1976 changes provide key insight
into the ordinary understanding of “limited partner” in 1977. See Mary E.
Brumder, Comment, Investor Protection and the Revised Uniform Limited
Partnership Act, 56 Wash. L. Rev. 99, 100–01 (1980).
Contemporaneous treatises point towards the same result. One
treatise explained that limited partners “are members of statutory limited
partnerships, typically sharing profits, immune from personal liability for
firm debts, and not participating in management.” A.R. Bromberg,
Crane and Bromberg on Partnership 141 (1968). Another
treatise explained that “it has always been difficult to justify immunity from
a debt that was incurred by one of the actual managers or directors of an
enterprise, and thus the limited partners, in return for immunity, must refrain
from any participation in the management or control the business, to include
control over any of the managing partners.” H.G. Reuschlein & W.A.
Gregory, Handbook on the Law of Agency and
Partnership 435 (1979).
While it does not appear that our court passed on the definition of
“limited partner” around the time the relevant statute was enacted, at least
one of our sister circuits did. See Plasteel Prods. Corp. v. Helman, 271 F.2d 354,
356 (1st Cir. 1959). The Plasteel court recognized that if a partner controlled
partnership affairs, the partner was no longer functioning as a limited partner.
Ibid. But it suggested a limited partner could have lesser involvement. Ibid.
For example, it noted that a limited partner could sign the partnership
agreement as a general partner without losing his limited-partner status. Ibid.
(citing Rathke v. Griffith, 218 P.2d 757, 757 (Wash. 1950)). While Plasteel
turned on state law, not federal tax law, it nonetheless formed part of the
backdrop against which Congress enacted § 1402(a)(13) in 1977. And that
backdrop suggests some participation is allowed, so long as the partners do
7
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not exercise control over the business. Contra post, at 23 (arguing that Plasteel
does not allow for such a distinction).
Because the plain text of the statute points towards this conclusion,
we are unmoved by the dissent’s citation to Tax Court and circuit precedent
interpreting different statutes. See post, at 16–19, 23–24. With due respect to
the Tax Court, federal courts decide relevant questions of law. See Loper
Bright Enters. v. Raimondo, 603 U.S. 369, 398 (2024). And even “[y]ears of
consistent practice cannot vindicate an interpretation that is inconsistent
with a statute’s plain text.” Buenrostro-Mendez v. Bondi, 166 F.4th 494, 506
(5th Cir. 2026). What’s more, as to the dissent’s circuit authority, neither
out-of-circuit nor in-circuit precedent about securities law (and other non-
§ 1402 topics) can overcome the plain text of a duly enacted statute. Contra
post, at 23–24. 2
Likewise, we are unconvinced by the dissent’s parade of horribles. Id.
at 15. This critique hypothesizes that our rule will result in bad policy
consequences. Ibid. But this court’s job is to “discern and apply the law’s
plain meaning as faithfully as we can, not ‘to assess the consequences of each
approach and adopt the one that produces the least mischief.’” BP P.L.C. v.
Mayor & City Council of Balt., 593 U.S. 230, 246 (2021) (quoting Lewis v.
_____________________
2
Even worse for the dissent, many of its cases support the idea that limited partners
may play a small role in a company. See, e.g., Marin TV Servs. Partners, Ltd. v. FCC, 993
F.2d 261, 262, 264 (D.C. Cir. 1993) (focusing on active participation and “material”
participation); Steinhardt Grp. Inc. v. Citicorp, 126 F.3d 144, 152 (3d Cir. 1997) (allowing for
nominal or limited responsibilities); Masel v. Villarreal, 924 F.3d 734, 744 (5th Cir. 2019)
(“Nonetheless, even a limited partnership interest may not be a security when limited
partners are given such managerial control that it can no longer be said that the limited
partners are dependent on the entrepreneurial skills of the promoter or a third party.”
(emphasis added)).
8
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Chicago, 560 U.S. 205, 217 (2010)). Here, we apply the plain text. Nothing
more.
At bottom, all relevant sources suggest that, in 1977, the ordinary
public meaning of “limited partner” included a partner who did not play a
significant role in managing or running the business.
B
In adopting this reading, we reject the Tax Court’s Soroban decision.
