Soroban Capital (Sept 17, 2026) and K Alain (Aug 12, 2026): Limited Partner Self-Employment Tax Tests

Two courts, two sentences

Both courts started from the same statute, the same 1977 enactment (Pub. L. 95-216, section 313(b)) and the same dictionaries. They differ on how much a limited partner may do.

Sources: Second Circuit opinion No. 25-2079 (L), September 17, 2026; Fifth Circuit opinion No. 24-60240, August 12, 2026, both read and saved November 5, 2026. The 1997 proposal is described in the Second Circuit opinion.

The Second Circuit wrote that “there appears to be little daylight between the Fifth Circuit’s position and the Tax Court’s holding,” and added that the Commissioner does not say that any services at all disqualify a partner. Its own words: a partner “may play a role in the partnership and still qualify as” limited, so long as the activities do not amount to controlling, managing or running the business. The Fifth Circuit was harder on the Tax Court. It called the “passive investor” rule one “divorced from statutory text” and noted that the IRS’s own 1978 return instructions defined a limited partner as one “whose potential personal liability for partnership debts is limited to the amount of money or other property that the partner contributed or is required to contribute to the partnership.” The 2025 Form 1065 instructions still carry that definition, followed by a warning: “whether a partner qualifies as a limited partner for purposes of self-employment tax depends on whether the partner is considered a limited partner under section 1402(a)(13).” The Second Circuit answered that IRS instructions are not binding law.

What the Soroban record shows

The facts were stipulated; the taxpayer did not challenge the Tax Court’s findings on appeal. The numbers show how lopsided the arrangement was.

Source: Second Circuit opinion No. 25-2079 (L), September 17, 2026. The IRS notices were issued April 25, 2022 under the TEFRA partnership audit rules, which applied through the 2017 tax year and are why the case is about adjustments to the partnership’s earnings and not a bill to any person; a footnote in the Fifth Circuit dissent makes the same point: “the adjustments do not represent the amount of taxes that would be owed.”

The size of the tax is a separate step. At the Medicare rate alone, 2.9% of $141,530,264 is $4,104,377.66 (our arithmetic). That is not the tax assessed: the 12.4% part stops at the wage base for each person, the 0.9% part is computed per person, and the 92.35% factor on Schedule SE applies. It shows only that the Medicare side, which has no cap, is where the money is.

What K Alain did, and did not, decide

K Alain, L.L.L.P. was formerly called Sirius Solutions, a Delaware limited liability limited partnership running a business consulting firm. It reported ordinary income of $5,829,402 for 2014, $7,242,984 for 2015 and a loss of $490,291 for 2016, allocated it all to limited partners and reported $0 of net earnings from self-employment. The IRS raised the figure to $5,915,918 for 2014 and $7,372,756 for 2015. The Tax Court upheld the adjustments on February 20, 2024, following Soroban I.

On August 12, 2026 the Fifth Circuit panel granted panel rehearing, denied rehearing en banc, withdrew its earlier opinion and substituted this one. It again vacated and remanded “so the Commissioner may consider whether the partners at issue fall within that meaning.” So the court gave a rule, not a result. A partner in the Fifth Circuit who plays a non-significant role in a business may argue that the exception applies; whether the Sirius partners did is still open.

Where real estate fits

Neither opinion concerns real estate. The Real Estate Roundtable filed a brief in Soroban supporting the taxpayer, which shows the industry is watching. What the opinions and the IRS forms let a reader do is sort K-1 situations by which rule governs. The table below is our reading of the sources, not a ruling on any return.

Sources: 26 U.S.C. 1402 (Cornell Legal Information Institute, read November 5, 2026); Instructions for Form 1065 (2025); Instructions for Schedule SE (Form 1040) (2026); the two opinions. The sponsor and dealer rows are our reading of the statute applied to a fact pattern.

The Second Circuit tied the exception to the surrounding paragraphs of section 1402: real estate rentals, stock dividends and interest, and capital asset gains are excluded “but only if they are not the product of a trade or business in those areas.” That passage is why a reader should not treat the limited partner exception as a general passive-income shelter. The test follows the work, not the label on the K-1. For the K-1 boxes themselves, see our K-1 boxes guide; for how the 0.9% tax sits on top, see our Additional Medicare Tax guide.

The same $400,000, with and without the exception

Take a single filer in 2026 with no wages and a $400,000 distributive share from an operating business that the IRS treats as self-employment income (our arithmetic, from the Schedule SE lines and 26 U.S.C. 1401).

Our arithmetic. Rates and the wage base from 26 U.S.C. 1401 and Schedule SE (2026); thresholds from the Instructions for Form 8959 (2025). The 3.8% net investment income tax is a separate question: the Form 8960 instructions exclude “income subject to self-employment taxes” from it. See our net investment income tax guide.

The gap of $35,115.20 a year on $400,000 is why the question is worth litigating, and why a reader who is a general partner should know which side of it the K-1 puts them on.

What a reader can do with this

These are the questions the opinions create, not a recommendation for any return.

• Read box 14 on every K-1. The Schedule SE instructions say a partner reports self-employment earnings from box 14 code A. If it is blank and you do run something, ask why.
• Sort your role by what you do, not what the document calls you. Both courts looked at actual management: committees, hiring, running the business. A “limited partner” who is also a member of the sponsor’s management entity is the Soroban pattern.
• Separate rent from operations. Rents are excluded by section 1402(a)(1); an operating company, a hotel-style rental with services, or a dealer business is not. Our real estate professional guide covers a different test (passive losses) that should not be confused with this one.
• Know your circuit. The Second and Fifth Circuits have spoken; the First is pending. In a circuit that has not ruled, the Tax Court’s functional test in Soroban I is the starting point.
• Ask before filing, not after. The audits in both cases covered 2014 to 2017 and the notices came in 2020 to 2022. The exposure is retrospective.
• Flipping and development income is a separate line. See our house flipping guide for the dealer rules.

The Second Circuit held that a limited partner under section 1402(a)(13) has limited liability and does not run, manage or control the business. Whether a particular sponsor, general partner or active limited partner is on one side or the other is a facts question about the partnership agreement and what the person does. A CPA or tax attorney who has your K-1s decides it; a matched adviser can raise the planning questions with you.

FAQ

Sources, read and saved on November 5, 2026: Soroban Capital Partners LP v. Commissioner, Nos. 25-2079 (L) and 25-2250 (CON), Second Circuit opinion of September 17, 2026; K Alain, L.L.L.P. v. Commissioner, No. 24-60240, Fifth Circuit opinion of August 12, 2026; 26 U.S.C. 1401 and 1402 (Cornell Legal Information Institute); Schedule SE (Form 1040) (2026) and its instructions; Instructions for Form 1065 (2025); Instructions for Form 8959 (2025); Instructions for Form 8960 (2025). This is analysis of public documents, not investment, legal or tax advice.