Tax News & Views Limited Partner Coffee Break Roundup

Fifth Circuit Overrules Tax Court on Meaning of Limited Partner - Kristen Parillo, Tax Notes ($):

A divided Fifth Circuit has held that a limited partner for purposes of the self-employment tax exclusion means a state law limited partner with limited liability, rejecting a Tax Court ruling that the provision applies only to passive investors.

In a 2-1 decision issued January 16 in Sirius Solutions LLLP v. Commissioner, the majority wrote that “the touchstone of a ‘limited partner’ in 1977 was limited liability” and said the Tax Court’s passive investor interpretation “is wrong.”

The decision vacates a February 2024 Tax Court order and decision that had upheld the IRS’s adjustments against Sirius Solutions LLLP, a Delaware limited liability limited partnership that operates a business consulting firm based in Houston.

5th Circ. OKs Self-Employment Tax Break For Limited Partners - Kat Lucero, Law360 Tax Authority ($):

The judges in part disagreed with the Tax Court's application of a cumbersome test, known as the functional analysis, which held that Sirius' limited partners were not "passive investors" entitled to an exemption from the SECA tax under Internal Revenue Code Section 1402 because they were active in the company's day-to-day business operations.

The SECA tax generally applies to earnings of self-employed individuals to fund Social Security and Medicare, but it exempts limited partners under IRC Section 1402(a)(13). Under the functional analysis espoused by the Tax Court, however, a state-law "limited partner" label alone is insufficient for the tax exemption, requiring additional factors to determine whether a partner is truly a passive investor. The Fifth Circuit took exception to that in its Friday ruling.

Narrow Self-Employment Tax Analysis Nixed by Appeals Court - John Woolley and Maia Spoto, Bloomberg ($):

Judge James E. Graves Jr. dissented, saying the law is clear that the tax exemption for limited partners should only apply to passive investors.

“The record here clearly establishes that the individual partners were not merely passive investors but were ‘limited’ in name only,” he said.

My take: The IRS remains free to follow the Tax Court decision outside the Fifth Circuit, which covers Texas, Louisiana, and Mississippi. Appeals are pending in other circuits. If one or more of them uphold the Tax Court, a trip to the Supreme Court may follow.

This litigation has been in the making for decades. IRS attempts to update regulations to reflect the massive changes in state partnership and LLC law were stifled by Congress in the 1990s. Of course Congress never passed legislation to settle the issue. The IRS has since tried to establish policy through examination and litigation.

Student Loan Defaulters to Get Big Beautiful Refunds Too

Trump Administration Delays Forced Collections on Student Loan Defaults - Tara Siegal Bernard, New York Times:

The Trump administration provided struggling student loan borrowers with a reprieve on Friday, announcing that it would temporarily delay forced collections, including seizing tax refunds and garnishing wages, from those who have defaulted on their loans.

The pause reverses the Education Department’s previous plan to gradually restart wage garnishment for groups of borrowers earlier this month, and provides the administration more time to complete its overhaul the student loan repayment system.

The administration has been pushing for a big tax refund season since the passage of their big tax bill last summer. Administrative actions to boost refunds ahead of the midterm elections have included not updating 2025 withholding tables to reflect the bill's tax cuts, delaying their benefit until refunds are claimed during filing season. This action fits that effort.

The Greenland Tariff Meltdown

Trump to Hit European Nations With 10% Tariffs as He Presses for Sale of Greenland - Kim Mackrael, Meridith McGraw and Gavin Bade, Wall Street Journal:

The president, in a social-media post on Saturday, said the 10% tariffs would go into effect on Feb. 1 and would apply to all goods sent to the U.S. from Denmark, Norway, Sweden, France, Germany, the United Kingdom, the Netherlands and Finland. The tariffs will increase to 25% on June 1 and remain in place until a deal is reached for what he called the “complete and total purchase” of Greenland, Trump said.

Trump’s announcement comes after European nations sent military and diplomatic assets to Greenland to deter the U.S. from acquiring the territory.

Trump ties Greenland takeover bid to Nobel Prize in text to Norway leader - Ellen Francis and Steve Hendrix, Washington Post:

In a message to Norway’s prime minister, President Donald Trump linked his insistence on taking over Greenland to his grievance over not receiving the Nobel Peace Prize — adding a new twist to Trump’s stoking of a trade war that is shaking the transatlantic alliance.

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“Considering your Country decided not to give me the Nobel Peace Prize for having stopped 8 Wars PLUS, I no longer feel an obligation to think purely of Peace, although it will always be predominant, but can now think about what is good and proper for the United States of America,” Trump wrote in the text, which was first reported by PBS.

EU readies €93bn tariffs in retaliation for Trump’s Greenland threat - Henry Foy and Mercedes Ruehl, Financial Times:

EU capitals are considering hitting the US with €93bn worth of tariffs or restricting American companies from the bloc’s market in response to Donald Trump’s threats to Nato allies opposed to his campaign to take over Greenland.

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“There are clear retaliation instruments at hand if this continues . . . [Trump’s] using pure mafioso methods,” said a European diplomat briefed on the discussion. “At the same time we want to publicly call for calm and give him an opportunity to climb down the ladder.”

Tariff Wars for Peace, Wine Front

Trump Threatens 200 Percent Tariffs on French Wine - Yan Zhuang, New York Times:

President Trump threatened on Monday to impose 200 percent tariffs on French wine, including Champagne, if President Emmanuel Macron of France declined to join his proposed “Board of Peace” for Gaza.

Critics said the board could undermine the United Nations, which Mr. Trump has accused of liberal bias and waste. A senior French official said on Monday that France did not intend to join, citing concerns that the board’s charter raised serious questions about respecting the role of the United Nations.

Who Pays These Tariffs?

