Soroban Capital Partners LP v. Commissioner of Internal Revenue, Nos. 25-2079 (L), 25-2250 (CON) (2d Cir. Sept. 17, 2026), aff’g 161 T.C. 310 (2023), and T.C.M. (RIA) 2025-52.

K Alain, L.L.L.P. v. Commissioner of Internal Revenue, No. 24-60240, 184 F.4th 766 (5th Cir. Aug. 12, 2026), granting reh’g, withdrawing and substituting 165 F.4th 374 (5th Cir. 2026), vacating and remanding Nos. 11587-20, 30118-21 (U.S. Tax Court Feb. 20, 2024)

The tax world has reached a defining moment regarding the application of the federal Self-Employment Contributions Act (SECA) tax to partnership distributive shares. For over a decade, asset managers, private equity sponsors, hedge fund operators, and pass-through entities have relied heavily on state-law limited partnership structures to insulate active partner distributive shares from the 15.3% SECA tax imposed under Internal Revenue Code (I.R.C.) § 1401(a)–(b). That reliance has encountered a formidable wall of judicial precedent.

On September 17, 2026, the United States Court of Appeals for the Second Circuit issued its highly anticipated decision in Soroban Capital Partners LP v. Commissioner of Internal Revenue, Nos. 25-2079 (L), 25-2250 (CON) (2d Cir. Sept. 17, 2026), affirming the United States Tax Court’s rulings in Soroban Capital Partners LP v. Commissioner (“Soroban I”), 161 T.C. 310 (2023), and Soroban Capital Partners LP v. Commissioner (“Soroban II”), T.C.M. (RIA) 2025-52, 2025 WL 1517432 (May 28, 2025). The Second Circuit held unequivocally that the statutory exemption under I.R.C. § 1402(a)(13) for a “limited partner, as such” does not protect partners who exert operational or managerial control over a partnership’s business, regardless of their formal designation under state partnership law.

This significant ruling comes shortly after the United States Court of Appeals for the Fifth Circuit granted rehearing, withdrew its initial opinion in Sirius Solutions, L.L.L.P. v. Commissioner, 165 F.4th 374 (5th Cir. 2026), and issued a revised opinion under the taxpayer’s renamed entity, K Alain, L.L.L.P. v. Commissioner, No. 24-60240, 184 F.4th 766 (5th Cir. Aug. 12, 2026).

For CPAs, Enrolled Agents, and tax attorneys advising pass-through entities, understanding the precise statutory mechanics, procedural jurisdictional hurdles, and substantive functional standards established by these decisions is critical. This article provides a comprehensive technical analysis of the facts in Soroban, the taxpayers’ request for relief, the Second Circuit’s statutory analysis, the application of law to facts, and a rigorous comparison with the Fifth Circuit’s revised decision in K Alain to evaluate whether a true circuit split exists.

Factual and Procedural Background of Soroban Capital Partners

Soroban Capital Partners LP (“Soroban”) is a Delaware limited partnership that operates a high-profile investment management firm. Soroban’s sole general partner is Soroban Capital Partners GP LLC (the “GP”), a Delaware limited liability company classified as a partnership for federal income tax purposes. Under Soroban’s Limited Partnership Agreement, sole authority to manage, operate, and control Soroban was vested in the GP.

The operational reality of Soroban, however, centered on three founding individual principals: Eric W. Mandelblatt, Gaurav Kapadia, and Scott Friedman (the “Principals”). The Principals held limited partnership interests in Soroban LP and were also members and managers of the GP. During the 2016 and 2017 tax years at issue, Mandelblatt served as Soroban’s Managing Partner and Chief Investment Officer; Kapadia served as Co-Managing Partner; and Friedman served as Head of Trading and Risk Management. Mandelblatt and Kapadia possessed direct authority to manage the GP.

