Second Circuit Affirms the Tax Court in Holding Limited Partners Must Really Be Limited Partners (9/17/26)

In Soroban Capital Partners LP v. Commissioner, ___ F.4th ___ (2d Cir. 9/17/26), CA2 here, CL here, and GS [to come], the Panel (Judges Calebresi, Chin , and Merriam, with opinion by Chin) affirmed the Tax Court’s decision holding that persons nominated as limited partners who exercised managerial control did not qualify for the limited partner exception to the Medicare tax. Specifically, the opinion states its holding (Slip Op. 30):

We hold that "limited partner," as used in § 1402(a)(13), means a partner who, in addition to having limited liability, does not run, manage, or control the partnership's business.10 We arrive at this conclusion based on three sources that provide guidance as to the meaning of the term as used here: (1) the text of the statute and its ordinary meaning in 1977, when § 1402(a)(13) was enacted; (2) the statute's surrounding text and structure; and (3) the statute's legislative history and historical context.

This is a major opinion simply because the scam it shoots down was so egregious. I don’t feel that I can add anything meaningful to the substantive opinion. To the extent readers may be interested in my opinion, I think it is correct. I will make some comments that, like many of my blogs, will address picky issues in the opinion.

JAT Comments:

1. Soroban follows on the Fifth Circuit’s recent revised opinion in Alain, L.L.L.P. v. Commissioner, ___ F.4th ___ (5th Cir. 8/12/26), discussed (with links) in Fifth Circuit on Rehearing Corrects on the Limited Partner Gambit to Avoid Tax (Federal Tax Procedure Blog 8/13/26; 8/20/26), here. Alain is somewhere in the middle between a taxpayer loss and a taxpayer win (but closer to a taxpayer loss), remanding to the Tax Court to apply whatever the Tax Court can ferret out of the panel majority opinion in Alain opinion. As I said in the blog, “I am not sure that the panel majority formulation materially differs from the Tax Court’s functional analysis approved by the Tax Court.” Soroban discusses Alain (Slip Op. 56-57) including the following footnote):

n16 The Fifth Circuit explicitly rejected the Tax Court's decision in this case, which it described as holding that "the term 'limited partner' could refer only to 'passive investors.'" K Alain, 185 F.4th at 771 (citing Soroban, 161 T.C. at 321). We need not decide whether the Fifth Circuit's parsing of Soroban I, 161 T.C. 310, is accurate. We do observe, however, that if our reading of K Alain is correct, there appears to be little daylight between the Fifth Circuit's position and the Tax Court's holding in Soroban II that a limited partner is one who acts "generally akin to [a] passive investor[]." Soroban II, T.C.M. 2025-52, at *9; see K Alain, 185 F.4th at 779-80 (Graves, J., dissenting). In any case, here, the Principals clearly played a "significant role" in managing Soroban's business, and they would fail to qualify as limited partners under the Fifth Circuit's rule.

2. In its interpretation exegesis, the Court states the standard opening line that it has to start with the text of the statute. (Slip Op. 30.)

3. The opinion fusses over Dictionaries, as courts regularly do nowadays. (See Slip Op. 16 n. 9, 31-35, 40), concluding on p. 34-35:

Thus, contemporaneous dictionaries overwhelmingly described limited partners as having both limited liability and a lack of control over the partnership.

4. The opinion misspeaks at p. 47 n. 14 in describing the Joint Committee on Taxation as a “joint commission of Congress.” I know, picky, picky.