Fifth Circuit Shields Limited Partners From Self‑Employment Tax in Sirius Solutions v. Commissioner

Sirius Solutions, L.L.L.P. v. Commissioner, No. 24-60240 (5th Cir. Jan. 16, 2026), is a major taxpayer win that adopts a bright-line, liability-based definition of “limited partner” for the Section 1402(a)(13) self-employment tax exception. It rejects the Tax Court’s functional analysis and holds that partners in a state-law limited partnership (including an LLLP) who have limited liability qualify for the limited partner exception on their distributive shares, even if they materially participate, with self-employment tax generally limited to their guaranteed payments.

What the Fifth Circuit Held

·         A “limited partner” under Section 1402(a)(13) means a partner in a limited partnership who has limited liability under applicable state law.

·         The phrase “as such” in Section 1402(a)(13) means that the exception applies to income earned in the partner’s legal capacity as a limited partner, not to compensation for services (e.g., guaranteed payments).

·         The court expressly rejected the Tax Court’s “functional analysis,” which had disqualified Sirius’s limited partners because they were actively involved in the consulting business.

·         The decision vacates the Tax Court and remands, but there is little left to resolve other than mechanics given the court’s construction of “limited partner.”

Facts and Procedural Background

·         Sirius Solutions operated as a Texas limited liability limited partnership (LLLP), with a corporate general partner (Sirius GP, LLC) holding a very small percentage interest and multiple limited partners.

·         The limited partners all had limited liability under Texas law but also provided substantial services to the consulting firm.

·         Sirius treated the limited partners’ distributive shares (other than guaranteed payments) as exempt from self-employment tax under Section 1402(a)(13).

·         The IRS recharacterized a large portion of those amounts as subject to SE tax, and the Tax Court sided with the IRS using a multi-factor functional test focused on participation and “passive investor” status.

·         On appeal, the Fifth Circuit reversed, finding the Tax Court’s functional interpretation inconsistent with the statutory text and historical usage of “limited partner.”

The Court’s Reasoning

·         Text and ordinary meaning: The court looked to dictionaries and contemporaneous usage at the time Section 1402(a)(13) was enacted and concluded that “limited partner” was universally understood as a partner whose liability is limited by state limited partnership statutes.

·         Administrative materials: The opinion relied on historic SSA and IRS guidance that tied “limited partner” status to limited liability, not to a passive-investor or non-service test.

·         Structure of Section 1402: The court noted that where Congress wanted to condition SE tax treatment on the provision of services, it knew how to do so expressly (e.g., in nearby Section 1402(a)(10)), and it did not add such language to Section 1402(a)(13).

·         “As such” language: The court read “as such” as limiting the exclusion to the partner’s capacity as a limited partner but not as importing a separate “passivity” or “no services” requirement.

·         Rejection of Soroban and similar views: The panel explicitly disapproved the Second Circuit’s Soroban Capital Partners decision and other authorities reading a “passive investor” gloss into “limited partner.”

Practical Implications for Limited Partners and Fund Managers

·         Planning clarity in the Fifth Circuit: Within the Fifth Circuit (Texas, Louisiana, Mississippi), partners with limited liability in a state-law limited partnership or LLLP can generally treat their distributive shares as excluded from SE tax, regardless of their level of services, subject to SE tax on guaranteed payments.

·         Entity choice for managers: Fund and asset management structures using limited partnerships with LLLP features gain significant comfort that GP and LP interests with limited liability can be planned to minimize SE tax, so long as the state-law limited partnership form and liability protections are respected.

·         Guaranteed payments remain exposed: The opinion repeatedly notes that guaranteed payments for services (and any other clearly service-based compensation streams) remain subject to self-employment tax.

·         Open questions: Commentators highlight unresolved issues, including whether owners of the general partner entity in an LLLP might themselves be treated as “limited partners” for purposes of the exception and how other circuits (notably the First and Second, which have pending cases) will respond to Sirius.

·         Golsen and Tax Court cases: For taxpayers in the Fifth Circuit, the Tax Court will be bound by Sirius under Golsen, while outside circuits the IRS is likely to continue litigating for a functional or Soroban-like approach until the conflict is resolved or guidance is updated.

Illustration: Simple Example

Assume a Texas LLLP with:

·         GP entity with a small interest and limited liability,

·         Several individual limited partners with limited liability under Texas law, each providing substantial services,

·         Distributive shares of partnership income and separate guaranteed payments for services.

Under Sirius in the Fifth Circuit, the distributive shares allocable to the limited partners (and arguably some or all of the GP interest if treated as a limited partner under state law) should qualify for the Section 1402(a)(13) exclusion from SE tax, while guaranteed payments remain subject to SE tax.

