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

Most readers of this blog will already have heard of or even read the opinions (majority and dissenting) in Sirrius 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 Sirrius, 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 Sirrius 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 Sirrius majority opinion.