Tag: limited partnerships

Fifth Circuit Reverses Tax Court, Sides with Taxpayer and Roundtable in Limited Partnership Tax Dispute

Posted on by abigail_grenadier

The U.S. Court of Appeals for the Fifth Circuit issued a 2-1 decision in Sirius Solutions, L.L.L.P. v. Commissioner (No. 24-60240) on Jan. 16, restricting the federal government’s effort to extend self-employment taxes to a broad range of limited partners in limited partnerships. The Real Estate Roundtable (RER) submitted an amicus brief in the case, and the Court’s ruling closely aligns with the RER’s position.

Court Ruling

  • Since 1977, the tax code has exempted limited partners from self-employment taxes. In recent years, the IRS has asserted a new and more restrictive test to determine whether a limited partner qualifies for the exclusion.
  • The Fifth Circuit held that the Section 1402(a)(13) “limited partner” exception from self-employment (SECA) tax applies to a partner in a state-law limited partnership who has limited liability. (TaxNotes, Jan. 27)
  • The ruling vacates and remands the Tax Court decision that followed Soroban Capital Partners LP v. Commissioner (No. 25-2079), and applied a “functional analysis” of partner roles and activities to determine whether the SECA exclusion applies. (Sullivan Cromwell, Jan. 27)
  • The Fifth Circuit rejected that approach and held that “limited partner” in Section 1402(a)(13) is a status-based, state-law concept tied to limited liability, not an activity test.
  • The decision is the first appellate ruling to reach the issue and reverse the Tax Court’s restrictive interpretation. (Reuters, Jan. 21)
  • This ruling has set a precedent for future SECA tax cases, with significant consequences for real estate and other industries that use limited partnerships for business purposes.

Roundtable Advocacy

  • In August 2024, RER submitted an amicus brief to the Fifth Circuit. The brief argued that the IRS’s interpretation was flawed and inconsistent with decades of state law recognizing that limited partners can provide services while retaining limited partner status. (Roundtable Weekly, Sept. 6, 2024)
  • The brief emphasized that pre-1977 state court decisions and the IRS’s own 1994 proposed regulations contradict the government’s position that limited partners must be passive to avoid SECA taxes.
  • RER argued the Tax Court’s “passive investor” test is found nowhere in the statute and reflects a misunderstanding of partnership law that real estate and other businesses have relied on for decades.
  • RER has continued this advocacy across the circuits. In Dec. 2025, RER filed an amicus brief with the Second Circuit in Soroban, challenging the IRS’s restrictive interpretation of the “limited partner exception” under Section 1402(a)(13). (Roundtable Weekly, Dec. 19, 2025)
  • This successful outcome in the Sirius case supports RER’s position and could reduce momentum for formal tax guidance that would broaden the reach of SECA taxes.

What’s Next

  • Related appeals are pending in the First Circuit (Denham) and Second Circuit (Soroban). (TaxNotes, Jan. 27)
  • Divergent outcomes could create a circuit split and increase the odds of Supreme Court review. (Skadden Arps, Jan. 27)
  • The First Circuit is scheduled to hear oral arguments in Denham on Feb. 5. (TaxNotes, Jan. 27)

RER remains committed to protecting entrepreneurs’ ability to flexibly organize in partnerships and other pass-through entities that promote capital formation, risk-taking, and economic growth, and it will remain engaged as the SECA dispute moves forward.

Roundtable Urges Second Circuit Court of Appeals to Preserve Employment Tax Exemption for Limited Partners

Posted on by abigail_grenadier

The Real Estate Roundtable (RER) filed an amicus brief this week with the Second Circuit Court of Appeals in Soroban Capital Partners LP v. Commissioner, a case that challenges the IRS’s restrictive interpretation of the “limited partner exception” from self-employment (SECA) taxes under section 1402(a)(13) of the tax code. (Amicus Brief, Dec. 15)

Why It Matters

  • Income-producing real estate—rental housing, neighborhood shopping centers, office buildings, etc.—is predominantly owned and operated in partnership form. In 2022, there were over 2.2 million real estate partnerships in the United States, with nearly 9.6 million partners.
  • The Self-Employment Contributions Act (SECA) imposes Social Security and Medicare taxes on net earnings from self-employment. The SECA tax rate on earnings above $250,000 is 3.8%. While the tax applies to a broad range of trade or business income, Congress expressly exempted limited partners from SECA in the Social Security Amendments of 1977.
  • Legislative proposals and proposed regulations have unsuccessfully attempted to extend the 3.8% SECA tax or the 3.8% net investment income tax to limited partners.
  • The IRS has undertaken an aggressive effort to redefine what it means to be a limited partner by challenging taxpayers and litigating the issue in several cases before the Tax Court.