 Have an IRS Tax Problem?

     Contact the Tax Lawyers at

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or Toll Free at 888 8TAXAID (888-882-9243)

Sources:

1.       https://www.hklaw.com/-/media/files/news/2026/fifthcircuitopinion_siriussolutionsvcommissioner.pdf?rev=aff908d4a3e744859aeea327f3479fdf&hash=ED705A122BB432AC39D17C28DE6DA51F       

2.      https://www.proskauertaxtalks.com/2026/01/fifth-circuit-in-sirius-solutions-reverses-tax-court-and-exempts-limited-partners-from-self-employment-tax/                  

3.      https://www.stinson.com/newsroom-publications-update-on-limited-partner-exception-to-self-employment-tax-liability-fifth-circuit-decision-revives-the-issue            

4.      https://www.ca5.uscourts.gov/opinions/pub/24/24-60240-CV0.pdf               

5.       https://www.cbiz.com/insights/article/fifth-circuit-court-of-appeals-hands-irs-defeat-in-limited-partner-definition-case    

6.      https://klehr.com/publications/fifth-circuit-rules-that-all-limited-partners-having-limited-liability-are-exempt-from-self-employment-tax-even-if-they-participate-in-management/  

7.       https://tax.thomsonreuters.com/news/expert-unpacks-whats-next-after-sirius-solutions-decision/ 

8.      https://www.sullcrom.com/insights/memo/2026/January/Fifth-Circuit-Overturns-Tax-Court-Limited-Partner-Case-Sirius-Solutions

9.      https://www.troutman.com/insights/fifth-circuit-overturns-tax-court-ruling-in-favor-of-the-taxpayer-in-case-evaluating-standard-for-limited-partner-exception-to-self-employment-tax/

10.   https://www.santabarbara.courts.ca.gov/forms-filing/local-rules

11.    https://www.texaslawblog.law/2026/01/the-fifth-circuit-defines-limited-partner-for-purposes-of-the-1402a13-exception-to-self-employment-tax/

12.   https://static.e-publishing.af.mil/production/1/af_ja/publication/dafi51-201/dafi51-201.pdf

13.   https://www.winston.com/en/blogs-and-podcasts/tax-impacts/5th-circuit-gives-taxpayers-sirius-victory-in-self-employment-tax-case

14.   https://ccresourcecenter.org/state-restoration-profiles/tennessee-restoration-of-rights-pardon-expungement-sealing/

15.    https://www.law360.com/tax-authority/federal/articles/2436546/5th-circ-ruling-clarifies-tax-rules-for-limited-partners

IRS Corporate Audits in 2026: What LB&I’s New Rules Really Mean for Your Company

The IRS has rolled out significant changes to its Large Business & International (LB&I) audit procedures — reforms that aim to speed up examinations and improve efficiency, but also shift new responsibilities onto corporate taxpayers. Here are three major aspects companies should keep in mind.

1. Elimination of the Acknowledgment of Facts (AOF) Process

The IRS has scrapped the Acknowledgment of Facts (AOF) process, previously intended to formalize agreement on the facts before issuing a Notice of Proposed Adjustment (NOPA). Treasury determined the step added time but little value, as companies often resisted confirming facts without knowing how the IRS planned to apply them legally.

Practitioners generally support the change, but warn that taxpayers now bear more responsibility for making sure all relevant facts are on the record. If a company introduces new information after the NOPA, the issue may be sent back to exam, delaying the appeal.

In short, corporations should proactively document and present all favorable facts early, even if they seem only potentially relevant, to avoid future procedural hiccups.

2. Expansion of the Fast-Track Settlement (FTS) Program

LB&I’s Fast-Track Settlement (FTS) process will now be open to a broader range of cases and stages in an audit, giving taxpayers more chances for early resolution. Many see this as a positive step toward reducing prolonged disputes and encouraging collaboration.

However, practitioners are concerned about unclear boundaries — such as which issues remain excluded (e.g., docketed cases, designated litigation matters) and how consistent acceptance criteria will be applied across teams. The ABA has urged the IRS to publish a tiered list clarifying what issues qualify and why, to make the process more predictable.

Taxpayers considering FTS should be prepared to settle in good faith, as the process works best when both sides are truly ready to resolve disputes rather than merely test arguments.

3. Confidentiality and Evidence Concerns Under Rule 408

Even with its expansion, some companies remain hesitant to participate in FTS because of uncertainty surrounding Federal Rule of Evidence 408 - which protects statements made in settlement negotiations from being used later in litigation.

