Update: On August 12, 2026, the Fifth Circuit granted panel rehearing in this case, withdrew the January 2026 opinion this article originally covered, and substituted a new opinion reaching a different conclusion about what “limited partner” means. This article has been rewritten to reflect the substitute opinion. The original analysis, which treated state-law limited partner status as controlling, no longer describes the law in the Fifth Circuit. If you stopped paying self-employment tax on your partnership distributions after the Fifth Circuit’s January decision, the ground under that position moved on August 12, 2026.
That day the Fifth Circuit granted panel rehearing, withdrew its January opinion, and substituted a new one. The withdrawn opinion had been read to mean that limited partner status under state law was enough to claim the exclusion in Section 1402(a)(13) of the Internal Revenue Code. The substitute opinion answers the same question the other way. In the court’s own words: “Today, we hold its original public meaning is a partner who plays no significant role in managing or running a business.”
For founders and executives holding partnership interests in Texas, Louisiana, or Mississippi, that flips the question you have to answer. It is no longer what your certificate of limited partnership says. It is what you actually do inside the business, and you already know the honest answer to that one.
A Quick Primer: Limited Partnerships and Self-Employment Tax
Before diving into the ruling, here’s some background if you’re new to these concepts.
A limited partnership (LP) is a business structure with two types of partners. General partners run the business and have unlimited personal liability for the partnership’s debts. Limited partners are typically investors who contribute capital but don’t manage day-to-day operations. In exchange for staying out of management, limited partners get liability protection: if the business fails, they can only lose what they invested, not their personal assets.
Self-employment tax is the Social Security and Medicare tax that self-employed people pay. When you work for an employer, your employer pays half of these taxes and you pay the other half through payroll withholding. But when you’re self-employed, including as a partner in a partnership, you pay both halves yourself. The combined rate is 15.3% on most earnings.
Here’s where it gets important: back in 1977, Congress created an exemption. Under Section 1402(a)(13) of the Internal Revenue Code, limited partners don’t have to pay self-employment tax on their share of partnership profits. The idea was that limited partners are more like investors than workers, so their partnership income is more like investment income than wages.
The question this case answers: what does “limited partner” actually mean for purposes of this exemption?
What the Court Actually Held
The court’s order is short and it is not ambiguous: “Treating the petition for rehearing en banc as a petition for rehearing, the petition for rehearing is GRANTED. We withdraw our prior opinion, Sirius Solutions, L.L.L.P. v. Commissioner of Internal Revenue, 165 F.4th 374 (5th Cir. 2026), and substitute the following.”
A withdrawn opinion is not weakened precedent. It is not precedent at all.
The substitute opinion is captioned K Alain, L.L.L.P.; K Alain GP, L.L.C.; Tax Matters Partner v. Commissioner of Internal Revenue, No. 24-60240, decided August 12, 2026, on appeal from the United States Tax Court (Nos. 11587-20, 30118-21). If you or your advisor set a citation alert on the old case name in January, it may not have caught this.
The holding runs to one sentence: “The sole question on appeal is what ‘limited partner’ means in § 1402(a)(13). We hold the ordinary public meaning of this phrase is a partner who plays no significant role in managing or running a business.”
Read that against the January framing and the direction reverses. Under the withdrawn opinion, limited liability under state law did the work. Under the substitute, the work is done by your role in managing or running the business. A partner who plays a significant role in managing or running the business is not a “limited partner” for purposes of Section 1402(a)(13).
The court did not decide whether these particular partners qualify. It vacated and remanded. The opinion discusses the Tax Court’s functional analysis test from Renkemeyer, and notes that the parties “stipulated that Sirius’ partners are not limited partners if evaluated under a functional analysis test.” Where that leaves the taxpayers is for the proceedings on remand, and this article does not predict it.
What This Means for You
Self-employment tax runs 15.3% on earnings up to the Social Security wage base ($184,500 in 2026), plus 2.9% Medicare tax on everything above that, plus an additional 0.9% Medicare surtax for high earners. On $1 million of distributions, tens of thousands of dollars a year ride on how the distributive share gets classified. That number now cuts both ways. It is what a genuinely hands-off partner keeps, and it is the annual amount at stake for a partner who claimed the exclusion while helping run the business.
Here’s where you stand:
Inside the Fifth Circuit (Texas, Louisiana, Mississippi): The substitute opinion is the current Fifth Circuit statement of what “limited partner” means in Section 1402(a)(13). The test named in the opinion is whether the partner plays a significant role in managing or running the business. Entity paperwork does not answer that by itself, and a partner who runs the company has a harder position than the January coverage suggested.
LLC members and LLP partners: The January opinion was described as reserving judgment on whether it reached these entity types. That reservation belonged to an opinion that no longer exists. Read the substitute opinion directly before assuming anything about how it treats an LLC or an LLP, because this article does not resolve that question.
Outside the Fifth Circuit: The substitute opinion does not bind courts in other circuits. What changed for you is which Fifth Circuit authority exists to point to. There is no longer a Fifth Circuit decision holding that state-law status alone controls.
One thing the rehearing did not change: guaranteed payments for services are their own analysis. A guaranteed payment is a fixed amount the partnership agrees to pay you whether or not the partnership makes a profit, usually in exchange for services. Think of it like a salary. Section 1402(a)(13) reaches a limited partner’s distributive share, which is your portion of the partnership’s profits based on your ownership percentage, and it carves out guaranteed payments “for services actually rendered.” Whichever way the classification question comes out for your distributive share, the guaranteed payment line on your K-1 sits outside it.
