Fifth Circuit Knows a Limited Partner When Reads It (1/24/26; 1/20/26)

Most readers of this blog will already have heard of or even read the opinions (majority and dissenting) in Sirius Solutions, L.L.L.P v. Commissioner, ___ F.4th ___ (5th Cir. 2025), CA5 here and GS here, Basically, the majority held that the limited partner exception in § 1402(a)(13) does not apply to earnings allocated to a nominal limited partner. Bottom-line that interpretation means that partners providing services to a partnership can escape the Social Security and Medicare tax on income they allocate to their limited partner interests even though that income is really the return on their personal services. The Tax Court held otherwise in the Tax Court phase of Sirius, based on Soroban Capital Partners LP v. Commissioner, 161 T.C. 310 (2023).

I do not plan to get deeply into the merits of the majority and dissenting opinions. Two reasonable articles are Jon Endean, Reflections on the Fifth Circuit’s Ruling on Limited Partner Exception (TaxProf Blog 1/21/26), here; and Maureen Leedy, Fifth Circuit Reverses Tax Court on Limited Partner Self-Employment Tax (ThomsonReuters 1/21/26), here.

On the merits, I do say that, it seems to me, the difference between the majority and the minority is that the majority is not practical in being a faithful agent to Congress and the minority, like the Tax Court, is more practical in being the faithful agent.

JAT Comments:

1. I think it relevant, at least at the margins, that the two judges in the majority are Trump appointees and the judge in the minority is an Obama appointee.

2. The differences in statutory interpretation driven by ideologies and, for the majority, simplisms is stark. A good example is the majority’s claim “legislative history is generally of dubious value in statutory interpretation” and the follow-through that “where, as here, textual arguments yield a clear answer, judges must stop.” (Slip Op. 19; cleaned up with internal quotations marks and citations omitted.) I think originalists have beat that horse beyond its ability to persuade; why is not Congress’ view of the legislation it enacted relevant to interpreting the legislation? If one takes the view, as I do, that interpreting the law is an exercise like fact-finding (see Chevron, Loper Bright, and Statutory Ambiguity (Federal Tax Procedure Blog 1/8/26; 1/9/26), here)), then why would not relevant evidence be considered for whatever persuasive value it might have?

I suggest that the term “limited partner” is not as clear on its face as the majority claims—that the term limited partner is like the mythical pornography that one knows it when one sees it. Life is not that simple, and that “limited partner” requires some contextual interpretation in order to be a faithful agent to Congress.

Moreover, going to the legislative history, the majority claims that “the legislative history is at most ambiguous.” (Slip Op. 20.) If, as Loper Bright claims, courts can always interpret to the “best meaning” of statutes, why can’t they interpret to the best meaning of legislative history to inform the meaning of the statute? And, of course, the dissent and the majority in Soroban Capital Partners do a creditable job of finding meaning from the legislative history.

On the subject of Loper Bright, both the majority and dissent finds something in Loper Bright to talk/speculate about. (See majority at Slip Op. 7, 10, 11, 12, and dissent at 42 (see particularly fn 13 & 14).)

3. I doubt that the SG will authorize a petition for certiorari in Sirius without a split with one or more other Circuits. The issue is currently on appeal to the First Circuit (Denham Capital v. Commissioner, T.C. Memo. 2024-114, on appeal to the First Circuit) and Second Circuit (Soroban Capital Partners, on appeal to the Second Circuit). If a conflict develops, the taxpayer will surely petition for certiorari, with the SG likely to acquiesce, and the Supreme Court may take the case and resolve the specific issue. That issue is fairly limited; even with a goofy Supreme Court resolution to a single (dare I say “best”) interpretation, the resolution alone may not be that significant because Congress can change it (in theory). But the crazies on the Supreme Court may flail around to create further confusion on the topic of statutory interpretation. See the poster children of blinkered Supreme Court resolutions: Frank Lyon Co. v. United States, 435 U.S. 561 (1978); and Gitlitz v. Commissioner, 531 U.S. 206 (2001). Actually Gitlitz may be more like the Fifth Circuit’s Sirius majority opinion. 

4. (Added 1/25/27 at 12:05 pm) I uploaded the Sirius opinion to NotebookLM, an AI tool, and asked the following: Summarize the approaches to statutory interpretation by the majority and the dissenter. The return I received was:

The primary disagreement between the majority and the dissenter centers on whether the term "limited partner" in 26 U.S.C. § 1402(a)(13) refers to a legal status defined by limited liability or a functional role defined as a passive investor.

The Majority Approach: Textualism and Limited Liability

The majority, led by Judge Oldham, employs a textualist approach, arguing that the statute should be interpreted according to its ordinary meaning at the time of enactment in 1977.

• Dictionary Definitions: The majority relies heavily on contemporaneous dictionaries from the 1970s and 80s, noting that the "touchstone" of a limited partner in every definition was limited liability—being responsible for partnership debts only up to the amount of capital contributed.

• Agency Consistency: They point to over 40 years of consistent interpretations from the IRS and the Social Security Administration (SSA), both of which historically defined "limited partner" based on financial liability rather than the level of activity within the business.

• Rejection of Functional Tests: The majority rejects the IRS’s "newly adopted" functional analysis, arguing that if Congress wanted to exclude only "passive investors," it could have used that specific term as it did in other parts of the Tax Code.

• Interpretation of "As Such": They interpret the phrase "limited partner, as such" as a recursive term meant to clarify the tax status of individuals who hold dual roles (acting as both a limited and a general partner in the same entity).

The Dissenting Approach: Functional Analysis and Legislative Intent

The dissenter, Judge Graves, advocates for a functional analysis, arguing that the tax exemption was intended specifically for those acting as passive investors.

• Contextual Meaning: The dissenter argues that dictionary definitions of the era also frequently included language describing limited partners as those who "take no part in running business".

• Legislative History: Judge Graves relies on a 1977 House Report to argue that Congress intended to close a loophole where investors could "buy" Social Security coverage without performing actual work.

• The "As Such" Qualifier: To the dissenter, the words "as such" are not redundant; they signal that a partner must be functioning in the capacity of a limited partner (i.e., a passive investor) to qualify for the exclusion.

• Anti-Surplusage Canon: The dissent argues that the majority’s view violates the canon against surplusage by reading the phrase "as such" out of the statute, whereas a functional reading gives every word meaning.

Comparison of Interpretive Tools

Feature	Majority Approach	Dissenting Approach
Primary Focus	Statutory Text and ordinary meaning.	Legislative Intent and functional role.
Key Characteristic	Limited Liability.	Passive Investment.
Use of History	Viewed as "dubious" if text is clear.	Essential to understanding the "loophole" Congress meant to fix.
Agency Deference	Cites longstanding consistent guidance as "especially useful".	Argues tax form instructions are qualifiers, not definitive interpretations.

5. (added 1/27/26 6:30pm): I have moved and expanded a comment appearing in this paragraph 5 to a separate blog entry: Fifth Circuit Claims a Pro-Taxpayer Canon When the Court Should have Interpreted the Exemption in the Statute Fairly or Applied the Anti-Taxpayer Canon (Federal Tax Procedure Blog 1/27/26), here.

6. (added 1/30/26 1:30pm): For a good discussion of the merits of the Fifth Circuit's majority and dissenting opinions in Sirius, see this article by Robert S. Horwitze, titled descriptively: Fifth Circuit Hands the Taxpayer a Win in the First Appeals Court Case Interpreting “Limited Partner” for Purposes of Self-Employment Tax,  here.