In Soroban, the Tax Court selected a rule divorced from statutory text and
that appears to prohibit even the most minor involvement in corporate
affairs. The Tax Court held that the term “limited partner” could refer only
to “passive investors.” Soroban, 161 T.C. at 321. With just a few sentences of
operative analysis—citing no contemporary textual authority—the Tax
Court insisted that “limited partner, as such” somehow denoted more than
limited liability. Id. at 320 (emphasis added). The Tax Court then said,
without significant analysis, that this required a “passive investor” rule. Ibid.
The Tax Court made no attempt to ground its rule in the original public
meaning of “limited partner” in 1977. 3
In our view, that was erroneous. An informed reader of the English
language in 1977 would have understood that a “limited partner” could not
manage the partnership, see Limited Partnership, Black’s Law
Dictionary (5th ed. 1979), but perhaps could participate in certain non-
managerial aspects of the business, see Plasteel, 271 F.2d at 356. That is a
different and more refined analysis than the one the Tax Court offered in
Soroban. And most importantly, the managerial/non-managerial distinction
_____________________
3
Given our interpretation of the Tax Code’s plain text rejects Soroban and thus
decides the issue on appeal, we need not discuss additional Tax Court precedents like
Renkemeyer, Campbell & Weaver v. Commissioner, 136 T.C. 137 (2011). Contra post, at 26.
9
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is one that is rooted in the legal sources that existed in 1977 when Congress
adopted § 1402(a)(13).
What’s more, the Soroban decision cannot be squared with decades of
IRS-approved guidance insisting that what mattered was limited liability
alone. In 1978, the first year in which the “limited partner” exception was
implemented, the IRS issued partnership tax return instructions that defined
“Limited Partner” as “one whose potential personal liability for partnership
debts is limited to the amount of money or other property that the partner
contributed or is required to contribute to the partnership.” Internal
Revenue Service, Package X: Informational Copies of
Federal Income Tax Forms 137 (1978). Thus, parties were led to be-
lieve that what mattered was liability, not control. One looks in vain for a con-
trol test in the relevant sections of the IRS guidelines, whether in the two
years preceding the 1977 revision or in the forty years following them. See
Internal Revenue Service, Instructions for Form 1065 30
(1976); Internal Revenue Service, Instructions for Form
1065 149 (1977); Internal Revenue Service, Instructions for
Form 1065 2 (2015) (explaining a limited partner is “a partner in a partner-
ship formed under a state limited partnership law, whose personal liability for
partnership debts is limited to the amount of money or other property that
the partner contributed or is required to contribute to the partnership.”); In-
ternal Revenue Service, Instructions for Form 1065 2
(2016) (same); Internal Revenue Service, Instructions for
Form 1065 2 (2017) (same).
The Commission’s position in this case is that it can change the mean-
ing of “limited partner” from (A) “limited liability alone,” which was the
pre-Soroban standard, to (B) Soroban’s “passive investor” standard—with
zero action from Congress to amend § 1402(a)(13)’s text. Perhaps that level
of administrative control over billions or trillions of dollars in tax liability is
10
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permissible as a general matter. But at a minimum, even assuming the Com-
missioner can unilaterally effectuate such changes through tax instructions,
its instructions must comport with the original public meaning of the text en-
acted by Congress in 1977.
The Tax Court did not attempt that task. We therefore VACATE its
judgment and REMAND the case for further proceedings consistent with
this opinion.
11
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James E. Graves, Jr., Circuit Judge, dissenting.
Because the text and structure of 26 U.S.C. § 1402(a)(13) are clear
that its tax exemption for limited partners applies only to those functioning
as passive investors, I would affirm the Tax Court’s decision upholding the
adjustments to Sirius Solutions’ federal tax returns for 2014, 2015, and 2016.
Thus, I respectfully dissent.
I.
Sirius Solutions L.L.L.P. (Sirius) is a limited liability limited
partnership under the state law of Delaware that operates as a business-
consulting firm based in Houston, with additional offices in Dallas and
London. 1 Sirius is treated as a partnership for federal income tax purposes.
