K Alain, L.L.L.P. v. Commissioner of Internal Revenue, No. 24-60240, --- F.4th --- (5th Cir. Aug. 12, 2026), withdrawing and substituting for Sirius Solutions, L.L.L.P. v. Commissioner of Internal Revenue, 165 F.4th 374 (5th Cir. Jan. 16, 2026), vacating and remanding Nos. 11587-20 and 30118-21 (T.C. Feb. 20, 2024)

On August 12, 2026, the United States Court of Appeals for the Fifth Circuit issued a major decision that fundamentally reshapes the landscape of self-employment tax liability for partners in limited partnerships. In K Alain, L.L.L.P. v. Commissioner of Internal Revenue (formerly known as Sirius Solutions, L.L.L.P. v. Commissioner), the court granted a petition for rehearing, withdrew its previous well publicized opinion issued on January 16, 2026, and substituted a newly updated majority and dissenting opinion.

The decision is a stunning development for tax professionals. While the court’s January opinion held that the limited partner exception under Internal Revenue Code (IRC) Section 1402(a)(13) was governed strictly by limited liability under state law, the August opinion on rehearing completely shifted course. The court now holds that the “original public meaning” of the phrase “limited partner” is “a partner who plays no significant role in managing or running a business”. Although the court still vacated and remanded the Tax Court’s decision, it rejected both its own prior “limited liability alone” touchstone and the Tax Court’s strict “passive investor” standard. Instead, the Fifth Circuit has established a new “managerial versus non-managerial” distinction, allowing for some limited participation by limited partners so long as they do not cross the line into exercising control or playing a significant role in management. This technical article explores the facts of the case, the court’s statutory analysis, the conceptual differences between the withdrawn and substituted opinions, and the practical planning implications for CPAs and EAs.

Factual Background and Partnership Structure

The taxpayer, Sirius Solutions, L.L.L.P. (which was subsequently renamed K Alain, L.L.L.P.), is a limited liability limited partnership (LLLP) organized under the state law of Delaware. The partnership operates a Houston, Texas-based business-consulting firm, with additional offices in Dallas, Texas, and London, England. For federal income tax purposes, the entity is treated as a partnership.

During the tax years under audit (2014, 2015, and 2016), the partnership’s ownership structure was divided between several individual partners and a single corporate general partner, Sirius Solutions GP, L.L.C. (Sirius GP), also a Delaware entity, which acted as the Tax Matters Partner (TMP) under IRC Section 6231(a)(7). In 2014, the partnership was owned by nine individual partners and Sirius GP, which held a minor 0.6457% interest. Following the sale of four individual partnership interests in 2014 (two of whom became employees of the partnership), the entity was owned in 2015 and 2016 by five individual partners and Sirius GP, which held a 0.7529% interest.

Crucially, the partnership agreements and corporate structure set forth specific, highly active roles for the individual partners. While the partnership agreements purported to state that limited partners would not participate in the management or control of the business, the partners agreed to a covenant not to engage in outside employment or consulting. Furthermore, the individual partners each held specific business titles and worked full-time. It was stipulated by the parties that each individual partner “worked exclusively for Sirius” and “devoted large amounts of their time to Sirius” during the years at issue. Their daily activities included:

Delivering services on client engagements;
Developing the business;
Supervising staff and billing hours on client engagements;
Selecting staff for specific engagements and negotiating client engagements; and
Participating in decisions to hire, evaluate, and terminate staff.

In contrast, Sirius GP, the general partner, was organized for the sole purpose of acting as the GP, was wholly owned by some of the individual partners, and was not entitled to receive any compensation or fees. Its delegated board of directors did not hold formal meetings or receive compensation, and its sole activity was providing nominal general partner services.

Tax Reporting, IRS Adjustments, and the Tax Court’s Precedent

For the tax years in question, Sirius reported ordinary business income of $5,829,402 in 2014, $7,242,984 in 2015, and a loss of –$490,291 in 2016. The partnership allocated all of this ordinary income and loss directly to its individual partners; no portion of the income was allocated to Sirius GP. Because Sirius treated these individual partners as “limited partners,” the partnership excluded their distributive shares of ordinary income from its calculation of net earnings from self-employment under the limited partner exception of Section 1402(a)(13). Consequently, the partnership reported $0 of net earnings from self-employment on its returns.

The Internal Revenue Service audited the returns and rejected this treatment. In June 2020 and June 2021, the Commissioner of Internal Revenue issued Notices of Final Partnership Administrative Adjustment (FPAAs) to Sirius GP. The IRS determined that the distributive share exception under Section 1402(a)(13) did not apply because the individual partners were not “limited partners” for purposes of the statutory exception due to their active services. The IRS adjusted Sirius’s net earnings from self-employment from $0 to $5,915,918 for 2014, $7,372,756 for 2015, and a loss of –$490,291 for 2016. Sirius GP, as Tax Matters Partner, filed petitions in the United States Tax Court seeking a readjustment of the partnership returns.

