In Sirius Solutions, L.L.L.P. v. Commissioner,1 the Fifth Circuit rejected the passive investor functional analysis test applied by the Tax Court in this case and Renkemeyer, Campbell & Weaver, LLP v. Commissioner,2 as well as the analysis adopted by the IRS and the Tax Court in similar pending cases such as Soroban Cap. Partners LP v. Commissioner,3 and Denham Cap. Mgmt LP v. Commissioner.4
At issue is the meaning of the term “limited partner” for the purposes of computing self-employment tax (“SECA tax”). Code Section 1402(a)(13)5 provides that the distributive share of income (or loss), other than guaranteed payments, of a limited partner may be excluded from the computation of net earnings to which SECA tax is applied.
Applying principles of statutory interpretation concerning the plain and ordinary meaning of the term “limited partner” and the U.S. Supreme Court’s decision in Loper Bright, the Fifth Circuit vacated and remanded Sirius to the Tax Court for further proceedings consistent with its opinion. Previously, the Tax Court interpreted the meaning of limited partner for SECA tax purposes as referring only to passive investors, and therefore required a functional analysis of the partner’s attributes and activities to determine whether a partner was functioning as a limited partner and was a passive investor.
I. What is the history and importance of Code Section 1402(a)(13)?
SECA tax applies to net earnings from self-employment.6 A general partner’s share of partnership income or loss is generally included in the calculation of SECA tax, whereas a limited partner’s share of partnership income (or loss) is generally excluded from the calculation of SECA tax. Regardless of a partner’s status as a general or limited partner, payments to a partner for services rendered remain included in the calculation.7
Due in part to perceived abuses by investor limited partners (performing no services) claiming benefits under the Social Security program on account of their shares of partnership income, Congress enacted this limited partner carveout in the Social Security Amendments of 1977,8 which added a sister provision to the Social Security Act.9 Following enactment, the IRS and SSA issued guidance on the provision.
“[F]or well over 40 years, the IRS’s instructions made clear that the term ‘limited partner’ in § 1402(a)(13) did not have some hidden, narrower meaning from the rest of the Tax Code.”10 Specifically, the instructions stated that “[l]imited partners may treat as self-employment income only guaranteed payments for personal services actually rendered to the partnership.”11 Subsequent instructions materially conformed to the 1978 instructions; in 2022, the IRS added a definition of the term “limited partner” by reference to Code Section 1402(a)(13).12
In 1980, the SSA promulgated a rule, still in force as of the issuance of Sirius, stating that “[y]ou are a ‘limited partner’ if your financial liability for the obligations of the partnership is limited to the amount of your financial investment in the partnership.”13 These agencies’ guidance frame the administration of Code Section 1402(a)(13) and what it means to be a “limited partner.”
II. How did the Fifth Circuit determine the meaning of “limited partner” for purposes of Code Section 1402(a)(13)?
Sirius Solutions, L.L.L.P. (“Sirius”) is a Delaware limited liability limited partnership that operates a business consulting firm throughout Texas and England.14 For tax years 2014-2016, Sirius had nine limited partners and one general partner, Sirius GP.15 Sirius reported millions in ordinary business income over the three tax years and allocated all the income to its limited partners.16 Applying the “limited partner exception,”17 Sirius excluded these allocations from its calculation of net earnings from self-employment.18 The IRS rejected Sirius’s position and proposed SECA tax adjustments.19 The Tax Court agreed with the IRS based on the formalism analysis laid out in Soroban Cap. Partners LP v. Commissioner, which required passivity to be considered a “limited partner” for purposes of Code Section 1402(a)(13).20
On appeal, the Fifth Circuit rejected the Tax Court’s functionalism in favor of formalism.
First, the court held that the plain language of Code Section 1402(a)(13) makes clear that the definition of a “limited partner” turns on limited liability, not the partner’s level of activity in the business.21 This was supported by the IRS’s and SSA’s guidance, neither of which required a “limited partner” to perform services.22
Second, the court found that the Tax Court misconstrued the phrase “as such” to require a limited partner to act as a limited partner in a passive capacity.23 Relying on Black’s Law Dictionary (5th ed. 1979), the Fifth Circuit determined that the phrase “‘[a] limited partner, as a limited partner’ is merely recursive”,24 i.e., a limited partner is a partner functioning as a limited partner, with no passivity requirement. In this respect, the phrase “as such” offers clarity for dual-status partners, i.e., individuals who serve as both a limited partner and a general partner in the same partnership.25
Third, the Fifth Circuit emphasized that its reliance on state law is not inappropriate: although the definition of a term used in a federal statute “is ultimately a question of federal law.”26 According to the Court, the definition turns on state law because it is state law that creates the legal interests underlying the issue.27
Fourth, the legislative history does not support an alternative definition of a “limited partner”.28 In addition, the Court stated that “legislative history is ‘generally of dubious value in statutory interpretation’”29 especially “‘[w]here as here,’ textual arguments ‘yield[] a clear answer, judges must stop.’”30 Because contemporaneous dictionary definitions and guidance clarify the plain meaning of the text, the court did not adopt a legislative history analysis.31
Notably, the Fifth Circuit cited recent Supreme Court precedent from Loper Bright Enters. v. Raimondo32 in its rejection of the IRS interpretation of the meaning of a “limited partner” for the purposes of the SECA tax computation. In Loper Bright, the Court recognized that it is the province of the courts to “exercise independent judgment in determining the meaning of statutory provisions.”33 Therefore, it “remains the responsibility of the court to decide whether the law means what the agency says.”34 Courts may consider agency interpretations to be “‘especially useful in determining the statute’s meaning’ if those interpretations are ‘issued contemporaneously with the statute at issue, and … have remained consistent over time.’”35
