Fifth Circuit on Rehearing Makes the Same Mistake on the Limited Partner Gambit to Avoid Tax (8/13/26)

In Alain, L.L.L.P. v. Commissioner, ___ F.4th ___ (5th Cir. 8/12/26), CA5 here; GS [to come], the Court on panel rehearing (also denying en banc rehearing), stuck to its guns and rejected the Tax Court and IRS interpretation of the limited partner exception to the “self-employment income” in § 1402(1)(13). Readers paying attention in the tax procedure universe are surely familiar with that issue. Basically, active service participants in a business enterprise who would have had self-employment income in straight-forward characterization of their earnings have tried to avoid that tax on self-employment income by the magic of labeling their income as a distributive share for share for limited partners.

Alain was originally decided in Sirius Solutions, L.L.L.P. v. Commissioner, 165 F.4th 374 (5th Cir. 2026), GS here, which the Court withdrew on the rehearing. The judges on the panel rendered opinions to the same effect as before. The Sirius majority opinion was nominally authored by Judge Oldham. The panel rehearing opinion is per curiam with neither of the majority judges stepping up as the author.

I critiqued the majority in Sirius Solutions in Fifth Circuit Knows a Limited Partner When Reads It (Federal Tax Procedure Blog 1/24/26; 1/20/26), here. I don’t think there is anything significant in the new majority opinion. Other than stating that the bottom-line result is the same, with the judges' reasoning is pretty much as before, except neither judge in the majority claims credit, I can’t add anything useful to what I said before.

Except:

The Trumpian majority (both long-time Federalist Society members who have imbibed that kool-aid including slavish textualism) pays homage to textualism and dictionaries. They seem not to have learned the lessons taught long ago by Judge Learned Hand in Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934), GS here, which, after making an iconic statement there is no duty, patriotic or otherwise, to pay more tax than is due, but then said: “Nevertheless, it does not follow that Congress meant to cover such a transaction, not even though the facts answer the dictionary definitions of each term used in the statutory definition.” Then, the Supreme Court said much the same thing on certiorari in Gregory v. Helvering, 293 U.S. 465, 470 (1935), here: 

          In these circumstances, the facts speak for themselves and are susceptible of but one interpretation. The whole undertaking, though conducted according to the terms of [the reorganization statute], was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction upon its face lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.

The majority on the original opinion and the rehearing opinion (although not appearing as author) is wrong which, in the rehearing, may explain why neither claims authorship credit. In my opinion. but I remind readers that I am  not a judge.