In 2002, each of Sirius’ individual partners signed its Statement of
Qualifications as “General Partner.” Sirius Solutions GP, L.L.C. (Sirius
GP), also formed under the state law of Delaware, is the tax matters partner
(TMP) of Sirius, as defined in 26 U.S.C. § 6231(a)(7) (2014). 2 Sirius GP is
the general partner of Sirius. This appeal concerns Sirius’ federal tax returns
for 2014, 2015 and 2016.
In 2014, Sirius had two classes of partnership interests, Class A Units
and Class B Units, and was owned by nine individual partners and the general
partner, Sirius GP. 3 Sirius GP held a 0.6457% interest. Four individual
partners sold their partnership interests in 2014, with two of them becoming
employees of the partnership. Thus, in 2015 and 2016, there were five
_____________________
1
See Del. Code Ann. tit. 6, §§ 17-101(8)-(9), 17-301(a)(2) (2014).
2
K Alain GP, L.L.C., is now the TMP. However, I continue using Sirius to avoid
confusion.
3
Class A units were purchased from the Partnership in exchange for a five-year
installment note payable to the partnership.
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individual partners and Sirius GP, which held a 0.7529% interest. The
individual partners were allocated a share of Sirius’ income or loss during the
relevant years.
Sirius reported ordinary business income of $5,829,402 in 2014,
$7,242,984 in 2015, and –$490,291 in 2016. None of that income was
allocated to Sirius GP. Instead, that income was allocated to the individual
partners. However, Sirius did not report any net earnings from self-
employment to any of the individual partners. 4
On June 12, 2020, the Commissioner of Internal Revenue issued a
TMP Notice of Final Partnership Administrative Adjustment (FPAA) to
Sirius GP, as tax matters partner for Sirius (collectively referred to as
“Sirius” in the singular). The Commissioner determined that an adjustment
was appropriate to the amount Sirius reported on its 2014 federal tax return
as net earnings from self-employment. Of particular relevance here, the
adjustment notice said:
(2) Net earnings (loss) from self-employment
It is determined that your ordinary income from business
consulting services is included in net earnings from self-
employment for which your individual partners are liable for
the self-employment tax imposed by IRC § 1401. It is further
determined that your individual partners are not “limited
partners” within the meaning of IRC § 1402(a)(13), and thus
their distributive shares of the partnership’s ordinary business
income are not excluded from their net earnings from self-
employment. Therefore, the net earnings from self-
employment is $5,915,918.00 rather than $0.00 as shown on
_____________________
4
The Internal Revenue Code (IRC) imposes Social Security and Medicare taxes
on net earnings from self-employment. 26 U.S.C. § 1402(b). The meaning of “net
earnings from self-employment” is defined by statute and includes various exceptions. 26
U.S.C. § 1402(a).
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your return. Accordingly, the net earnings from self-
employment is increased by $5,915,918.00.
On September 4, 2020, Sirius petitioned the Tax Court for
readjustment of the FPAA adjustment, asserting that the Commissioner
erred in determining that the individual partners were not “limited partners”
for purposes of section 1402(a)(13). See 26 U.S.C. § 6226(a) (2014). The
Commissioner responded on November 20, 2020.
On June 21, 2021, the IRS issued FPAAs to Sirius determining similar
adjustments to Sirius’ 2015 and 2016 net earnings from self-employment.
For 2015, the Commissioner determined that the net earnings from self-
employment should be increased from $0.00 to $7,372,756.00. For 2016, the
Commissioner determined that the net earnings from self-employment
should be decreased by $490,291.00. On September 17, 2021, Sirius filed a
second Tax Court petition seeking readjustment of the 2015 and 2016
adjustments. The two petitions were consolidated for consideration. 5
On November 28, 2023, the Tax Court issued the precedential
opinion of Soroban Capital Partners, LP v. Commissioner, 161 T.C. 310 (2023),
which effectively resolved the issue here. 6 The parties filed multiple
stipulations of fact and issues both before and after Soroban was decided.
Following Soroban, the parties stipulated that Sirius’ partners are not limited
partners if evaluated under a functional analysis test, as discussed later
_____________________
5
As Sirius acknowledges, the adjustments do not represent the amount of taxes
that would be owed. The adjustments would be allocated to each partner for purposes of
determining the partner’s net earnings from self-employment subject to taxation.
