In a move that shocked many tax practitioners, the Fifth Circuit has withdrawn its January opinion in a closely watched partnership tax case. In its place is a significantly different interpretation of who qualifies as a “limited partner” for purposes of the self-employment tax exception.

Background and Procedure

In January, the U.S. Court of Appeals for the Fifth Circuit held in Sirius Solutions, L.L.L.P. v. Commissioner that the term “limited partner” under section 1402(a)(13) of the tax code meant a state-law limited partner with limited liability. Under that approach, what a partner actually did for the business did not determine whether the exception applied—that was a very different take from the IRS’s view.

On August 12, 2026, the court withdrew its January opinion in its entirety and issued a substitute opinion in the case (now captioned K Alain L.L.L.P. v. Commissioner). The court now holds that a limited partner for purposes of section 1402(a)(13) is a partner who plays “no significant role in managing or running a business.”

If the whole thing has you scratching your head, it’s because this is not what happens in most court cases. Procedurally, here’s what happened.

After that January ruling, the government asked for an en banc rehearing. That means it asked the Fifth Circuit to reconsider the January decision. En banc rehearing requires action by the eligible active judges of the circuit and is considered extraordinary.

The Fifth Circuit denied the request. But the original three-judge panel treated the en banc petition as also asking for panel rehearing. A panel rehearing asks the original three-judge appellate panel to reconsider its own decision because it allegedly overlooked or misapprehended a material point of law or fact.

Ordinarily, the Fifth Circuit........

© Forbes