Roundtable View

  • Real estate partnerships have relied for decades on longstanding tax law as it relates to limited partners and the SECA exception.
  • In Soroban and related cases, the Tax Court has imposed a judge-made test and concluded contrary to decades of established state law that a limited partner must be a ‘passive investor,’ notes the RER amicus brief.
  • The Tax Court’s 2023 Soroban ruling wrongly introduced a federal “passivity” requirement that is unmoored from statute, legislative history, and Treasury’s own prior interpretations. However, limited partners have routinely provided business services to their partnerships without losing their limited liability status. (Roundtable Weekly, Sept. 12)
  • “A shift in the federal tax definition of a limited partner could alter underlying partnership economics, increase tax burdens, and create significant uncertainty for real estate and other pass-through businesses,” said RER President and CEO Jeffrey DeBoer. “Such changes need to go through Congress and withstand legislative scrutiny.”

Background

  • RER’s amicus brief was drafted by litigation counsel at Sullivan & Cromwell LLP, in consultation with RER’s Tax Policy Advisory Committee (TPAC). RER also filed an amicus brief in August
    with the First Circuit Court of Appeals in a related case, Denham Capital Management LP v. Commissioner. (Roundtable Weekly, Sept. 12)

Next Steps

The decision in any of the pending cases could have nationwide implications for how partnerships are treated under SECA. A ruling against the Tax Court’s passive investor test would reinforce state law’s central role in defining “limited partner” status.

Roundtable Urges First Circuit Court of Appeals to Preserve Employment Tax Exemption for Limited Partners

Posted on by abigail_grenadier

The Real Estate Roundtable (RER) filed an amicus brief last month with the First Circuit Court of Appeals in Denham Capital Management LP v. Commissioner, a case that challenges the IRS’s restrictive interpretation of the “limited partner exception” from self-employment (SECA) taxes under section 1402(a)(13) of the tax code. (Amicus Brief, Aug. 15)

Why It Matters

  • Income-producing real estate—rental housing, neighborhood shopping centers, office buildings, etc.—is predominantly owned and operated in partnership form. In 2022, there were over 2.2 million real estate partnerships in the United States, with nearly 9.6 million partners.
  • The Self-Employment Contributions Act imposes Social Security and Medicare taxes on net earnings from self-employment. The SECA tax rate on earnings above $250,000 is 3.8%. While the tax applies to a broad range of trade or business income, Congress expressly exempted limited partners from SECA in the Social Security Amendments of 1977.
  • Legislative proposals (including the House version of the Build Back Better Act) and proposed regulations have attempted unsuccessfully to extend the 3.8% SECA tax or the 3.8% net investment income tax to limited partners.
  • More recently, the IRS has undertaken an aggressive effort to redefine what it means to be a limited partner by challenging taxpayers and litigating the issue in several cases before the Tax Court.

Roundtable View

  • Real estate partnerships have relied for decades on longstanding tax law as it relates to limited partners and the SECA exception.
  • In Denham and related cases, the Tax Court “imposed a judge-made test and concluded contrary to decades of established state law that a limited partner must be a ‘passive investor,’” notes the Roundtable amicus brief.
  • On the contrary, “state law in the run-up to the 1977 Amendments tells an entirely different story—one that remains true today: limited partners have routinely provided key business services to their partnerships without losing their limited liability status.” (Amicus Brief, Aug. 15)
  • The Tax Court’s 2023 Soroban ruling wrongly introduced a federal “passivity” requirement that is unmoored from statute, legislative history, and Treasury’s own prior interpretations. (TaxNotes, Sept. 10)
  • “A shift in the federal tax definition of a limited partner could alter underlying partnership economics, increase tax burdens, and create significant uncertainty for real estate and other pass-through businesses,” said Real Estate Roundtable President and CEO Jeffrey DeBoer. “Such changes need to go through Congress and withstand legislative scrutiny.”

Background

  • The Roundtable amicus brief was prepared by President’s Council Member Isaac Wheeler and his colleagues at Sullivan & Cromwell LLP, in consultation with RER’s Tax Policy Advisory Committee (TPAC).

Next Steps

The First Circuit’s decision in Denham could have nationwide implications for how partnerships are treated under SECA. A ruling against the Tax Court’s passive investor test would reinforce state law’s central role in defining “limited partner” status.