6
As discussed herein, the Tax Court also reaffirmed its Soroban decision in the
similar challenge of Denham Capital Management LP v. Commissioner, T.C.M. 2024-114,
2024 WL 5200039 (Dec. 23, 2024). See also Soroban Capital Partners LP v. Commissioner,
T.C.M. 2025-52, 2025 WL 1517432 ( May 28, 2025).
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herein. However, Sirius maintained that Soroban was incorrectly decided,
arguing that the proper test under § 1402(a)(13) was whether the partners are
limited partners under the applicable state law. As a result, Sirius asked the
Tax Court to enter a decision under Tax Court Rule 251 in favor of the
Commissioner so that it could appeal the holding in Soroban. On February
20, 2024, the Tax Court issued decisions upholding the adjustments. The
Tax Court also denied each party’s pending summary judgment motions as
moot. Sirius appealed. The panel majority vacated and remanded, while I
dissented. See Sirius Sols., L.L.L.P. v. Comm’r of Internal Revenue, 165 F.4th
374 (5th Cir. 2026). The panel majority now withdraws that prior opinion on
rehearing but still vacates and remands. Again, I dissent. This opinion tracks
portions of my previous dissent because the majority partially corrected
course. See id. at 388 (Graves, J., dissenting).
II.
This court reviews a decision of the Tax Court under the same
standard that is applied to district court decisions. Green v. C.I.R., 507 F.3d
857, 866 (5th Cir. 2007). “Findings of fact are reviewed for clear error and
issues of law are reviewed de novo. Clear error exists when this court is left
with the definite and firm conviction that a mistake has been made.” Id.
(internal citation omitted).
III.
The issue on appeal is whether the Tax Court erred in its
interpretation of “limited partner, as such” in 26 U.S.C. § 1402(a)(13),
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which was enacted in 1977. Section 1402(a)(13) excludes from net earnings
of self-employment 7 the following:
[T]here shall be excluded the distributive share of any item of
income or loss of a limited partner, as such, other than
guaranteed payments described in section 707(c) to that
partner for services actually rendered to or on behalf of the
partnership to the extent that those payments are established
to be in the nature of remuneration for those services.
26 U.S.C. § 1402(a)(13).
Section 707(c) states:
To the extent determined without regard to the income
of the partnership, payments to a partner for services or the use
of capital shall be considered as made to one who is not a
member of the partnership, but only for the purposes of section
61(a) (relating to gross income) and, subject to section 263, for
purposes of section 162(a) (relating to trade or business
expenses).
26 U.S.C. § 707(c). Section 61(a) generally defines gross income. 26 U.S.C.
§ 61(a). Section 162(a) sets out allowable deductions for ordinary and
necessary trade or business expenses. 26 U.S.C. § 162(a). Section 263 states
which capital expenditure deductions are not allowed. 26 U.S.C. § 263.
The Tax Court previously considered the application of § 1402(a)(13)
in the context of other entities. 8 In Renkemeyer, Campbell & Weaver v.
_____________________
7
Section 1402(a) also defines net earnings from self-employment. 26 U.S.C.
§ 1402(a).
8
The majority fails to discuss or distinguish any of these cases preceding Soroban
or the impact of this decision on those cases. Regardless of the entity, the meaning of
“limited partner, as such” pursuant to § 1402(a)(13) applied by the Tax Court has not
changed since Renkemeyer in 2011. Presumably, the majority is somehow “rejecting” all of
these cases as well.
16
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Commissioner, 136 T.C. 137 (2011), the Tax Court considered the issue of
whether income allocated to partners of a law firm organized as a limited
liability partnership (LLP) under the laws of Kansas was subject to self-
employment tax. 9 136 T.C. at 138. In doing so, the court explained the
history behind § 1402(a)(13) and applied the principles of statutory
construction to ascertain Congress’ intent. Id. at 148-150. Because the
statute does not define “limited partner,” the Tax Court looked to its
ordinary meaning and legislative history. Id. at 149-150. The court concluded
that:
The insight provided reveals that the intent of section
1402(a)(13) was to ensure that individuals who merely invested
in a partnership and who were not actively participating in the
partnership’s business operations (which was the archetype of
limited partners at the time) would not receive credits toward
Social Security coverage. The legislative history of section
1402(a)(13) does not support a holding that Congress
contemplated excluding partners who performed services for a
partnership in their capacity as partners (i.e., acting in the
manner of self-employed persons), from liability for self-
employment taxes.
