Ref: Sirius Solutions, LLLP v. Comm’r, 2026 PTC 7 (5thCir 2026)

The Courts and IRS have been debating this topic for some time. A “truly” limited partner (or LLC member) is subject only to income tax on the net income reported to him/her on the Form K-1 from the entity. The IRS has often pushed to expand that taxation to add on self employment tax (currently 15.3%) on top of the income tax.

The Fifth Circuit withdrew its January 2026 opinion and in a 2-1 decision, substituted a new opinion defining the meaning of the term “limited partner” in IRC Sec 1402(a)(13) is a partner who plays no significant role in managing or running the business.

It’s very important that limited partners/members not be part of making management decisions for the underlying entity.