Oral Arguments Heard in Sirius Solutions v. Commissioner Case

Posted on by Trey Jackson

This week, the Fifth Circuit heard oral arguments in Sirius Solutions v. Commissioner, a pivotal case that could redefine the self-employment (SECA) tax obligations of many partners in real estate and other limited partnerships.

At issue is the longstanding statutory exception from SECA taxes for limited partners and recent efforts by the IRS to restrict the scope of the limited partner exception to only passive investors. 

Why It Matters

  • The Fifth Circuit’s ruling in Sirius will set a precedent for future SECA tax cases, There are more than 441,000 limited partnerships in the U.S., with over 10 million partners. Nearly half of these limited partnerships are real estate partnerships.
  • If the IRS position prevails, it could result in widespread tax increases on limited partners who engage in any level of activity, directly or indirectly, with respect to the partnership and effectively raise the tax burden on real estate businesses.

Roundtable Advocacy

  • In August 2024, The Roundtable submitted an amicus brief to the Fifth Circuit and argued that the IRS’s interpretation, upheld by the Tax Court, is flawed, pointing to decades of state law that allows limited partners to provide services and still retain their limited partner status. (Roundtable Weekly, September 6)
  • The brief emphasized that pre-1977 state court decisions and the IRS’s own 1994 proposed regulations contradict the government’s position.  The passive investor test is found nowhere in the statute and rests on a fundamental misunderstanding of state laws that Roundtable members and others have relied on for decades.  

Oral Arguments

  • The latest oral arguments on Feb. 6 suggested some judicial skepticism about the IRS’s position. (TaxNotes, Feb. 7).
  • The three-judge panel in the Fifth Circuit Court of Appeals raised the lack of statutory basis for a passive investor test under Section 1402(a)(13) and questioned whether taxpayers had adequate notice of the IRS’s evolving position. 
  • The panel also challenged the workability of the IRS’s multi-factor test used to determine whether a partner is active or passive.  Judge Andrew Oldham noted that IRS forms and guidance have never mentioned a passive investor requirement and called into question whether taxpayers were ever clearly told how the government interprets the law. (Oral Arguments)
  • The Roundtable brief was cited during the oral argument when Judge Oldham asked whether a taxpayer could be both a general partner and limited partner in 1977.

A decision is expected in the next few months. The Roundtable remains committed to protecting entrepreneurs’ ability to flexibly organize in partnerships and other pass-through entities that promote capital formation, risk-taking, and economic growth, and it will remain engaged as the SECA dispute moves forward.   

The Roundtable Files Amicus Brief in Sirius Solutions v. Commissioner

Posted on by Trey Jackson

On August 19, The Roundtable submitted an amicus brief to the Fifth Circuit Court of Appeals in Sirius Solutions v. Commissioner, a pivotal case that could redefine the tax obligations of limited partners under the self-employment tax in the Self-Employed Contributions Act (SECA). (Amicus Brief)

Why It Matters

  • There are more than 441,000 limited partnerships in the U.S., with over 10 million partners. Nearly half of these limited partnerships are real estate partnerships.
  • If the IRS position prevails, it could result in widespread tax increases on real estate limited partners who provide some services to the business and effectively raise the tax burden on real estate investments.
  • The IRS’s position would requires limited partners to be “passive investors” to qualify for the exemption from the 3.8% SECA tax under Section 1402(a)(13).

Roundtable Amicus Brief

  • The Roundtable’s amicus brief argues that the IRS’s interpretation is flawed, pointing to decades of state law that allows limited partners to provide services and still retain their status.
  • The brief emphasizes that pre-1977 state court decisions and the IRS’s own 1994 proposed regulations contradict the government’s position that limited partners must be passive to avoid SECA taxes.
  • The Tax Court’s imposition of the passive investor test is found nowhere in the statute and rests on a fundamental misunderstanding of state laws that Roundtable members and others have relied on for decades.  
  • Ignoring an established body of partnership law, the IRS is relying on a recent Tax Court decision, Soroban, that imposes a judge-made test requiring a limited partner to be a “passive investor.” The Roundtable believes this fundamental error should be reversed. 

What’s Next

  • The Fifth Circuit’s ruling in Sirius will set a precedent for future SECA tax cases, with significant consequences for real estate and other industries that use limited partnerships for business purposes.
  • A successful outcome in the Sirius case could reduce the likelihood that the government moves forward with formal tax guidance that expands the reach of SECA taxes.    

The Roundtable remains committed to protecting entrepreneurs’ ability to flexibly organize in partnerships and other pass-through entities that promote capital formation, risk-taking, and economic growth, and it will remain engaged as the SECA dispute moves forward.