Blog · 14 October 2026

Limited Partner Self-Employment Tax After Soroban: Second Circuit Ruling — What US CPA Firms Should Tell Clients

By Keshav Bansal, CA

The limited partner self-employment tax exception just got narrower. On September 17, 2026, the Second Circuit affirmed the Tax Court in Soroban Capital Partners LP v. Commissioner (Nos. 25-2079, 25-2250), holding that hedge-fund principals who ran the firm were not “limited partners” under IRC §1402(a)(13). Their distributive shares of roughly $141.5 million for 2016 and 2017 were subject to self-employment tax. For US CPA firms, Soroban changes how you review K-1s for partners in LPs and LLCs, and what you tell clients who rely on a state-law title.

What the Second Circuit decided in Soroban

Section 1402(a)(13) excludes from net earnings from self-employment (NESE) the distributive share of “a limited partner, as such,” other than guaranteed payments for services. The Code does not define “limited partner.” Soroban argued that any partner holding a limited partnership interest with limited liability under state law qualifies.

The court disagreed. Writing for the panel, Judge Chin held that a “limited partner” under §1402(a)(13) is a partner who, in addition to having limited liability, does not run, manage, or control the partnership’s business. The court relied on the term’s 1977 ordinary meaning, the words “as such” and the legislative history. It also held the Tax Court had jurisdiction because NESE was a partnership item under TEFRA, which still applied to the 2016 and 2017 years.

The facts CPA firms should study:

• Soroban was a Delaware limited partnership; its general partner was a separate Delaware LLC.
• The three principals were limited partners and members of the general partner. They held the titles Managing Partner and Chief Investment Officer, Co-Managing Partner, and Head of Trading and Risk Management.
• They worked full time, about 2,300 to 2,500 hours a year, managed the funds’ investments, sat on Soroban’s governing committees and took part in hiring, firing and promotion decisions.
• Their guaranteed payments for 2016 and 2017 totaled about $2.5 million, while their distributive shares totaled roughly $141.5 million. Soroban reported NESE of $2,035,395 (2016) and $1,901,131 (2017), roughly the guaranteed payments plus the general partner’s share.

The IRS adjustments raised Soroban’s NESE by $77,663,962 for 2016 and $63,866,302 for 2017. The appeal followed the Tax Court’s decisions in Soroban I, 161 T.C. 310 (2023), which adopted a functional analysis, and Soroban II, T.C. Memo. 2025-52, which applied it.

Services are not automatically disqualifying

The opinion does not say that any work for the partnership triggers self-employment tax. The court wrote that “so long as the activities in question do not constitute controlling, managing, or running the business, a partner may play a role in the partnership and still qualify.” Duane Morris (October 8, 2026; republished by Legal500 on October 12) describes it as a fact-intensive inquiry, not a simple “services equal SECA” rule. The firm also notes the analysis can reach LLCs and professional service firms whose members enjoy limited liability while taking part in management.

Soroban also argued that Congress’s 1997 moratorium on a proposed regulation, which used bright-line tests such as more than 500 hours of participation, ruled out a functional test. The court disagreed, describing its test as depending on the totality of the circumstances rather than a strict numbers game.

Fifth Circuit K Alain and First Circuit Denham

In January 2026 the Fifth Circuit, in Sirius Solutions, L.L.L.P. v. Commissioner, held that a limited partner was simply a partner in a limited partnership with limited liability. On August 12, 2026, the same panel withdrew that opinion and substituted K Alain, L.L.L.P. v. Commissioner (No. 24-60240). It now holds that a limited partner is “a partner who plays no significant role in managing or running a business,” and it vacated and remanded so the Commissioner may consider whether the partners fall within that meaning. The Second Circuit said there appears to be little daylight between the two tests. Duane Morris reports that the K Alain taxpayer petitioned for en banc review on September 26, 2026.

A third case, Denham Cap. Mgmt. LP v. Commissioner (No. 25-1349), is pending in the First Circuit on both the TEFRA jurisdiction question and the merits. Two circuits have now rejected a state-law-title-only test.

How to review K-1 Box 14 after Soroban

The IRS Partner’s Instructions for Schedule K-1 (Form 1065) already say that whether a partner is a limited partner for self-employment tax depends on §1402(a)(13), not just on state law. Box 4a reports guaranteed payments for services; Box 14, code A reports net earnings (loss) from self-employment. Build these checks into your review:

• Compare Box 14 code A with Box 4a and the partner’s ordinary income. If code A equals only the guaranteed payments while a large ordinary-income share is excluded, ask why.
• Read the role, not the label. Ask for the operating or partnership agreement, committee memberships, officer titles, signing authority and hiring or firing responsibilities.
• Check the guaranteed-payment level. In Soroban the distributive shares were over 55 times the guaranteed payments. A small guaranteed payment next to a large allocation to a working partner is the pattern the court examined.
• Separate passive investors from working members. A partner who contributes capital and stays out of management is in a different position from a founder who runs the business.

What CPA firms should tell clients

• A state-law title is not enough. “LP” or “non-managing member” on paper does not settle self-employment tax if the person runs, manages or controls the business.
• Document the facts annually. Keep a short memo per partner: role, authority, hours if tracked, committees and capital contributed. Clean books help; see our QBO cleanup handoff checklist.
• Revisit open positions before filing. For extended 2025 returns due October 15, 2026, confirm whether an exclusion is still supportable and whether disclosure (for example, Form 8275) is appropriate. Our October 15 extension checklist covers the rest of the deadline.
• Explain the stakes. The opinion describes self-employment tax as 12.4% Social Security plus 2.9% Medicare, with no cap on Medicare. See our note on IRS audit rates and assessment periods.
• Refer structuring to counsel. Changes to agreements, management companies or compensation design are legal decisions. Your job is to surface the facts and the risk.

Where this fits for Tax Brew readers

Soroban is a review-quality issue: K-1 data, partner roles and the documentation behind Box 14 need a consistent check before returns are signed.

If partnership returns and K-1 tie-outs are crowding your reviewers this season, outsourced tax prep and bookkeeping support for US CPA firms can handle data gathering, workpapers and drafts while your firm keeps judgment and sign-off. Email info@taxbrewglobal.com.

Check current guidance: this article summarizes the Second Circuit’s opinion in Soroban Capital Partners LP v. Commissioner (decided September 17, 2026), the Fifth Circuit’s substituted opinion in K Alain, L.L.L.P. v. Commissioner (August 12, 2026), the Duane Morris alert of October 8, 2026 (republished by Legal500, October 12, 2026) and the IRS 2025 Partner’s Instructions for Schedule K-1 (Form 1065). It is general information, not tax or legal advice. Further appeals, a First Circuit ruling in Denham or IRS guidance may change the analysis. Sources as of 14 October 2026.