Id. at 150 (emphasis added). The Tax Court also concluded that the LLP
partners were not “limited partners” for purposes of § 1402(a)(13) because
it was “clear that the partners’ distributive shares of the law firm’s income
did not arise as a return on the partners’ investment and were not ‘earnings
which are basically of an investment nature.’” Id. The court instead found
that “the distributive shares arose from legal services they performed on
behalf of the law firm” and that they were “subject to self-employment
taxes.” Id.
_____________________
9
Interestingly, the firm’s practice emphasized Federal tax law. 136 T.C. at 138.
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About six years later, the Tax Court considered the case of Hardy v.
Commissioner, 113 T.C.M. (CCH) 1070 (Jan. 17, 2017). Dr. Stephen P. Hardy
was a plastic surgeon who owned a minority interest in one of several surgery
centers in which he performed surgeries. Id. at * 1, 4-7. However, Hardy had
no day-to-day management or operational responsibilities in the center,
which was organized as a limited liability company (LLC) in Montana. Id.
The patients were responsible for choosing the location where the surgery
would be performed, and the center or hospital billed separately for the use
of the facility. Id. at * 4, 6. In relevant part, the issue was whether Hardy’s
income from the center was passive, which would allow the deduction of
passive activity loss for the year in which the loss was incurred. Id. at * 2.
Applying the Renkemeyer functional analysis test, the Tax Court repeatedly
referenced the fact that the surgeon was a passive investor and found his
income from the surgery center was passive because he “received the
distributions as a limited partner acting in his capacity as an investor.” Id. at
** 2, 30-32.
Later that year, the Tax Court again applied the functional analysis
test and found that member-managers of a law firm organized as a
professional limited liability company (PLLC) under Mississippi law were
not limited partners for purposes of the self-employment income exclusion.
See Castigliola v. Commissioner, 113 T.C.M. (CCH) 1296, ** 3, 14 (Apr. 12,
2017); see also 26 U.S.C. 1402(a)(13). Acknowledging that the exact meaning
of limited partner may vary slightly by state, the court considered the
Uniform Limited Partnership Act (ULPA) of 1916, the Revised Uniform
Limited Partnership Act (RULPA) of 1976, and amendments added in 1976
and 1985. Id. at 10. Specifically, the Tax Court quoted section 7 of ULPA
(1916), as follows: “A limited partner shall not become liable as a general
partner unless, in addition to the exercise of his rights and powers as a limited
partner, he takes part in the control of the business.” Id. at * 10. The court
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then turned to section 303(a) of RULPA, which it noted that Mississippi had
adopted with some modifications, for the proposition that “a limited partner
would lose limited liability protection if in addition to the exercise of his rights
and powers as a limited partner, he takes part in the control of the business.”
Id. at 10-11 (internal marks and citation omitted). The court also noted in its
analysis that, “[b]efore the members organized the PLLC, they operated as
a general partnership; and there is no evidence that organizing as a PLLC was
accompanied by any change in the way they managed the business,” and
ultimately concluded that the partners “may not exclude any part of their
distributive shares from self-employment income under section
1402(a)(13).” Id. at ** 13-14.
In 2023, the Tax Court considered Soroban, discussed more fully
below, concluding that the Renkemeyer functional analysis test likewise
applies in determining whether a limited partner in a state law limited
partnership is entitled to the limited partner exception under § 1402(a)(13).
161 T.C. at 318-19. Following Soroban, the Tax Court reaffirmed its decision
in Denham Capital, T.C.M. (RIA) 2024-114 (Dec. 23, 2024). In Denham
Capital, the Tax Court also reiterated the following:
Our caselaw has continuously reinforced our position
that determinations under section 1402(a)(13) require a factual
inquiry into how the partnership generated the income in
question and the partners’ roles and responsibilities in doing
so. Petitioner’s position that the Partners are eligible for the
limited partnership exception merely because the Partners
complied with formalities prescribed by state partnership law
does not comport with our caselaw.
