The Sirius Solutions Case Could Redefine Self-Employment Tax Rules for Partnerships

What Is the Sirius Solutions Case About?

Sirius Solutions is a Texas-based consulting firm structured as a limited liability limited partnership (LLLP). The firm is contesting the IRS’s approach to defining who qualifies as a “limited partner” under the tax code.

Under Section 1402(a)(13), a limited partner’s share of partnership income is excluded from self-employment tax, as long as that partner is truly limited in their role. However, the IRS and Tax Court have adopted a functional approach, examining whether the individual materially participates in the business, regardless of their formal title.

Sirius Solutions is challenging that standard.

What Is Sirius Arguing?

Sirius Solutions asserts that:

• The phrase “limited partner” should be interpreted according to its plain and ordinary meaning, based on state law definitions and legislative intent.

• When the statute was enacted in 1977, the IRS and the Social Security Administration both recognized the state-law meaning of “limited partner”, that is, someone who does not materially participate and whose liability is limited.

• The Tax Court’s functional analysis, which focuses on what the partner actually does rather than their legal designation, goes beyond the statutory text and imposes additional requirements not found in the law.

Sirius believes the statute does not require courts to look beyond whether the partner is a limited partner under applicable state law.

What Makes This Case So Important?

Sirius is now appealing the Tax Court’s position to the Fifth Circuit Court of Appeals. If that court rules in their favor, it could conflict with existing rulings in other circuits—specifically:

• The First Circuit, where the Denham Capital case is currently on appeal;

• And potentially the Second Circuit, if Soroban Capital Partners is appealed.

This could create a circuit split, meaning different parts of the country would apply the tax law differently. That scenario significantly increases the chances that the issue could be taken up by the United States Supreme Court in the future.

Background: The IRS’s Functional Approach

In recent years, the Tax Court has rejected taxpayer claims to the limited partner exclusion when the partner:

• Actively participates in management;

• Provides substantial services to the business;

• Sits on governance committees or exercises control.

This approach was applied in:

• Soroban Capital Partners LP v. Commissioner, 161 T.C. 310 (2023);

• Denham Capital Management, LP v. Commissioner, T.C. Memo. 2024-114.

In both cases, the Court concluded that real-world involvement determines whether income is subject to self-employment tax, not titles or state-law labels.

Sirius is directly challenging that framework.

Why This Matters to Business Owners and Investors

If you are a general or limited partner, or even a managing member of an LLC:

• Your income may be subject to self-employment tax, even if you are labeled a limited partner.

• The IRS may ignore your title and instead examine what you do.

• If Sirius is successful on appeal, the interpretation of the law may shift—potentially reducing SE tax liability for similarly structured businesses.

This issue is particularly important for:

• Private equity and venture capital firms;

• Professional services firms;

• Family offices;

• And consulting businesses.

What You Should Do Now

• Review your role in your business or fund. Are you passive or materially involved?

• Examine your partnership agreements. Do they reflect the reality of how your business operates?

• Prepare for both outcomes: If the courts uphold the IRS’s view, SE tax exposure will remain. If Sirius succeeds, a planning opportunity may emerge.

I Can Help You Evaluate the Impact

If you are uncertain how the Sirius Solutions case, or the broader IRS position on self-employment tax for limited partners might apply to your business or investment structure, I can help you assess the risks and opportunities.

Schedule a call to discuss how these developments may affect your current tax position and what steps you can take to stay ahead of potential changes.