The undisputed factual record established that the Principals worked full-time in Soroban’s business, logging between 2,300 and 2,500 hours annually per individual. They actively managed portfolio investments and exposures, directed investment funds, and comprised Soroban’s core investment team alongside subordinate research analysts and traders. As observed by the Tax Court, the Principals “played an essential role in generating [Soroban’s] income,” and “[b]ut for the three Principals, Soroban would not exist”.

In addition to investment decision-making, the Principals exercised comprehensive managerial control over Soroban’s operations. In 2016, all three Principals sat on all four of Soroban’s governing committees: the Brokerage, Trade Allocation, Valuation, and Management Committees. In 2017, they sat on the same four committees, representing every governing committee except a newly created Cybersecurity Committee whose members were appointed by the Management Committee. Furthermore, the Principals directed employee personnel decisions—including hiring, firing, evaluation, and promotion—and Soroban’s senior operational management reported directly to Mandelblatt and Kapadia.

In stark contrast to their extensive labor and managerial dominance, the Principals contributed negligible capital relative to the earnings generated. From inception through December 31, 2017, Mandelblatt contributed approximately $4.3 million in capital, while Kapadia and Friedman contributed zero capital.

For their services, Soroban paid the Principals guaranteed payments under I.R.C. § 707(c) totaling approximately $2.5 million combined across 2016 and 2017. In addition, Soroban allocated approximately 1% of its ordinary business income to the GP and the remaining 99% to the Principals as limited partners. For 2016 and 2017, the Principals’ distributive shares totaled roughly $141.5 million—an amount exceeding 55 times their guaranteed payments.

On its Forms 1065 (U.S. Return of Partnership Income) for 2016 and 2017, Soroban reported Net Earnings from Self-Employment (“NESE”) of $2,035,395 and $1,901,131, respectively. These figures represented the sum of the Principals’ guaranteed payments plus the GP’s 1% distributive share. Invoking I.R.C. § 1402(a)(13), Soroban excluded the Principals’ $141.5 million distributive shares from NESE, resulting in zero SECA tax paid on those amounts.

Following an audit, the Commissioner of Internal Revenue determined that because the Principals worked full-time managing and running Soroban, they were not “limited partners” eligible for the exclusion under § 1402(a)(13). On April 25, 2022, the IRS issued Notices of Final Partnership Administrative Adjustment (“FPAA”) to Soroban under the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”), recharacterizing the Principals’ distributive shares as NESE and increasing Soroban’s NESE by $77,663,962 for 2016 and $63,866,302 for 2017.

The Taxpayers’ Request for Relief and Core Arguments

On July 21, 2022, the GP, acting as Soroban’s Tax Matters Partner under TEFRA (I.R.C. § 6231(a)(7) (repealed 2015)), filed petitions for readjustment in the United States Tax Court pursuant to I.R.C. § 6226(a). Soroban sought complete relief from the IRS adjustments, advancing two primary legal theories:

First, on the substantive merits, Soroban argued that its Principals qualified as “limited partners” under the plain language of I.R.C. § 1402(a)(13) because they held formal limited partnership interests in a state-law limited partnership formed under the Delaware Revised Uniform Limited Partnership Act (6 Del. C. § 17-303(a)) and enjoyed limited liability for partnership debts. Soroban asserted that the Code does not define “limited partner” and contains no statutory authority permitting the IRS or courts to look beyond state-law form to conduct a “functional inquiry” into a partner’s management activities.
Second, on jurisdictional grounds, Soroban argued in the alternative that the IRS exceeded its statutory authority under TEFRA by adjusting NESE at the partnership level. Soroban contended that whether a partner is functionally a limited partner under § 1402(a)(13) is an individual, partner-level inquiry rather than a “partnership item” under I.R.C. § 6231(a)(3). Consequently, Soroban asserted that the FPAAs were procedurally defective and that the Tax Court lacked jurisdiction to evaluate the Principals’ functional roles in a TEFRA partnership-level proceeding.