While the case was pending, the Tax Court issued its landmark precedential decision in Soroban Capital Partners, LP v. Commissioner, 161 T.C. 310 (2023). In Soroban, the Tax Court held that for purposes of the Section 1402(a)(13) exception, the term “limited partners” does not automatically apply to any partner labeled as such under state law; instead, it “refer[s] to passive investors”. The Tax Court concluded that determining limited partner status requires a factual “functional analysis” test into the roles and responsibilities of the partners. Following Soroban, the parties in Sirius stipulated that under a functional analysis test, the individual partners were not limited partners because they were active in management and operations. However, Sirius maintained that Soroban was incorrectly decided as a matter of law. To facilitate an appeal, Sirius requested the Tax Court to enter a decision against it under Tax Court Rule 251. The Tax Court complied, upholding the IRS’s upward adjustments, and Sirius appealed to the Fifth Circuit.

The Fifth Circuit’s Rehearing and the Withdrawal of the Prior Opinion

The Fifth Circuit’s handling of the appeal represents a remarkable two-step legal evolution. Initially, on January 16, 2026, the court issued an opinion that flatly rejected the Tax Court’s Soroban decision. In that now-withdrawn opinion, the majority (written by Judge Oldham and joined by Judge Engelhardt) held that Section 1402(a)(13) was clear and that a limited partner is simply any partner in a state-law limited partnership who is afforded limited liability.

However, the Commissioner filed a petition for rehearing en banc. On August 12, 2026, the Fifth Circuit denied the en banc petition but treated it as a petition for panel rehearing, which it granted. The Per Curiam order stated: “We withdraw our prior opinion, Sirius Solutions, L.L.L.P. v. Commissioner of Internal Revenue, 165 F.4th 374 (5th Cir. 2026), and substitute the following.”. The court then issued its updated majority and dissenting opinions under the revised name K Alain, L.L.L.P. v. Commissioner of Internal Revenue (No. 24-60240).

Statutory Construction and the Substituted Managerial Standard

In the substituted August 2026 majority opinion, the court completely abandoned its previous “limited liability” definition, substituting an entirely new standard focused on management. Under Section 1402(a)(13), net earnings from self-employment exclude “the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments described in section 707(c)”. In Section I and II of the updated majority opinion, the court writes a noticeable typographical error, referencing the exception as “26 U.S. Code § 1402(1)(13)” (using the numeral 1 instead of the lowercase letter a).

The core question before the court was the federal definition of “limited partner” under Section 1402(a)(13). Guided by the principles that “tax law is federal law” and that once state law creates sufficient interests, state law is inoperative, and that because “the Tax Code’s phrase ‘limited partner’ is undefined,” the court must “interpret the words consistent with their ‘ordinary meaning... at the time Congress enacted the statute’”.

The court conducted a thorough historical inquiry into the “original public meaning” of the phrase in 1977, when the limited partner tax exception was enacted as part of the Social Security Amendments of 1977, Public Law 95-216, Section 313(b). The majority’s historical analysis relied on several sources:

Contemporaneous Legal Dictionaries: Dictionaries around 1977 defined a “limited partnership” as an association with general partners “who manage business” and limited partners who “contribute capital and share in profits but... take no part in running business.” (citing Black’s Law Dictionary 5th ed. 1979 and Black’s Law Dictionary 4th ed. rev. 1968). Other historic dictionaries, such as Rapalje & Lawrence’s 1888 Dictionary of American and English Law, similarly described special partners as those “who are not liable for the debts of the partnership” while general partners “conducted” the business.
Uniform Partnership Acts: The court examined the Uniform Limited Partnership Act (ULPA) of 1916 and its revised version (RULPA) of 1976. Under Section 7 of the 1916 ULPA, a limited partner loses limited liability if “he takes part in the control of the business”. The court noted that these acts provided “key insight into the ordinary understanding of ‘limited partner’ in 1977.”.
Contemporaneous Legal Treatises: Crane and Bromberg on Partnership (1968) explained that limited partners are “typically sharing profits, immune from personal liability for firm debts, and not participating in management.”.
Historical Case Law: The court cited the First Circuit case Plasteel Products Corporation v. Helman, 271 F.2d 354, 356 (1st Cir. 1959) and the Washington case Rathke v. Griffith, 218 P.2d 757 (Wash. 1950). The court observed that this “backdrop suggests some participation is allowed, so long as the partners do not exercise control over the business.”.

Synthesizing these sources, the court held: “Today, we hold its original public meaning is a partner who plays no significant role in managing or running a business.”. Consequently, the court established a “managerial/non-managerial distinction.”. Unlike the Tax Court’s Soroban standard, which the Fifth Circuit criticized as a “rule divorced from statutory text and that appears to prohibit even the most minor involvement in corporate affairs,” the Fifth Circuit’s new standard allows for minor participation. The court observed that “an informed reader of the English language in 1977 would have understood that a ‘limited partner’ could not manage the partnership... but perhaps could participate in certain nonmanagerial aspects of the business”. Because the Tax Court had evaluated Sirius’s partners under Soroban’s strict “passive investor” standard rather than this “no significant role in management” standard, the majority vacated and remanded the case.