The ABA and several practitioners have urged the IRS to formally confirm that FTS discussions and materials qualify as protected settlement communications under Rule 408. Without that assurance, taxpayers risk revealing legal positions or factual arguments that the IRS could later incorporate into new adjustments.

Until the IRS provides clarity, companies should weigh carefully how much to reveal in fast-track proceedings — balancing the goal of resolution with the need to preserve litigation strategy.

Bottom Line

These audit reforms signal the IRS's intent to streamline examinations and promote early settlements, but they place more responsibility on taxpayers to control the factual record and navigate evolving settlement parameters.

Corporations undergoing exams in 2026 and beyond should adjust their audit strategies, ensure facts are fully developed early, and monitor forthcoming IRS guidance on settlement process protections.

 Have an IRS Tax Problem?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

Sources:

1.       https://www.law360.com/tax-authority/federal/articles/2436248?nl_pk=70a1fdd0-8c75-4e81-b341-3ede5b45b00d

2.      https://www.law360.com/tax-authority/federal  

3.      https://www.crowell.com/en/insights/client-alerts/faster-audits-more-adr-irs-rolls-out-significant-lbandi-changes 

4.      https://www.law360.com/tax-authority/international

5.       https://www.jdsupra.com/legalnews/goodbye-to-the-irs-aof-information-8943388/

6.      https://www.law360.com/articles/2436248/3-things-to-keep-in-mind-about-irs-corporate-audit-changes

7.       https://www.cov.com/en/news-and-insights/insights/2025/07/new-irs-guidance-expedited-exam-process-for-large-taxpayers

8.      https://www.taxathand.com/article/40880/United-States/2026/IRS-opens-2026-filing-season-as-TIGTA-and-NTA-raise-concerns

9.      https://www.gtlaw.com/-/media/files/insights/published-articles/2023/10/law360---anticipating-intensified-partnership-enforcement-from-irs.pdf?rev=8f4fbf8e726b4b128a8c804a001837f7

10.   https://www.irs.gov/pub/irs-irbs/irb26-04.pdf

11.    https://www.irs.gov/newsroom/irs-issues-interim-guidance-to-improve-large-business-international-examination-process

12.   https://www.caltaxadviser.com/irs-audits-in-2026-new-rules-new-technology-and-new-triggers-every-business-should-prepare-for/

13.   https://www.hklaw.com/en/insights/publications/2025/07/irs-releases-guidelines-for-speeding-up-audits-of-large-businesses

14.   https://www.jdavidtaxlaw.com/blog/irs-updates-large-business-audit-process/

15.    https://www.bhfs.com/insight/taxation-representation-july-30-2025/

16.   https://www.skadden.com/insights/publications/2025/09/insights-september-2025/regulatory-developments/irs-procedural-reforms

Executive Order 14247: What IRS Payment Modernization Means for You and Your Clients

On September 24, 2005, we posted The IRS is Making a Major Shift: Say Goodbye to Paper Checks where we discussed The IRS will phase out paper checks for tax payments beginning September 30, 2025 and followed that up with our November 5, 2025 post Say Goodbye to Paper Checks: Get Ready for Mandatory Electronic IRS Payments in 2025 - IRS Goes Digital where we discussed a major shift is coming to how U.S. taxpayers send and receive money from the IRS.

Now the IRS has issued IR-2026-13 which describes how IRS has begun a major shift in how money moves to and from the federal government under Executive Order 14247, “Modernizing Payments To and From America’s Bank Account.” Starting with the 2026 filing season, the clear policy direction is that electronic payments and refunds will be the default, and paper checks will become the exception. For practitioners, this is less about how we file returns and more about how we get clients paid and how we help them pay.

What Is Executive Order 14247?

Executive Order 14247 directs Treasury, the IRS, and other federal agencies to transition federal payments—both incoming and outgoing—from paper-based to electronic methods, subject to existing law and limited exceptions. That mandate covers refunds, benefits, grants, vendor payments, and payments made to the government for taxes, fees, and penalties. The policy rationale is straightforward: electronic payments are faster, cheaper to process, and less vulnerable to fraud and error than paper checks and money orders.

Treasury is required to cease issuing paper checks for most federal payments by September 30, 2025, again with limited hardship and legal exceptions. Practically, this puts a clear time horizon on check-based workflows and makes it critical for taxpayers and advisors to modernize their banking and payment practices.

What Is Not Changing: Return Filing

One of the most important points from IRS guidance is what this Executive Order does not do: it does not change how taxpayers file their returns. E‑file, paper filing, and existing preparation practices remain in place, and the changes focus solely on the payment and refund rails, not on form preparation or submission. The IRS has stated that guidance for 2025 returns (filed in the 2026 filing season) will spell out the payment and refund procedures, but the core filing mechanics are unaffected.

