On August 12, 2026, the Fifth Circuit withdrew and substituted its earlier opinion in Sirius Solutions v. Commissioner (now proceeding as K Alain, L.L.L.P. v. Commissioner on rehearing). The court denied the government’s request for the full court to rehear the case, but the original three-judge panel reheard it and issued a substitute opinion.
In its original January 16, 2026 opinion, the Fifth Circuit rejected the Tax Court’s “functional analysis test” for determining what constitutes a limited partner for self-employment purposes. The Tax Court has held that a functional analysis test is required to determine if a limited partner is truly a “passive investor” to exclude trade or business income from self-employment tax under Section 1402(a)(13).
The Fifth Circuit previously opined that a “limited partner” for purposes of the self-employment tax was simply a partner in a state-law limited partnership with limited liability. The court substituted that opinion with a new one, concluding that a “limited partner” is instead a partner “who plays no significant role in managing or running a business.”
Why This Matters for Alternative Asset Managers
For the alternative asset industry, management companies and entities receiving fees are often structured using a Limited Partnership (LP)/Limited Liability Company (LLC) structure. The LLC is set up as the general partner of the management company, which is a limited partnership. The LLC holds a small stake (often 1%) in the LP as a general partner, and both entities by and large are owned by the same individuals. Those individuals are members of the LLC but claim limited partner status on their LP interests, which has resulted in significant self-employment tax savings that the IRS and Tax Court are contesting.
What Happens Next
The Fifth Circuit’s substituted opinion paves the road to future court battles as challenges to the Tax Court’s ruling are pending in the First Circuit (Denham Capital Management LP) and Second Circuit (Soroban). It is possible a circuit split will ensue and further muddy the waters for taxpayers who utilize the Fifth Circuit’s original interpretation (partner in a state-law limited partnership with limited liability).
While the substituted opinion does not side with the Tax Court, it is not as taxpayer friendly as the original ruling and will likely result in intense analysis and differing opinions over what a “significant role in managing or running a business” is.
Considerations for Taxpayers and Advisors
Taxpayers who currently utilize this structure, or those in the process of structuring, should consult with their legal counselor and/or tax professionals to understand the risk inherent in the structure, but also the potential savings it may offer.
This issue is far from settled law, but every tax practitioner must keep this latest development in mind and discuss these cases with clients as they work their way through the courts. Every client has a different risk appetite, facts and circumstances, as well as financial forecasts for their entity. All of these factors must be understood to make an informed decision.
Looking Ahead
There is a long road ahead for this issue with no clear resolution in sight. This opinion complicates matters further and introduces a gray area with the Fifth Circuit’s new definition of a limited partner.
Questions about how this evolving issue may affect your ownership structure or self-employment tax position? Contact a Grassi advisor to discuss the potential implications.
