Overview
- In a January 16 decision, the Fifth Circuit held that a limited partner is one who has limited liability under state law, allowing exclusion of distributive shares from self-employment tax while keeping guaranteed payments taxable.
- The court vacated the Tax Court’s ruling and remanded the case, leaving further proceedings to apply the new interpretation.
- The decision is binding in Texas, Louisiana, and Mississippi, and it departs from the Tax Court’s Soroban line that applied a functional, passive-investor analysis.
- Judge Graves dissented, arguing the statute permits a functional inquiry into whether a partner acted in a limited-partner capacity.
- Appeals in the First and Second Circuits remain pending, potential differences could create a circuit split and spur higher-court review, and commentators note unresolved questions for LLPs, LLCs, and owners of limited‑liability general partners as Fifth Circuit taxpayers consider protective refund claims.