As I’ve previously written, in January, the Fifth Circuit ruled in Sirius Solutions, LLLP v. Commissioner that the term “limited partner,” as defined in section 1402(a)(13) (the so-called “limited partner exception”) is “a partner in a limited partnership that has limited liability.” The government petitioned the Fifth Circuit to rehear the panel decision en banc, and the Fifth Circuit responded by denying rehearing en banc, treating the petition as a petition for panel rehearing, granting panel rehearing, withdrawing the January opinion, and substituting the August opinion in K Alain, LLLP v. Commissioner. (The case is the same; the name of the taxpayer has been updated.)

In the end, the Fifth Circuit—the same panel and the same two-judge majority—once again rejected the Tax Court’s functional analysis, articulated in Soroban Capital Partners LP v. Commissioner. It held instead that, “all relevant sources suggest that, in 1977, the ordinary public meaning of ‘limited partner’ included a partner who did not play a significant role in managing or running the business.” The two opinions in this litigation from the Fifth Circuit (the first one, authored by Judge Oldham; the second, issued per curiam by Judge Oldham and Judge Englehardt) both attempt to root their analysis in the textualist tradition.

What is remarkable is that on the same facts, the same litigants, the same law, and the same interpretative method, the same judges were able to come to two very different conclusions—indeed, the August opinion explicitly embraces one of the very conclusions the January opinion had rejected. Consider the following.

• In January, Judge Oldham declared that “[a]t bottom, in any complex statutory dispute, the best course is to follow the statute’s plain text.” Applying that approach, the opinion concluded: “Each contemporaneous dictionary has one and only one characteristic in common: limited liability. The touchstone of a ‘limited partner’ in 1977 was limited liability.”
• Seven months later, Judges Oldham and Engelhardt reached a different conclusion. Once again, the opinion insisted: “Here, we apply the plain text. Nothing more.” But this time the plain text yielded a different answer: “At bottom, all relevant sources suggest that, in 1977, the ordinary public meaning of ‘limited partner’ included a partner who did not play a significant role in managing or running the business.”

Over at Tax Notes, Kristen Parillo reports on the decision:

The Fifth Circuit’s revised test for the limited partner exception — which now hinges on management and control — provides little guidance on what standards should be used for applying the test, according to tax professionals.

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Walter D. Schwidetzky of the University of Baltimore School of Law said he views the new opinion “mostly as a win for the government.”

The majority appeared to adopt the 1976 Revised Uniform Limited Partnership Act and not the 2001 Uniform Limited Partnership Act, which allows more meaningful participation by limited partners, said Schwidetzky. “The fact that the decision does not allow a taxpayer to be involved in management and control is a big deal,” he added.

The majority’s January 16 opinion “would have made SECA essentially optional for wealthy taxpayers. That is no longer the case,” Schwidetzky said. “Going forward, it might be possible for an employee not in control to get, say, a guaranteed payment subject to SECA and a profit share not subject to SECA, but currently I do not see that as a big loophole. Aggressive taxpayers might try to game the management and control piece somehow, maybe with a straw man, but that could backfire.”