SECA Limited Partner Exception: Ripe For Review?

The debate over the scope of the limited partner exception to the Self-Employment Contributions Act (“SECA”) continues to make its way through the courts.

Section 1402(a)(13) generally exempts the distributive share of partnership income allocable to a “limited partner, as such” from self-employment tax, but neither the statute nor the legislative history defines the term “limited partner.” Recent litigation has centered on whether the exception turns on a partner’s status under state law or, as the government contends, on a “functional analysis” of whether the partner acts as a passive investor.

In our last update, available here, we discussed the Fifth Circuit’s decision in Sirius Solutions LLLP v. Commissioner, which rejected the Tax Court’s functional analysis approach and held that a partner’s status as a limited partner under state law was sufficient to qualify for the exception. The decision stands in contrast to the Tax Court’s approach in Soroban Capital Partners LP v.