For now, the IRS will continue to accept checks and money orders, even as it moves toward a fully electronic environment over time. The message for practitioners is to anticipate tighter electronic requirements but not to expect a sudden cutoff in traditional remittances overnight.

Refunds: Moving Away From Paper Checks

A central change is the gradual elimination of paper refund checks for most taxpayers. After September 30, 2025, the IRS generally will not issue paper refund checks where an electronic option is available, except in situations involving hardship, legal constraints, or procedural limitations. Individual taxpayers are expected to receive refunds via direct deposit, prepaid debit cards, or certain approved mobile apps if they lack traditional bank accounts.

If a taxpayer omits direct deposit information on a return, the IRS will still process the return, but the refund may be delayed. In those cases, the IRS plans to send Letter CP53E to the taxpayer’s last known address, asking for bank information or an explanation of why it cannot be provided. Taxpayers will be able to respond through their IRS Individual Online Account, where they can add or update banking details. For security reasons, IRS employees will not take direct deposit information over the phone or in person.

If the taxpayer does not respond to the CP53E letter and there are no other issues with the refund, the IRS will issue a paper check, but only after a six‑week waiting period. For practitioners, that delay is a concrete talking point when encouraging clients to provide accurate direct deposit information up front.

Payments to the IRS: Electronic First

On the payment side, the IRS is signaling a steady transition to electronic methods, even though it will continue to accept cash, checks, and money orders for now. The goal is to “fully transition” to electronic payments over time, subject to limited hardship and legal/procedural exceptions. Current electronic options include:

·         IRS Direct Pay (from a bank account, with no processing fee)

·         Individual Online Account and Business Tax Account payment options

·         EFTPS (for those already enrolled)

·         Debit or credit card and certain digital wallets

·         Cash payments through the Vanilla Direct network at participating retailers, which the IRS treats as an electronic method once received into the system

A key procedural change is that EFTPS enrollment for individuals closed on October 17, 2025. Individuals who are not already enrolled will instead need to use IRS Online Account for Individuals or Direct Pay, and the IRS expects to require a full transition away from EFTPS for individuals later in 2026. For business taxpayers, Federal Tax Deposits must continue to be made electronically, and non‑electronic deposits can trigger failure‑to‑deposit penalties unless the taxpayer can show reasonable cause.

Business, Fiduciary, and International Issues

For business taxpayers, the modernization push extends to refunds as well as payments. The IRS plans to add direct deposit capability to most business return types after September 30, 2025 and will phase out paper checks for business refunds, except where electronic methods are unavailable or an applicable hardship or legal constraint exists. Payroll providers and other third‑party stakeholders will be expected to use electronic channels, with tools like the EFTPS Batch Provider system continuing to support bulk payments.

Fiduciaries—especially court‑appointed trustees and similar roles—occupy a special corner of the guidance. Where a trustee’s systems cannot handle the required electronic methods, the IRS will allow continued use of checks under the hardship/legal/procedural exception framework. However, the expectation is still that institutions and professionals will migrate toward whatever electronic solutions become available over time.

For international taxpayers, the IRS will keep existing methods in place while it builds out improved cross‑border solutions. The agency is working on partnerships with international payment providers and expanded wire and related options to improve speed, cost, and reliability for non‑U.S. accounts.

Action Steps for Practitioners

From a practice‑management standpoint, Executive Order 14247 and the related IRS FAQs translate into clear action items:

·         Systematically collect and verify direct deposit information for all clients and incorporate this into intake and engagement workflows.

·         For unbanked clients, proactively discuss low‑ or no‑cost bank and credit union accounts, prepaid cards, and approved apps that can receive electronic refunds.

·         Encourage clients who pay balances due by check to migrate to IRS Direct Pay, Online Account payments, Business Tax Account, or other electronic options, and document that advice in your files.

·         For estates, trusts, and court‑appointed fiduciaries, identify where systems can support electronic methods and where genuine hardship or legal constraints require continued use of checks, then document those constraints for future reliance.

·         Educate clients that the IRS will not call, text, or email to ask for banking information and that legitimate requests (such as CP53E) will arrive by mail with instructions for responding through secure channels.

As Treasury and the IRS roll out additional technical details and system enhancements, firms that have already standardized on secure, electronic payment and refund workflows will be well‑positioned. The direction of travel is clear: fewer checks in the mail and more funds moving through verified electronic accounts—with corresponding expectations for taxpayers, practitioners, and financial institutions alike.

 Have an IRS Tax Problem?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)