Fifth Circuit Strikes Back On SECA Limited Partner Exception

A recent Fifth Circuit decision, Sirius Solutions LLLP v. Commissioner, brought welcome news for the investment funds industry. In Sirius, the Fifth Circuit held that the Self-Employment Contributions Act ("SECA") "limited partner exception" does not require a partner to be a "passive investor," as the IRS and the Tax Court had previously indicated. Instead, a taxpayer qualifies for the limited partner exception if it is "a limited partner in a state-law limited partnership that is afforded limited liability."

Section 1402(a)(13) generally exempts the distributive share of partnership income allocable to a "limited partner, as such," from self-employment tax, but the term "limited partner" is not defined. In several recent Tax Court cases, the Tax Court adopted the IRS's passive investor standard and reasoned that a "functional analysis" should be applied to assess whether state law limited partners act like passive investors. The Tax Court accordingly ruled that