Id. at * 14 (citing Renkemeyer, 136 T.C. at 150; Castigliola, 113 T.C.M. 1296,
at *7-14; Hardy, 113 T.C.M. 1070, at **29-32).
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Soroban Capital Partners LP was a Delaware limited partnership
composed of a general partner and limited partners. Soroban, 161 T.C. at 311.
For 2016 and 2017, Soroban reported as net earnings from self-employment
its guaranteed payments to its limited partners plus the general partner’s
share of ordinary business income. Id. The Commissioner later adjusted
Soroban’s net earnings from self-employment by increasing it to include the
limited partners’ share of ordinary business income on the basis that they
were limited partners in name only. Id.
In discussing the exclusion under section 1402(a)(13), the Tax Court
reiterated that, “Congress intended for this limited partner exception to
apply to earnings of an investment nature. To determine whether earnings
allocated to limited partners are of an investment nature necessarily requires
an inquiry into the functions and roles of the limited partners.” Id. at 312.
The Tax Court found that the “limited partner” exception does not apply to
a partner who is limited in name only. Id. at 320. “If Congress had intended
that limited partners be automatically excluded, it could have simply said
‘limited partner.’ By adding ‘as such,’ Congress made clear that the limited
partner exception applies only to a limited partner who is functioning as a
limited partner.” Soroban, 161 T.C. at 320. The Tax Court also found that:
Petitioner’s reliance on legislative history to overcome
the plain meaning of the statute is unavailing. To the extent
legislative history might be used to shed light on the meaning
of the phrase “limited partner, as such,” it confirms our
conclusion. Congress enacted section 1402(a)(13) to exclude
earnings from a mere investment. It intended for the phrase
“limited partners, as such” used in section 1402(a)(13) to refer
to passive investors.
Id.
Consistent with all of the cases cited above, the Tax Court said that it
must engage in an analysis of “the functions and roles of the limited partners
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in the partnership to determine whether their shares of earnings are excluded
from net earnings from self-employment.” Id. at 322-25. The Tax Court also
found that such a determination is more appropriate at the partnership level
than at the partner level. Id. at 323-24 (citing Treas. Reg. § 301.6231(a)(3)-
1(b) and 26 U.S.C. § 6221). Thus, the Tax Court had jurisdiction.
Sirius asserts here that the Tax Court erred by interpreting “limited
partner, as such” in Soroban to mean a partner functioning as a passive
investor, and by not interpreting it as meaning a state-law limited partner.
Sirius also argues that the Tax Court’s interpretation of “as such” somehow
renders “the carve-out for ‘guaranteed payments’ meaningless.” Sirius
asserts that “limited partner” is commonly defined as a partner in a state-law
limited partnership with limited liability, and both the IRS and Social
Security Administration have issued contemporaneous guidance defining it
as such. Sirius cites various dictionaries for what it asserts is the common or
ordinary meaning of “limited partner,” as does the majority. However,
much of this argument misses the mark.
Sirius offers only select portions of various definitions to form an
oversimplified definition of “limited partner” to support its result. But those
portions must be considered in context. For example, the Webster’s Third
New International Dictionary definitions for “limited partner” from 1971
and 1981 state only that liability “is usu[ally] limited” and then add a second
limitation: “providing he has not held himself out to the public as a general
partner and has complied with other requirements of law.” Webster’s
Third New International Dictionary 1313 (1971) and (1981)
(emphasis added). The Black’s Law Dictionary definition for “limited
partnership” also states “limited partners who contribute capital and share
in profits but who take no part in running business and incur no liability with
respect to partnership obligations beyond contribution.” Black’s Law
Dictionary (5th ed. 1979) (emphasis added). The 1968 version likewise
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uses language clearly describing a passive investor for “special partners”
under the “limited partnership” paragraph of “partnership,” as opposed to
general or ordinary partners “by whom the business is conducted.”