III. What do limited partners need to know about Sirius?
For partnerships organized as state-law limited partnerships within the Fifth Circuit (i.e., Louisiana, Mississippi, and Texas), Sirius restores a predictable rule aligned with limited liability, not the open-ended, multi-factor functional analysis of a partner’s day-to-day involvement in the partnership. A limited partner will be able to exclude its distributive shares of partnership income not attributable to guaranteed payments for services rendered from its net earnings in the SECA tax calculation, which is consistent with the IRS’s and SSA’s long-standing instructions and guidance. But Sirius also warns of possible abrupt agency shifts and flags fair notice concerns. Sirius’ reliance on contemporaneous dictionary definitions and agency guidance suggests heightened scrutiny of attempts to redefine terms through sub-regulatory instructions.
Because the case was vacated and remanded, taxpayers should continue to monitor how the Tax Court applies the limited partner exception under Code § 1402(a)(13), especially in light of Denham Cap. Mgmt. LP, which is currently on appeal to the First Circuit. Still, Sirius marks a significant course correction specifying that “limited partner” means, at least for certain partnerships in the Fifth Circuit, a partner in a state-law limited partnership with limited liability.
Further, Sirius represents another significant taxpayer court victory following Loper Bright. Where agency guidance departs from the plain meaning of the Code, courts appear to be more willing to exercise independent judgment, as well as principles of statutory interpretation, to determine the best reading of the statute.
1 No. 24-60240 (5th Cir. Jan. 16, 2026).
2 136 T.C. 137 (2011).
3 T.C. Memo. 2025-52 (2025).
4 T.C. Memo. 2024-114 (2024), on appeal, No. 25-1349 (1st Cir.).
5 References to the Code throughout this article refers to the Internal Revenue Code of 1986, as amended.
6 Code Section 1402(a).
7 Code Section 707(c) (“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).”).
8 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. 95-16, § 313(b), 91 Stat. 1509, 1536.
9 See 42 U.S.C. § 415.
10 Id. at 9.
11 Id. (quoting Internal Revenue Service, Package X: Informational Copies of Federal Income Tax Forms 145 (1978)) (emphasis in original).
12 Id. at 9-10 (citing Internal Revenue Service, Instructions for Form 1065, at 3, 39 (2022)).
13 Id. at 11 (quoting Federal Old-Age, Survivors, and Disability Insurance; Employment, Wages, Self-Employment, and Self-Employment Income, 45 Fed. Reg. 20074, 20090 (Mar. 27, 1980) (codified at 20 C.F.R. § 404.1080(b)(3)).
14 Id. at 3.
15 Id.
16 Id. at 4.
17 Code § 1402(a)(13)
18 Id.
19 Id.
20 Id. (citing 161 T.C. 310 (2023)).
21 Id. at 5-6.
22 See Section I, supra.
23 Sirius, No. 24-60240 at 14 (citing Soroban, 161 T.C. 310).
24 Id. at 15 (first citing Black’s Law Dictionary (5th ed. 1979); and then citing Bryan A. Garner, Garner’s Modern English Usage 873 (4th ed. 2016)).
25 Id. at 16.
26 Id. (quoting United States v. Craft, 535 U.S. 274, 278 (2002)).
27 Id. at 16-17.
28 Id. at 19-20.
29 Id. at 19 (quoting Deanda v. Becerra, 96 F.4th 750, 763 (5th Cir. 2024)).
30 Id. (quoting Food Mktg. Inst. v. Argus Leader Media, 588 U.S. 427, 436 (2019) ([ ] in original).
31 Id. at 20.
32 603 U.S. 369 (2024).
33 Id. at 394.
34 Id. at 392 (quoting Perez v. Mortgage Bankers Ass’n, 575 U.S. 92, 109 (2015)).
35 Sirius, No. 24-60240 at 7 (quoting Loper Bright Enters., 603 U.S. at 394).