The Court’s Analysis of the Law

The Second Circuit, in a panel opinion authored by Circuit Judge Chin (joined by Judges Calabresi and Merriam), systematically rejected Soroban’s jurisdictional and substantive contentions, affirming the Tax Court in all respects.

Jurisdictional Analysis Under TEFRA

The threshold issue addressed by the Second Circuit was whether NESE constitutes a “partnership item” under TEFRA, thereby conferring jurisdiction on the Tax Court under I.R.C. § 6226(f).

Under TEFRA, a “partnership item” is defined as:

“any item required to be taken into account for the partnership’s taxable year under any provision of subtitle A to the extent regulations prescribed by the Secretary provide that, for the purposes of this subtitle, such item is more appropriately determined at the partnership level than at the partner level.” I.R.C. § 6231(a)(3) (repealed 2015).

Judge Chin analyzed this definition under a two-pronged inquiry:

Required to Be Taken into Account Under Subtitle A: The court noted that under I.R.C. § 703(a) (located in Subtitle A), a partnership “shall” compute its taxable income “in the same manner as in the case of an individual”. Computing taxable income requires accounting for self-employment income generated under I.R.C. § 1401 and § 1402(b). Furthermore, I.R.C. § 6031(a) requires partnerships to file returns stating items of gross income and allowable deductions for the purpose of carrying out Subtitle A, which explicitly includes net earnings from self-employment on Form 1065, Schedule K, Line 14a. Thus, both partnerships and partners are required to take NESE into account under Subtitle A.
More Appropriately Determined at the Partnership Level: Treasury Regulation § 301.6231(a)(3)-1 provides a non-exclusive list of partnership items, including items of partnership income, gain, loss, deduction, or credit (Treas. Reg. § 301.6231(a)(3)-1(a)(1)(i)), tax-exempt income (Treas. Reg. § 301.6231(a)(3)-1(a)(1)(iv)), guaranteed payments (Treas. Reg. § 301.6231(a)(3)-1(a)(2)), and items relating to distributions. Crucially, Treas. Reg. § 301.6231(a)(3)-1(b) specifies that partnership items include “the legal and factual determinations that underlie the determination of the amount, timing, and characterization of items of income, credit, gain, loss, deduction, etc.”.

Judge Chin reasoned that because NESE directly impacts the legal characterization and amount of taxable partnership income, and because all building blocks of NESE (ordinary income, distributive shares, and guaranteed payments) are partnership items, NESE itself is logically and legally a partnership item. Centralizing this determination at the partnership level fulfills TEFRA’s core statutory purpose of avoiding duplicative, inconsistent partner-level audits (Callaway v. Comm’r, 231 F.3d 106, 108 (2d Cir. 2000)). Thus, the Tax Court properly exercised jurisdiction over the FPAA adjustments.

Statutory Interpretation of “Limited Partner” Under Section 1402(a)(13)

Turning to the substantive merits, the Second Circuit examined the plain meaning and statutory construction of “limited partner” under I.R.C. § 1402(a)(13). Section 1402(a)(13) excludes from NESE:

“[T]here shall be excluded 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) to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services.” I.R.C. § 1402(a)(13).

Because the Tax Code does not define “limited partner,” the court applied the fundamental canon that statutory terms must be interpreted according to their ordinary meaning at the time of enactment in 1977 (Watson v. Republican Nat’l Comm., 146 S. Ct. 2165, 2172 (2026); Tanzin v. Tanvir, 592 U.S. 43, 48 (2020)).

Judge Chin conducted an exhaustive analysis across three authoritative sources:

Ordinary Meaning in 1977 (Dictionaries, Treatises, and State Laws)

In 1977, contemporaneous legal dictionaries and treatises defined a “limited partner” as possessing two indispensable traits: limited liability AND lack of managerial control. Black’s Law Dictionary defined a limited partnership as featuring limited partners who “contribute capital and share in the profits” but “take no part in running [the] business and incur no liability . . . beyond contribution” (Limited Partnership, Black’s Law Dictionary (5th ed. 1979)). Leading treatises confirmed that “limited partners, in return for immunity, must refrain from any participation in the management or control of the business” (H.G. Reuschlein & W.A. Gregory, Handbook on the Law of Agency and Partnership § 264 (1979); A.R. Bromberg, Crane and Bromberg on Partnership 147 (1968)).