Black’s Law Dictionary (4th ed. rev. 1968). Black’s Law
Dictionary (4th ed. 1968)
The majority acknowledges that the Black’s Law Dictionaries from
1968 and 1979 “are not outliers,” and goes on to cite various other sources in
its purported quest to determine the “ordinary meaning” of “limited
partner.” In doing so, the majority cites the ULPA, RULPA, various law
review articles, and “[c]ontemporaneous treatises,” all of which effectively
state that a limited partner must be only a passive investor. Despite all of that
authority, the majority concludes that, “in 1977, the ordinary public meaning
of ‘limited partner’ included a partner who did not play a significant role in
managing or running the business.” The majority further concludes that,
“[i]n adopting this reading, we reject the Tax Court’s Soroban decision.” I
disagree for the reasons discussed below.
The majority cites Plasteel Products Corporation v. Helman, 271 F.2d
354, 356 (1st Cir. 1959), and states:
The Plasteel court recognized that if a partner controlled
partnership affairs, the partner was no longer functioning as a
limited partner. Ibid. But it suggested a limited partner could
have lesser involvement. Ibid. For example, it noted that a
limited partner could sign the partnership agreement as a
general partner without losing his limited-partner status. Ibid.
(citing Rathke v. Griffith, 218 P.2d 757, 757 (Wash. 1950)).
While Plasteel turned on state law, not federal tax law, it
nonetheless formed part of the backdrop against which
Congress enacted § 1402(a)(13) in 1977. And that backdrop
suggests some participation is allowed, so long as the partners
do not exercise control over the business. Contra post, at 23
(arguing that Plasteel does not allow for such a distinction).
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However, the majority’s statements regarding Plasteel are
unsupported. Plasteel was an action under state law, as the majority
acknowledges, to recover a $6,555.29 for merchandise sold and delivered to
the partnership. Id. at 355. Various defendants, including both general and
limited partners, moved for summary judgment. Id. The district court
granted the motions, in relevant part, and the plaintiff appealed. That case
involved a limited partnership agreement between a general partner, who
contributed services but no cash, and limited partners, who were described
as trustees of three trusts. Id. Further, the agreement named the father of
the beneficiaries of the first trust as the general sales manager. The First
Circuit said that the question was whether the appellees/limited partners
were “liable as general partners as a result of their execution of the December
1955 agreement,” which named a general sales manager. The First Circuit
specified that, “the only conduct relied on to charge appellees as general
partners is the signing of the limited partnership agreement.” Id. at 356. The
court then concluded that the limited partners took no part in the control of
the business under the Massachusetts ULPA, which said: “A limited partner
shall not become liable as a general partner unless, in addition to the exercise
of his rights and powers as a limited partner, he takes part in the control of
the business.” Id. at 355-56 (citing Mass. Gen. Laws Ann. c. 109, § 7). The
Plasteel court said nothing to indicate that some amount of control of the
business could be permissible, as the majority suggests. 10
Moreover, “federal courts,” including this circuit, have long used
“passive investor” in evaluating limited partners in a variety of cases. See
_____________________
10
The majority likewise misconstrues my disagreement with its characterization of
Plasteel. I simply disagree with the majority that what is unsaid in Plasteel, an out-of-circuit
case dealing with state law, somehow overcomes all of the acknowledged authority here
and supports reversing the Tax Court.
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Masel v. Villarreal , 924 F.3d 734, 744-46 (5th Cir. 2019); Nunez v. Robin, 415
F. App’x 586, 587 at n. 2, 591 (5th Cir. 2011); Steinhardt Group Inc. v. Citicorp,
126 F.3d 144, 145, 155 (3d Cir. 1997); Marin TV Servs. Partners, Ltd. v. F.C.C.,
993 F.2d 261, 262 (D.C. 1993); Maritan v. Birmingham Prop., 875 F.2d 1451,
1452, 1459 (10th Cir. 1989); Levin v. C.I.R., 832 F.2d 403,406-08 (7th Cir.
