Fifth Circuit Recasts 1977 Tax Exception, Redefining Limited Partner Test
Updated
Updated · Forbes · Aug 17
Fifth Circuit Recasts 1977 Tax Exception, Redefining Limited Partner Test
1 articles · Updated · Forbes · Aug 17
Summary
Aug. 12 brought a rare appellate reversal: the Fifth Circuit withdrew its January opinion and replaced it with a new rule for the section 1402(a)(13) self-employment tax exception.
The substitute opinion says a limited partner is one who plays no significant role in managing or running the business, abandoning January’s bright-line focus on state-law limited-partner status and limited liability.
The panel acted after the government sought rehearing, then vacated the Tax Court’s decision and sent the case back to apply the new management-based standard.
The new test still rejects the Tax Court’s passive-investor approach in Soroban, but offers little guidance on what counts as a significant management role or how dual-capacity partners should be treated.
Because the ruling binds Louisiana, Mississippi and Texas, it reshapes planning in the Fifth Circuit while leaving a broader circuit split possible as appeals proceed in the First and Second Circuits.