What does the phrase “limited partner, as such” mean? There is no statute or regulation that defines the term. The tax code generally imposes self-employment tax on an individual’s share of income received from a What does the phrase “limited partner, as such” mean? There is no statute or regulation that defines the term. The tax code generally imposes self-employment tax on an individual’s share of income received from a partnership. But, under Section 1402(a)(13) of the tax code, the income of a “limited partner, as such” is excluded from self-employment tax. This exclusion is referred to as the limited partnership exclusion. Self-employment tax, a separate tax that is in addition to income tax, is the social security tax (12.4%) and Medicare tax (2.9%) imposed on an individual’s earnings.

Sirius Solutions, LLLP was a limited liability limited partnership which operated a business consulting firm. Sirius had one general partner and four limited partners. Sirius excluded the limited partners’ share of partnership income from its calculation of self-employment. The IRS asserted that the limited partners’ share of partnership income was subject to self-employment tax. In Sirius Solutions, LLLP v. Commissioner, 2026 WL 125600 (5th Cir. Jan. 16, 2026), the U.S. Court of Appeals for the Fifth Circuit ruled that the phrase “limited partner, as such” means a partner in a limited partnership that has limited liability. The Appeals Court based its decision on the standard dictionary definition of limited partner. Because the limited partners in Sirius had limited liability under state law, the Court ruled that their share of partnership income was not subject to self-employment tax direct conflict, the U.S. Tax Court in Soroban Capital Partners LP v. Commissioner, 161 T.C. 310 (2023), ruled that a functional analysis test should be applied in determining whether to apply the limited partnership exclusion. The Tax Court reasoned that Congress meant to only exclude earnings that are of an investment nature and that distributions to limited partners are not automatically excluded from self-employment tax. Limited partners who actively participate in the partnership’s business would not be eligible for the limited partnership exclusion. Congress’ addition of the words “as such” was meant to limit the general definition of “limited partner.”

The Fifth Circuit Sirius ruling is only binding on cases from States covered by the Fifth Circuit, namely, Texas, Louisiana and Mississippi. Note that the taxpayer in Soroban filed an appeal with the Second Circuit and a separate case is pending in the First Circuit regarding the same issue. If either the Second Circuit or First Circuit issues a ruling in conflict with the Fifth Circuit ruling in Sirius, it is very possible the U.S. Supreme Court will ultimately rule on the definition of the phrase “limited partner, as such.”