On August 19, The Roundtable submitted an amicus brief to the Fifth Circuit Court of Appeals in Sirius Solutions v. Commissioner, a pivotal case that could redefine the tax obligations of limited partners under the self-employment tax in the Self-Employed Contributions Act (SECA). (Amicus Brief)

Why It Matters

• There are more than 441,000 limited partnerships in the U.S., with over 10 million partners. Nearly half of these limited partnerships are real estate partnerships.

• If the IRS position prevails, it could result in widespread tax increases on real estate limited partners who provide some services to the business and effectively raise the tax burden on real estate investments.

• The IRS’s position would requires limited partners to be “passive investors” to qualify for the exemption from the 3.8% SECA tax under Section 1402(a)(13).

Roundtable Amicus Brief

• The Roundtable’s amicus brief argues that the IRS’s interpretation is flawed, pointing to decades of state law that allows limited partners to provide services and still retain their status.

• The brief emphasizes that pre-1977 state court decisions and the IRS’s own 1994 proposed regulations contradict the government’s position that limited partners must be passive to avoid SECA taxes.

• The Tax Court’s imposition of the passive investor test is found nowhere in the statute and rests on a fundamental misunderstanding of state laws that Roundtable members and others have relied on for decades.  

• Ignoring an established body of partnership law, the IRS is relying on a recent Tax Court decision, Soroban, that imposes a judge-made test requiring a limited partner to be a “passive investor.” The Roundtable believes this fundamental error should be reversed. 

What’s Next

• The Fifth Circuit’s ruling in Sirius will set a precedent for future SECA tax cases, with significant consequences for real estate and other industries that use limited partnerships for business purposes.

• A successful outcome in the Sirius case could reduce the likelihood that the government moves forward with formal tax guidance that expands the reach of SECA taxes.    

The Roundtable remains committed to protecting entrepreneurs’ ability to flexibly organize in partnerships and other pass-through entities that promote capital formation, risk-taking, and economic growth, and it will remain engaged as the SECA dispute moves forward.