In previous posts, I have highlighted the ongoing litigation over the term “limited partner,” as defined in section 1402(a)(13) (the so-called “limited partner exception”). The Fifth Circuit, in its decision last month in K Alain, LLLP v. Commissioner, held that “the ordinary public meaning of [the] phrase [“limited partner”] is a partner who plays no significant role in managing or running a business,” but explicitly rejected the Tax Court’s Soroban decision.¹

On appeal in the Second Circuit, the court held in Soroban Capital Partners, LP v. Commissioner that “In 1977, when Congress enacted § 1402(a)(13), the ordinary meaning of ‘limited partner’ was a partner who had limited liability for partnership debts and who did not partake in running the business.”² Accordingly, the Second Circuit affirmed the Tax Court’s Soroban judgment.

As a technical matter, this creates a circuit split between the Fifth and Second Circuits. (The First Circuit is also hearing an appeal on the same issue in Denham Capital Management LP v. Bessent. That case was argued on February 5, and supplemental briefing was completed on May 4.) Nonetheless, while the Fifth Circuit rejected the Tax Court’s “functional analysis” test (i.e., a requirement to examine the roles and responsibilities of the partner in question to determine whether or not such partner is a passive investor or is a limited partner in name only), its own test (a limited partner is “a partner who plays no significant role in managing or running a business”) feels an awful lot like the functional analysis test that the Fifth Circuit so stridently rejected. Indeed, in a footnote to its decision in Soroban, the Second Circuit wrote that “We do observe, however, that if our reading of K Alain is correct, there appears to be little daylight between the Fifth Circuit’s position and the Tax Court’s holding in Soroban II that a limited partner is one who acts ‘generally akin to [a] passive investor[].’”³ Accordingly, absent further developments in the Fifth Circuit or First Circuit, any resolution to the question seems more likely to come from Congress than from 1 First Street.

For prior TaxProf Blog coverage, see here:

• Update in the Limited Partner Litigation (Aug. 19, 2026)
• Tax Notes: Soroban Gets Cool Reception on Limited Partner Argument (July 1, 2026)
• Updates on the Limited Partner Exception Litigation (Mar. 18, 2026)
• Reflections on the Fifth Circuit’s Ruling on Limited Partner Exception (Jan. 21, 2026)

1. K Alain, L.L.L.P. v. Comm’r, 184 F.4th 766, 769 (5th Cir. 2026). ↩︎
2. Soroban Cap. Partners LP v. Comm’r, No. 25-2079, 2026 WL 2751819, at *2 (2d Cir. Sept. 17, 2026). ↩︎
3. Id. at *18 n.15. ↩︎