7752 / Is a limited partner's distributive share of partnership income subject to the self-employment tax?
The answer to this previously clear-cut question has become more doubtious in recent years.Today, the answer may depend on which court hears the case and whether Congress elects to weigh in on the current split.
Late in 2023, the Tax Court held that when determining whether a limited partner's distributive share of partnership profits is exempt from self-employment tax under IRC Section 1402(a)(13), the limited partner's function and role in the partnership must be evaluated.The court did not actually perform the analysis in this "functional analysis test" to reach its conclusion in the 2023 case. Later, in 2025, the Tax Court reconsidered the issue and affirmed its conclusion that the partners in question did not qualify for the exemption. In applying the functional analysis test,the court found that the limited partners in question were limited partners in name only. The decision noted that the partners were "essential" to the business' operations, responsible for generating income and that the "limited" partners were held out to the public as essential, participating in both management and the partnership's decisions. In further applying the test, the court noted that the partners worked full-time, had authority to manage and that their income was not of an investment nature.1
The Fifth Circuit disagreed with this position. The case is Sirius Solutions L.L.L.P. v. Commissioner (Jan. 16, 2026). In vacating the Tax Court decision, the Fifth Circuit clarified that whether a partner in a state law limited partnership is a "limited partner" depends only on whether that partner has limited liability under state law and does not depend on the partner's level of participation in the business. The Fifth Circuit Court of Appeals interpreted Section 1402(a)(13) based on the contemporaneous meaning of the phrase "limited partner" as used by Congress when it created the exception--rather than an analysis of the limited partner's day-to-day activities within the partnership.2
Prior to the 2023 and 2025 Tax Court rulings, the answer was generally, no.A limited partner's distributive share of partnership trade or business income was simply not treated as earnings from self-employment subject to Social Security tax on self-employment income. However, guaranteed payments to limited partners for services actually rendered to or on behalf of the partnership are treated as self-employment income.3
1. Soroban Capital Partners v. Commissioner, 161 T.C. No. 12 (Nov. 23, 2023), Soroban Capital Partners LP v. Commissioner (T.C. Memo 2025-52).
2. Sirius Solutions L.L.L.P. v. Commissioner, No. 24-60240 (Jan. 16, 2026).
3. IRC § 1402(a)(13).