
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. Â
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.Â
- 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.