1987) (citing 87 T.C. 698, 725-26 (1986)); Frazier v. Manson, 651 F.2d 1078,
1081 (5th Cir. Unit A July 1981); Goodman v. Epstein, 582 F.2d 388, 406 n. 51
(7th Cir. 1978). 11 See also Renkemeyer, 136 T.C. at 147-48; Howell v. C.I.R.,
104 T.C.M. (CCH) 519, *4, 6 (2012).
The majority dismisses these cases, first chiding the Tax Court that
“federal courts decide relevant issues of law,” and then quoting “Buenrostro-
Mendez v. Bondi, 166 F.4th 494, 506 (5th Cir. 2026), for the following: “And
even ‘years of consistent practice cannot vindicate an interpretation that is
inconsistent with a statute’s plain text.’” Notwithstanding the majority’s
failure to identify any portion of the plain text which supports its decision to
reverse the tax court, as discussed below, the majority misconstrues
Buenrostro-Mendez. The selected portion of the statement quoted by the
majority was a reference to the government’s longstanding practice. In
context, this court said: “While that is true, the government’s past practice
has little to do with the statute’s text. The text says what it says, regardless
of the decisions of prior Administrations. Years of consistent practice cannot
vindicate an interpretation that is inconsistent with a statute’s plain text.”
Unlike the statute in that immigration case, the statute here does not specify
what the majority claims, nor does it define limited partner. Moreover, I am
_____________________
11
To reiterate, these cases are being cited for their longstanding use of “passive
investor” in evaluating limited partners, not for any interpretation of “different statutes”
or their corresponding facts, despite the majority’s attempted deflection while failing to
dispute my point.
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not referencing the government’s longstanding practice, I am referencing
judicial opinions in which “federal courts” across the country have used
“passive investor” to analyze limited partners, consistent with the statutory
text, common usage, all of the definitions, and other authority.
Regardless, the issue is not simply the definition of “limited partner.”
Instead, the issue is what constitutes a “limited partner, as such” for
purposes of section 1402(a)(13). Sirius acknowledges as much with its
additional arguments that the Tax Court misinterpreted the phrase “as
such,” as discussed herein. The majority likewise acknowledges this but
then concludes that the Tax Court erroneously “made no attempt to ground
its rule in the original public meaning of ‘limited partner’ in 1977.” The
majority fails to establish any basis for such a conclusion or any distinction
between “passive investor” and “limited partner, as such.”
The majority also states that “the plain text of the statute points
towards” a conclusion that “some participation is allowed, so long as the
partners do not exercise control over the business.” But the majority fails to
identify the portion of the statute’s plain text here which “points towards”
the conclusion that partners may participate “so long as the partners do not
exercise control over the business,” or so long as the partner “did not play a
significant role in managing or running the business.” 12 Again, the statute
does not define “limited partner.” But, even if it did, that would not
establish any error in the Tax Court’s definition of “limited partner, as
such.” That is because “federal courts” have long defined a limited partner
as a “passive investor,” and that is consistent with the functional analysis
test, as discussed herein. The parties here filed multiple stipulations of facts
_____________________
12
Or any other slight variations the majority may use in its opinion, although
differing or contradictory definitions only add unnecessary confusion.
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and settled issues—before and after Soroban. Those stipulations included a
joint Stipulation of Settled Issues filed on December 19, 2023, in which the
parties agreed that Sirius’ partners are not limited partners if evaluated under
a functional analysis test as set out in both Soroban and Renkemeyer, discussed
previously herein and decided in 2011. The majority fails to discuss
Renkemeyer or the impact of its decision on Renkemeyer.
Additionally, the majority’s position on a functional analysis is both
contradictory and unclear. It does not appear that the majority actually takes
issue with the Tax Court’s definition of “limited partner, as such.” Instead,
the majority appears to be improperly attempting to define “passive
investor” and taking issue with the application of a functional analysis test,
while simultaneously essentially arguing that a functional analysis test allows
for some level of participation. But the majority is also unable to point to any
evidence that the level of control or participation here was not as significant
as the parties stipulated. There is little clarity as to the intended effect of the
majority’s decision and its “rejection” of Soroban. It is clear, however, that
the majority has created an indefensible, illogical, and illegal loophole which
allows millions of dollars in net earnings from self-employment to go untaxed
as earnings even though that is exactly what they are.
Based on my de novo review, and because the majority ignores the
various definitions it cites, overlooks applicable cases, misconstrues the plain
text of the statute and Plasteel, and fails to establish that any authority
supports its conclusion, I would affirm the Tax Court. Thus, I respectfully
dissent.
26