Some Americans Eligible for Thousands in Tax Refund After Court Ruling

A new court ruling means several more Americans in three states could qualify for thousands in tax refunds.

The US Court of Appeals for the Fifth Circuit ruled earlier this month that the Tax Court’s decision in Sirius Solutions, LLLP v. Commissioner would be reversed. That means people in three states, Texas, Louisiana and Mississippi, don’t owe self-employment tax if they’re a true limited liability partner under the law.

Why It Matters

Tax filing season came underway last month, and the specific tax rules can determine exactly how much you owe or receive from the federal government. Under the new court ruling, thousands of taxpayers could file amended returns and get money back if they have already paid self-employment taxes.

What To Know

The new court ruling stipulates that a “limited partner” means “a partner in a limited partnership that has limited liability.”

That means these partners would have limited liability to avoid the self-employment taxes on their income.

The Fifth Circuit wrote that when a partner holds several roles in a partnership, the limited partner exception only applies to the income earned in the partner’s capacity as a limited partner.

“The court basically told the IRS, ‘No, you can’t just look at how active someone is in the business and decide whether they owe self-employment tax. If someone’s a true limited partner under state law (meaning they actually have limited liability), their share of partnership income doesn’t get hit with SE tax. Period,'” Michael Ryan, a finance expert and the founder of MichaelRyanMoney.com, told Newsweek.

Who’s Impacted by Fifth Circuit’s Tax Ruling

If you’ve been paying self-employment tax on your partnership income under the previous IRS rules in Texas, Louisiana, or Mississippi, and you’ve filed an amended return, you may get that money back.

“We’re talking potentially thousands a year for someone pulling good income from a partnership or fund structure,” Ryan said.

“This is especially huge for fund managers, consulting partners, PE folks, law firm partners who structured themselves as limited partners. They’ve basically been overpaying, and now they’ve got a window to fix it.”

What’s the Deadline to File an Amended Tax Return?

The deadline to file an amended tax return depends on the date you originally filed your tax return.

Generally, you must file Form 1040-X within three years of the date you first filed, or within two years of the date you paid the tax, whichever is later.

So if you filed for 2022 return in April of that year, the deadline would be in April of this year, three years after you first filed.

Tax Refund Estimator: How to Calculate Your Refund

There are several ways to estimate your tax refund online without any mathematical equations. The IRS Tax Withholding Estimator is one such option, and TurboTax and H&R Block also offer free estimators.

Generally, tax software provides a running total of your refund as you enter information into your forms. This can help, even if you changed jobs or are self-employed.

What People Are Saying

Alex Beene, a financial literacy instructor for the University of Tennessee at Martin, told Newsweek: “This ruling clarifies who qualifies as a ‘limited partner’ for the self-employment tax exception under federal tax law. The court rejected the IRS’s use of a functional ‘passive investor’ test and instead held that if someone is a limited partner under state law, that status generally controls for the tax exemption. For taxpayers structured as limited partnerships, this could significantly reduce exposure to self-employment taxes and provide clearer planning guidance.”

Michael Ryan, a finance expert and the founder of MichaelRyanMoney.com, told Newsweek: “The IRS had been doing this thing where they’d say, ‘Yeah, sure, you’re technically a limited partner, but you’re doing a lot of work, so we’re gonna tax you anyway.’ The court was like, nope! The statute already drew that line when it says limited partners are exempt (except for guaranteed payments for services). That’s the whole point of being a limited partner.”

What Happens Next

Several other cases on the matter are pending before the First Circuit (for Massachusetts) and the Second Circuit (for New York).

“If you’re in the Fifth Circuit and you’re a legitimate limited partner? Strong move to amended file returns and restructure prospectively. Get good documentation, though. Clearly lay out roles, who’s doing what, compensation structures. Make sure it actually holds up,” Ryan said.

“If you’re outside those three states? It’s murkier. The IRS will keep fighting this in other circuits. There are cases pending in the First and Second Circuits, and honestly, the government will be looking hard for a pro-IRS appellate win to create a circuit split. So if you’re thinking about a refund claim outside TX/LA/MS, go in with your eyes open. File a protective claim to preserve your statute of limitations, but don’t bank on it.”

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