Furthermore, state limited partnership statutes in 1977 were governed almost universally by the Uniform Limited Partnership Act of 1916 (ULPA) or the Revised Uniform Limited Partnership Act of 1976 (RULPA). Section 7 of ULPA explicitly provided that a limited partner “shall not become liable as a general partner unless . . . he takes part in the control of the business” (ULPA § 7 (1916)). Thus, under the legal backdrop against which Congress legislated, surrendered management control was the explicit quid pro quo for limited liability.

The court rejected Soroban’s attempt to bind federal tax law to Delaware’s formal state-law definition (6 Del. C. § 17-303(a)), invoking the classic principle of Burnet v. Harmel, 287 U.S. 103, 110 (1932):

“State law may control only when the federal taxing act, by express language or necessary implication, makes its own operation dependent upon state law.”

Because “tax law deals in economic realities, not legal abstractions” (Comm’r v. Sw. Exploration Co., 350 U.S. 308, 315 (1956); PPL Corp. v. Comm’r, 569 U.S. 329, 340 (2013)), formal state-law titles cannot override functional management control.

Statutory Context and Structure (“As Such” and Guaranteed Payments)

The court emphasized that § 1402(a)(13) excludes the distributive share of a “limited partner, as such”. Citing The Compact Edition of the Oxford English Dictionary (1971), Judge Chin noted that “as such” means “in that capacity”. The exclusion is therefore restricted to income received in the capacity of a passive limited partner (investment returns), rather than income earned from managing business operations. As Judge Chin colorfully summarized:

“A ‘limited partner’ who is a limited partner in name only is not a ‘limited partner, as such.’”

Additionally, the carveout for guaranteed payments under I.R.C. § 707(c) reinforces that work income remains subject to SECA tax. Viewing § 1402(a) as an integrated scheme, other exclusions—such as real estate rentals (§ 1402(a)(1)), dividends and interest (§ 1402(a)(2)), and capital gains (§ 1402(a)(3))—uniformly exclude passive investment income while taxing active business income (Mellouli v. Lynch, 575 U.S. 798, 809 (2014)).

Legislative History and Historical Context

Congress enacted I.R.C. § 1402(a)(13) as part of the Social Security Amendments of 1977 (Pub. L. No. 95-216, § 313(b), 91 Stat. 1509; 42 U.S.C. § 411(a)(12)). The legislative history reveals that Congress intended to close a specific tax loophole: passive investors were purchasing small limited partnership interests to generate self-employment income and improperly collect Social Security quarters of coverage without actually working (H.R. Rep. No. 95-702, pt. 1, at 40–41 (1977)). Congress excluded limited partner distributive shares because they were “basically of an investment nature”.

Ironically, in the decades following 1977, active business managers inverted this passive investor protection, attempting to shield hundreds of millions of dollars in active management compensation from SECA tax by labeling themselves limited partners. The Second Circuit held that this post-1977 posture directly contradicted clear congressional intent.

Rejection of Taxpayers’ Secondary Defenses

The court briskly dispatched Soroban’s remaining defenses:

1997 Congressional Moratorium: In 1997, Congress enacted a temporary moratorium on proposed IRS regulations that contained bright-line rules (e.g., a 500-hour participation test) (Taxpayer Relief Act of 1997, Pub. L. No. 105-34, § 935, 111 Stat. 788). Judge Chin held that a temporary freeze on specific mechanical regulations did not constitute a rejection of the ordinary 1977 common-law functional definition (Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 187 (1994)).
IRS Form Instructions and SSA Guidance: IRS Form 1065 instructions describing limited partners in terms of limited liability do not possess the force of law (United States v. Josephberg, 562 F.3d 478, 498 (2d Cir. 2009)). Furthermore, SSA regulations (20 C.F.R. § 404.1050(a)(2)(i)) and POMS guidance (RS 01802.302) explicitly state that limited partners generally do not perform services or participate in business control.

