An interesting Court of Appeals decision came out on Friday: Sirius Solutions, LLLP v Commissioner. Before getting to the decision and what it means (and does not mean), I wanted to comment about timing of court decisions.
This case deals with the 2014-2016 tax returns of Sirius (filed in 2015 through 2017). The audit of 2014 was completed, with a report on 2014 issued in June 2020. (There’s nothing in the Court decision to note when the audit began; however, given the normal three year statute of limitations it likely began in 2016). Sirius disagreed with the result at audit, and filed a Tax Court petition in September 2020. (The IRS later ruled against Sirius for 2015 and 2016 in June 2021; Sirius filed a second Tax Court petition in September 2021. The two cases were consolidated for trial.) The Tax Court ruled in February 2024 against Sirius. The Court of Appeals decision was released on January 16, 2026. That’s about 11 years from filing until a precedential opinion. It takes a long time for there to be precedential opinions in tax cases.
As for the case, it’s an important one dealing with limited liability partnerships and self-employment tax. Sirius filed three returns showing various amounts of income, but no self-employment income for their limited partners. (The limited partners were active in the business.) The IRS’s position is that only passive limited partners (partners not active in the business) could avoid self-employment tax on the income. The Tax Court ruled (at the request of Sirius) that a prior Tax Court case, Soroban Capital Partners LP v Commissioner, bound the court to rule against Sirius. The 5th Circuit Court of Appeals did not agree.
The 5th Circuit’s ruled that Limited Liability Limited Partnerships (LLLPs) are a creature of state law; and that Congress didn’t write the law on self-employment tax to include income attributable to LLPs. (Do note that guaranteed payments made to limited partners are subject to self-employment tax.) The IRS could appeal this ruling (either asking the full 5th circuit to rule on it en banc or appeal to the Supreme Court) but for now Sirius Solutions is the law in the 5th Circuit (Louisiana, Mississippi, and Texas).
Before I get into an interesting corollary from this ruling I do need to let readers know that both the IRS and Tax Court are free to continue ruling against limited partners who follow the Sirius Solutions decision in states not covered by the 5th Circuit. And I expect both to do so (until other circuits opine on this decision, or the Supreme Court rules).
The corollary relates to Limited Liability Company (LLC) members. I’m such an individual. Am I (or any other LLC member) subject to self-employment tax on my share of the net income of my business? I haven’t fully researched this, but it’s on my agenda. When this portion of the Internal Revenue Code was enacted (Section 1402(a)), Limited Liability Companies weren’t a thing (as far as I know). The 5th Circuit opinion specifically says (in footnote 1), “…[W]e do not discuss whether members of another entity, such as an LLP or LLC, may also qualify for the limited partner exception.” It makes for interesting speculation.