Americans Are the Ones Paying for Tariffs, Study Finds - Tom Fairless, Wall Street Journal:

Americans, not foreigners, are bearing almost the entire cost of U.S. tariffs, according to new research that contradicts a key claim by President Trump and suggests he might have a weaker hand in a reemerging trade war with Europe.

Trump has repeatedly claimed that his historic tariffs, deployed aggressively over the past year as both a revenue-raising and foreign-policy tool, will be paid for by foreigners. Such assertions helped to reinforce the president’s bargaining power and encourage foreign governments to do deals with the U.S.

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By analyzing $4 trillion of shipments between January 2024 and November 2025, the Kiel Institute researchers found that foreign exporters absorbed only about 4% of the burden of last year’s U.S. tariff increases by lowering their prices, while American consumers and importers absorbed 96%.

Meanwhile in the Other Branch of Government

Capitol Hill Recap: Another Bite at the Reconciliation Apple? - Alex Parker, Eide Bailly:

There aren’t nearly as many expiring tax policies in the months ahead to force Congress into major action, and most of their time will be taken up by the 2026 midterms, anyways.

Nevertheless, key Republicans such as House Speaker Mike Johnson are talking about trying to pass another major bill this year, to address issues left out of the OBBBA. Johnson said the party was again looking at the reconciliation process, which allowed Congress to pass the OBBBA with only Republican votes through both the House and Senate. While not exclusively tax-specific, reconciliation bills tend to involve many tax changes, as the rules limit what else can be included.

To proceed, Johnson will need to overcome some strong skepticism from his own caucus. Rep. Jason Smith, R-Mo., the chairman of the tax-writing House Ways and Means Committee, has said that he doesn’t think it is possible. That’s a sentiment echoed by a Ways and Means staffer who spoke at a DC tax conference last week, who said the current dynamics would make it very difficult to pass something along partisan lines.

IRS: Budgets and Enforcement

IRS Advisory Council report defends workers, criticizes budget and staff cuts - Martha Waggoner, The Tax Adviser:

IRSAC, which had 37 members in 2025, advises the IRS commissioner and recommends administrative and policy changes for the agency. Its most recent report concentrates on upheaval at the IRS, which includes multiple leadership changes, including the role of IRS commissioner, a position now filled by Treasury Secretary Scott Bessent.

The Inflation Reduction Act of 2022, P.L. 117-169, called for $80 billion to be allocated to the IRS over 10 years, but more than half of that has been rescinded, the report said. And on Wednesday, the House approved a two-year budget for some federal agencies, including $11.2 billion for the IRS, a 9% cut from its 2025 budget, according to Bloomberg and other media outlets.

SEC and IRS Enforcement Changes Are No Excuse for Lax Behavior - Andrew Belnap, Bloomberg ($):

In contrast to the SEC’s purposeful recalibration, the erosion of IRS enforcement appears less strategic and more destabilizing. Having seven different commissioners in less than a year creates a level of instability that makes it nearly impossible to execute a coherent enforcement philosophy.

The IRS also has faced more than a decade of declining staffing and budget authority. While the Inflation Reduction Act briefly increased funding, ongoing political efforts to claw back those resources have left the agency unable to rebuild its core enforcement infrastructure.

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Even though IRS enforcement is expected to decline, tax professionals must resist any temptation to equate reduced audit rates with reduced compliance obligations. The tax gap is already enormous, and future administrations facing fiscal pressure may seek to recoup lost revenue by increasing enforcement or revisiting prior-year filings.

Blogs and Bits

Tax statements you need to file your tax return - Kay Bell, Don't Mess With Taxes. "And those potential IRS inquiries, based on its checking its copies against your tax return entries, are another reason why you shouldn’t even think about filing before you get all your official tax statements."

Tax Breaks: The Countdown To The 2026 Tax Season Edition - Kelly Phillips Erb, Forbes:

Finally, as tax filing season kicks off, scammers are ramping up, too. The Federal Trade Commission is reporting a surge in calls from people posing as the IRS or fake “tax resolution” agencies with official-sounding names, claiming you owe back taxes or qualify for a special relief program. These calls are designed to scare you into acting fast—sharing your Social Security number, bank details, or sending money to settle a tax bill that doesn’t exist.

Remember: the IRS will never initiate contact by phone, text, email, or social media. If you really owe taxes, they’ll contact you by mail first.

February 2 Deadline is Approaching for Forms W-2 and 1099 - Parker Tax Pro Library. "As the February 2 deadline for sending Forms W-2, 1099-MISC, and 1099-NEC to employees and payees fast approaches, it is a good time for practitioners to reach out to clients and remind them of this deadline and the penalties that can result when the deadline is missed."

California Is #1 State People Leave—But Tax Man May Follow Them - Robert Wood, Forbes. "Many innocent facts might not look so innocent to California's tax agency. For example, do you maintain a California base in a state of constant readiness for your return?"

Quotable

Then there is the really bad tax policy. I hate all taxes. I don’t like paying them, and I think they make the economy less efficient. But they are also a necessary fact of life. The government does need revenue, and again there are some distributional concerns. But there are good taxes and bad taxes. Good taxes don’t mess with people’s behavior so much. I think where many economists break with everyone else is that we take it for granted most people make the best decisions for themselves. They know their preferences; they have more information. It is not our job to make people deviate from their normal behavior, or bad things happen—or you just grow less. A good tax is less distortionary and can also be collected. Feasibility is important too.

And by these standards, the best kinds of taxes are consumption taxes, followed by income taxes, followed by wealth taxes. And yet we have the worst kinds of taxes.

- Allison Schrager, "These inefficiencies won't stand," Known Unknowns.

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Tax News & Views Limited Partner Coffee Break Roundup

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Joe B. Kristan, CPA