Application of the Law to the Facts and Conclusions of the Court

Applying the functional standard to Soroban’s undisputed factual record, the Second Circuit concluded that the Principals failed every element of the functional test:

The Principals worked full-time (2,300 to 2,500 hours per year) running Soroban’s core investment operations.
They held key executive roles (Managing Partner, CIO, Co-Managing Partner, Head of Trading) and generated the firm’s income.
They exercised total managerial control, occupying all or nearly all seats on Soroban’s governing management, valuation, allocation, and brokerage committees, and controlling employee hiring and firing.

Accordingly, the Second Circuit held:

“Because the principals exerted managerial control over Soroban, they do not qualify as limited partners under § 1402(a)(13), and their distributive shares are thus subject to the self-employment tax.”

The Second Circuit fully AFFIRMED the orders and decisions of the Tax Court, sustaining the IRS adjustments to include $141.5 million in NESE subject to SECA tax.

Comparison with the Fifth Circuit’s Revised Decision in K Alain

To evaluate the broader legal landscape for pass-through entities, tax professionals must examine the Fifth Circuit’s recent procedural evolution in K Alain, L.L.L.P. v. Commissioner, No. 24-60240, 184 F.4th 766 (5th Cir. Aug. 12, 2026).

Procedural History of K Alain (f/k/a Sirius Solutions)

Sirius Solutions, L.L.L.P. (“Sirius,” later renamed K Alain, L.L.L.P.) operated a business consulting firm based in Houston, Texas. During the 2014–2016 tax years, Sirius was structured as a Delaware limited liability limited partnership comprising individual partners and a general partner LLC. Sirius allocated ordinary business income totaling roughly $12.6 million to its individual partners but reported $0 in NESE, claiming the § 1402(a)(13) limited partner exception. The IRS issued FPAAs recharacterizing the distributive shares as NESE, and the Tax Court sustained the adjustments under its Soroban I precedent.

On initial appeal, a Fifth Circuit panel issued an opinion in Sirius Solutions, L.L.L.P. v. Commissioner, 165 F.4th 374 (5th Cir. 2026). However, upon petition for rehearing, the Fifth Circuit panel explicitly granted rehearing, withdrew its prior opinion, and substituted a new opinion on August 12, 2026 (K Alain, L.L.L.P. v. Commissioner, 184 F.4th 766 (5th Cir. 2026)).

The Fifth Circuit’s Revised Standard

In its substituted opinion, the Fifth Circuit panel majority held:

“Today, we hold its original public meaning is a partner who plays no significant role in managing or running a business. Thus, we VACATE and REMAND so the Commissioner may consider whether the partners at issue fall within that meaning of § 1402(1)(13) [sic].”

In reaching this conclusion, the Fifth Circuit majority agreed with the Second Circuit that:

Federal tax law controls over state-law definitions (United States v. Bess, 357 U.S. 51, 55 (1958); Burnet v. Harmel, 287 U.S. 103, 110 (1932)).
The ordinary public meaning of “limited partner” in 1977 turned on the role partners played in the enterprise, as demonstrated by 1977 dictionary definitions (Black’s Law Dictionary (4th & 5th ed.)), ULPA § 7 (1916), and contemporaneous treatises (Bromberg; Reuschlein & Gregory).