Comparative Analysis: The January Opinion Versus the August Substituted Opinion

For tax practitioners, the intellectual shift between the court’s January and August opinions is profound. The key conceptual and structural differences include:

Abandonment of the State-Law Liability Standard: In January, the majority held that “a ‘limited partner’ is a partner in a limited partnership that has limited liability,” meaning that state-law liability protection was the sole test. In August, the majority abandoned this standard, declaring that “original public meaning... turns on the role partners played in the enterprise.”.
Deletion of the Social Security Administration (SSA) Arguments: In its January opinion, the majority relied heavily on contemporaneous agency regulations, particularly those of the SSA. The January majority cited 20 C.F.R. § 404.1080(b)(3), a regulation adopted in 1980 that plainly defined a limited partner based strictly on limited liability (“if your financial liability... is limited to the amount of your financial investment”). The January opinion contained a detailed section arguing that because Social Security taxes and benefits are congruent, the SSA’s liability-focused definition should be given “due respect” under Loper Bright. In the August opinion, this entire regulatory argument and all references to 20 C.F.R. § 404.1080(b)(3) were completely removed from the majority’s opinion.
Deletion of IRS Procedural Regulations: The January majority cited 26 C.F.R. § 601.602(a) to emphasize that IRS return instructions explain the Tax Code to the public and provide “fair notice”. This argument was completely excised from the substituted August opinion.
Recharacterization of IRS Form Instructions: In January, the majority argued that the IRS’s Form 1065 instructions from 1978 to 2022 consistently defined a limited partner based on limited liability, and that this contemporaneous agency interpretation was “especially useful”. In August, the majority shifted its use of these instructions, citing them primarily to show that “the Soroban decision cannot be squared with decades of IRS-approved guidance insisting that what mattered was limited liability alone.”.

The Dissential Voice: Illogical Loopholes and Unresolved Practical Questions

Judge James E. Graves, Jr. dissented in both opinions, but his August dissent contains important new critiques addressing the majority’s course correction. He opened by noting: “The panel majority now withdraws that prior opinion on rehearing but still vacates and remands. Again, I dissent. This opinion tracks portions of my previous dissent because the majority partially corrected course.”.

Judge Graves agreed that the majority “partially corrected course” by abandoning the pure “limited liability” test in favor of a control/management-based standard. However, he strongly disagreed with the majority’s newly formulated test, arguing that the majority’s “managerial/non-managerial distinction” is legally unsupported and introduces immense uncertainty. He pointed out that:

Lack of Textual Basis: The majority “fails to identify the portion of the statute’s plain text here which ‘points towards’ the conclusion that partners may participate ‘so long as the partners do not exercise control over the business,’ or so long as the partner ‘did not play a significant role in managing or running the business.’”.
Misconstruction of Plasteel: Judge Graves argued that the majority’s reliance on Plasteel was entirely “unsupported”. He noted that Plasteel was a state-law contract action where “the only conduct relied on to charge appellees as general partners is the signing of the limited partnership agreement” and that the First Circuit “said nothing to indicate that some amount of control of the business could be permissible.”.
Creation of an Illegal Loophole: Judge Graves warned that the majority’s fuzzy standard “has created an indefensible, illogical, and illegal loophole which allows millions of dollars in net earnings from self-employment to go untaxed as earnings even though that is exactly what they are.”.
Factual Sufficiency: Under any reasonable control test, Judge Graves argued that the partners at issue were “limited in name only”. They stipulated to working exclusively and full-time for Sirius, delivering client services, billing hours, supervising staff, and negotiating engagements—activities that “are all indicative of ‘management or control.’”.

Strategic Planning and Compliance Takeaways for Practitioners

The Fifth Circuit’s substituted opinion in K Alain, L.L.L.P. creates both opportunities and substantial compliance challenges for tax professionals:

The Fifth Circuit Rejects Soroban: For partnerships subject to the jurisdiction of the Fifth Circuit (Texas, Louisiana, and Mississippi), the strict Tax Court Soroban “passive investor” test is no longer the governing law. Instead, the “no significant role in managing or running a business” standard applies.
The Non-Managerial Excludability Opportunity: Limited partners who perform services for the partnership may still be eligible to exclude their distributive shares of ordinary income from self-employment tax, provided their services are strictly “non-managerial” (e.g., administrative, technical, or advisory) and they do not play a “significant role” in running or managing the business.
Drafting and Operational Covenants: Partnership agreements must be drafted defensively. CPAs and EAs must advise clients to segregate management functions. All “management and control” should reside strictly in the general partner or a designated management committee, and limited partners should be strictly barred from managerial activities.
The Threat of Litigation and Disuniformity: As Judge Graves and the majority both recognized, this new standard is highly factual and will likely lead to “a great deal of litigation about how much participation in the partnership is too much”. CPAs and EAs must proceed with caution, documenting carefully the non-managerial nature of any active limited partner’s duties.

Prepared with assistance from Gemini Notebook.