Where This Stands Now
Here is what is confirmed. On August 12, 2026, the Fifth Circuit granted panel rehearing, withdrew its January opinion, and substituted one adopting a test built on the partner’s role in managing or running the business. The court vacated and remanded instead of resolving these partners’ status, so the dispute is not finished.
Here is what this update does not tell you: where the related appeals in other circuits stand today. The original version of this article named two of them and projected a Supreme Court timeline off a circuit split that had not happened. Those projections are gone. If you are counting on activity outside the Fifth Circuit, get the posture from the courts’ own records before you act on it.
The part worth sitting with is the rehearing itself. A panel of the same court looked at the same statute twice in seven months and came out in different places. That is a fair warning about how much weight one recent decision can carry.
The Questions to Answer Before You Call Your Tax Advisor
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Who actually manages or runs the business? Not who the partnership agreement calls a limited partner. Who signs contracts, sets budgets, hires, and holds bank authority. The court’s test is about role, and that is the record you will be judged on.
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Did anyone here take a position in reliance on the January opinion? Original returns, amended returns, protective claims. Someone has to own the list, and right now that person is probably assuming someone else has it.
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How much of each partner’s K-1 is distributive share versus guaranteed payment? The classification fight only reaches one of those two lines. If nobody outside the tax preparer knows the split, that is the first gap to close.
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If your structure changed because of the January decision, what was the business reason underneath it? If there was one, the structure holds. If the only reason was the tax result, you have a problem that is now visible.
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Who is watching the remand? The court vacated and remanded rather than deciding, which means this is an open item on someone’s list or it is on nobody’s.
Practical Takeaways
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Read the holding sentence yourself before any advisor call. The substitute opinion is No. 24-60240, decided August 12, 2026. The operative words are “no significant role in managing or running a business,” and everything downstream turns on how your facts sit against that phrase rather than on how anyone summarized it.
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Put every position taken in reliance on the January opinion on one page, with filing dates and amounts, before your next finance review. A withdrawn opinion cannot support a return position, and someone has to decide what happens to each one.
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Build the management-role record out of operating facts, not entity documents. Signature authority, budget approval, hiring decisions, bank authority, and calendars showing operating meetings. Your certificate of limited partnership says nothing about the question the court asked.
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Separate distributive share from guaranteed payments on every partner’s K-1 (Box 14, Code A shows self-employment earnings) so you know which dollars are even in dispute. Mixing them is how a manageable question turns into a whole-return question.
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Re-open any partner compensation model or financial projection that assumed no self-employment tax on distributive shares in Texas, Louisiana, or Mississippi. That assumption was resting on an opinion that no longer exists, and the difference shows up in cash, not just on a return.
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Tell your CFO or outside accountant about the withdrawal directly instead of assuming they saw it. A substitute opinion issued under a different case caption is easy to miss if the alert was set on the old name.
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Hold any entity conversion that was driven by the January decision until the management-role analysis is done. If the conversion still makes sense for operating reasons, document those reasons and proceed. If the tax result was the only reason, the reason moved.
What This Changes for Founders, Operators, and Boards
For founders and operating partners
If you hold a limited partnership interest and you also run the company, you are precisely the person the new test is aimed at. The question is no longer whether your interest is labeled limited. It is whether your day job amounts to playing a significant role in managing or running the business. The uncomfortable part is that the facts that make you good at your job are the same facts that answer the court’s question.
For CFOs and finance leads
Any model, partner distribution projection, or accrual built on the January opinion needs a second look, and this year’s tax position has to be set with the substitute opinion in front of you rather than with the summary of the old one that circulated in January. The practical effect is a cash question, not just a filing question: partner draws sized around an exclusion that may not apply leave a gap somebody has to fund.
For boards and investors
In diligence on a partnership, the question set changed direction. A target that claimed the Section 1402(a)(13) exclusion for active partners in reliance on the January opinion has an open item rather than a closed one, and the size of it is calculable from the K-1s. Representations drafted in the spring to track “applicable circuit law” now track a different rule in the Fifth Circuit than they did when they were written, which is worth a look before the next closing.
The counterpoint worth stating plainly: none of this means an active partner automatically owes the tax. The court vacated and remanded without deciding these partners’ status, and “significant role in managing or running a business” is a standard that will get worked out on facts. What changed is which way the uncertainty runs.
Watchlist
- Resolved, August 12, 2026: Panel rehearing granted, the January opinion withdrawn, and a substitute opinion issued under the caption K Alain, L.L.L.P. v. Commissioner, No. 24-60240.
- Open: The proceedings on remand. The court vacated and remanded without resolving the partners’ status.
- Open: Whether any further review is sought in this case. Nothing of the kind is confirmed as of this update.
- Open: Whether Congress or Treasury supplies a definition of “limited partner” for Section 1402(a)(13). No development is confirmed as of this update.
Closing Perspective
What I keep coming back to is how fast a clean answer went stale. In January, the reasoning read like a bright line: state-law status controls, activity is beside the point. Seven months later that opinion does not exist, and the test the same court substituted asks the exact question the first version said you could skip.
A panel opinion is a data point, not a foundation. Anything you build on one decision, you should be able to unwind for the price of the decision itself.
I would not spend energy guessing where the remand lands. The useful work is knowing your own facts well enough to answer the court’s question about your role in the business in about a minute, with a record behind it, whichever way the rest of this goes. The next real signal is what the proceedings on remand do with “significant role,” because that phrase is doing all the work now and nobody has told us yet how much weight it holds.
This article is for informational purposes only and does not constitute legal advice. Every company’s situation is different, and you should consult with qualified legal counsel before making compliance decisions based on the developments discussed here.