However, the Fifth Circuit panel majority explicitly critiqued and rejected the Tax Court’s formulation in Soroban I:

“In adopting this reading, we reject the Tax Court’s Soroban decision. In Soroban, the Tax Court selected a rule divorced from statutory text and that appears to prohibit even the most minor involvement in corporate affairs. The Tax Court held that the term ‘limited partner’ could refer only to ‘passive investors’ . . . 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 . . . That is a different and more refined analysis than the one the Tax Court offered in Soroban.”

Citing Plasteel Products Corp. v. Helman, 271 F.2d 354, 356 (1st Cir. 1959), the Fifth Circuit concluded that minor or non-managerial participation is permissible, provided the partner plays “no significant role in managing or running a business”.

Circuit Judge James E. Graves, Jr. dissented in K Alain, arguing that the statutory text and legislative history of § 1402(a)(13) restrict the exemption strictly to passive investors (Renkemeyer, Campbell & Weaver v. Comm’r, 136 T.C. 137 (2011); Hardy v. Comm’r, T.C.M. 2017-16; Castigliola v. Comm’r, T.C.M. 2017-62; Denham Capital Mgmt. LP v. Comm’r, T.C.M. 2024-114).

Analysis of Circuit Alignment and Practical Takeaways for Tax Professionals

A critical question for CPAs and tax professionals is whether the Second Circuit’s decision in Soroban and the Fifth Circuit’s revised decision in K Alain represent a true circuit split.

A rigorous side-by-side analysis demonstrates that there is no true circuit split on the core legal principle governing active business managers:

Legal Issue	Second Circuit (Soroban)	Fifth Circuit (K Alain)	Circuit Alignment
State-Law Form Control	Rejected: State-law title does not dictate federal SECA tax treatment.	Rejected: Federal tax law controls; state law titles are inoperative.	Complete Agreement
Functional Analysis Requirement	Required: Court must examine the operational functions and management roles of partners.	Required: Court must examine whether partner plays a significant role in managing or running business.	Complete Agreement
Active Operational Managers	Taxable: Active managers who exert managerial control fail § 1402(a)(13).	Taxable: Partners playing a significant management role fail § 1402(a)(13).	Complete Agreement
Minor / Non-Managerial Activity	Excludes partners who “run, manage, or otherwise exert control or managerial authority”.	Allows minor involvement provided partner plays “no significant role in managing or running”.	Substantial Harmony

In footnote 16 of the Soroban opinion, Judge Chin specifically addressed the Fifth Circuit’s revised decision in K Alain, observing:

“We observe, however, that if our reading of K Alain is correct, there appears to be little daylight between the Fifth Circuit’s position and the Tax Court’s holding in Soroban II that a limited partner is one who acts ‘generally akin to [a] passive investor[].’ In any case, here, the Principals clearly played a ‘significant role’ in managing Soroban’s business, and they would fail to qualify as limited partners under the Fifth Circuit’s rule.”

Key Takeaways for Tax Practice

End of State-Law Form Shielding: Both the Second and Fifth Circuits have soundly rejected the position that state-law limited partner form provides an automatic SECA tax shield. Active fund managers, operating executives, and working partners cannot avoid SECA tax on distributive shares merely by organizing under state LP statutes.
Focus on Management Control: Under both Soroban (“managerial control”) and K Alain (“significant role in managing or running”), functional participation in management is the fatal factor. Partners who sit on executive management committees, make investment decisions, or direct employee operations are subject to SECA tax on their distributive shares.
Guaranteed Payment Structuring: Taxpayers can no longer rely on paying modest guaranteed payments under I.R.C. § 707(c) for management services while treating tens of millions in distributive shares as exempt passive income.
Audit and IRS Enforcement Horizon: With favorable appellate precedent in the Second Circuit and a remanded functional standard in the Fifth Circuit (alongside pending appeals in the First Circuit, Denham Capital Management LP v. Commissioner, No. 25-1349), IRS exam activity targeting pass-through entities, hedge funds, and private equity firms under § 1402(a)(13) will intensify dramatically.

Prepared with assistance from Gemini Notebook.