US – Fifth Circuit Rejects IRS’ ‘Passive Investor’ Test For Limited Partner Exception In Self-Employment Tax.

Executive SummaryWhat’s new: The Fifth Circuit rejected the IRS’ “passive investor” test for the self-employment tax exception, holding that a “limited partner” is simply a partner in a state-law limited partnership with limited liability. Background: Self-Employment Tax and the Limited Partner ExceptionThe Internal Revenue Code generally imposes self-employment tax on a partner’s distributive share of partnership income. Fifth Circuit: ‘Limited Partner’ Means What It SaysThe Fifth Circuit reversed, holding that a “limited partner” under section 1402(a)(13) is a partner in a state-law limited partnership with limited liability — period. These sources consistently defined a limited partner by limited liability, not by the degree of involvement in the partnership’s business. Key TakeawaysThe Fifth Circuit has rejected the IRS’ “passive investor” test for the limited partner exception to self-employment tax.