A Tax Telenovela? Yes! K Alain v. Commissioner

A look at what the Fifth Circuit’s new limited-partner standard could mean for self-employment tax.

Some people think tax is boring.

To me, it is an ongoing telenovela: competing interpretations, unexpected reversals, appellate drama, and just when you think you understand where the story is going, somebody files for rehearing.

The latest example is K Alain, L.L.L.P. v. Commissioner, decided by the Fifth Circuit on August 12, 2026.

At the center of the case is a surprisingly simple question:

What exactly is a “limited partner”?

That may seem like something the Internal Revenue Code would define.

It does not.

And that omission has turned into a heated debate over self-employment tax.

The Problem

Ordinarily, a partner’s share of income from a partnership’s trade or business is included in net earnings from self-employment.

But Section 1402(a)(13) creates an exception: a limited partner’s share of partnership profits is generally excluded from self-employment income.

The problem is that Congress used the term “limited partner” without telling us exactly what it means for purposes of this particular rule.

So the courts have had to answer the question themselves:

Does “limited partner” simply mean someone who is legally designated as a limited partner? Or does it depend on what that person actually does for the business?

First Came Soroban

In Soroban Capital Partners LP v. Commissioner, 161 T.C. 310 (2023), the Tax Court took what is commonly called a functional approach.

In simpler terms, the court said the label alone was not enough.

A partnership could not simply call someone a limited partner and assume that the person’s share of the profits automatically escaped self-employment tax.

Instead, the Tax Court wanted to know what the partner actually did.

Was this person a passive investor?

Or was the partner actively performing the work of the business?

Under Soroban, a partner who was heavily involved in providing services to the partnership could have difficulty qualifying for the limited-partner exception, even if state law and the partnership agreement called that person a limited partner.

Sirius Solutions Changes the Story

On January 16, 2026, the Fifth Circuit issued an opinion in Sirius Solutions, L.L.L.P. v. Commissioner.

And it went in a very different direction.

The court essentially said that if state law recognizes someone as a limited partner and that person is not personally responsible for the partnership’s debts, then the individual qualifies as a “limited partner” for purposes of Section 1402(a)(13).

In other words, a person’s participation or active involvement in the business did not determine whether they qualified as a limited partner.

That was a major departure from Soroban and a substantial victory for taxpayers.

Under that approach, the legal structure of the partnership carried enormous weight.

But the story was not over.

The government asked the Fifth Circuit to reconsider.

And the Fifth Circuit did.

The August Reversal

On August 12, 2026, the Fifth Circuit withdrew its January Sirius Solutions opinion and issued a new opinion under the partnership’s new name: K Alain, L.L.L.P. v. Commissioner, No. 24-60240 (5th Cir. Aug. 12, 2026).

And with it came a new rule.

The court said that a limited partner is someone who plays “no significant role in managing or running a business.”

That is importantly different from both Soroban and the Fifth Circuit’s original Sirius opinion.

The Fifth Circuit did not return to the Tax Court’s passive-investor standard.

Instead, the court looked at how limited partnerships were understood when Congress enacted Section 1402(a)(13) in 1977.

The court concluded that limited partners historically could do more than simply invest money and sit quietly on the sidelines, so some participation was permitted.

Why K Alain Matters

The August decision lands somewhere between the Tax Court’s Soroban approach and the Fifth Circuit’s original Sirius opinion.

It is less taxpayer-friendly than the January Sirius decision, because simply being a state-law limited partner with limited liability is no longer enough.

But K Alain is also more taxpayer-friendly than Soroban, because the Fifth Circuit rejected the idea that a limited partner must necessarily be a completely passive investor.

A person may potentially perform services or participate in the partnership without automatically losing the limited-partner exception.

The real question is whether that participation rises to the level of significant management or control.

The Fifth Circuit also did not ultimately decide whether the K Alain partners themselves qualify for the exception.

Instead, it sent the case back to the Tax Court to reconsider the facts using this new standard.

And the Story Is Not Over

Two other closely watched cases involve the same limited-partartner question.

Soroban is currently before the Second Circuit.

Denham Capital Management is before the First Circuit.

If those courts adopt the same reasoning as K Alain, we may begin to see a more consistent national standard.

If they do not, taxpayers could end up facing different interpretations of the same federal tax provision depending on where their case is heard.

That would create a genuine circuit split, and potentially make the issue a stronger candidate for Supreme Court review.

So, for now, K Alain gives us an important new rule, but not necessarily the final answer.

A limited partner does not have to sit silently on the sidelines.

But simply putting the words “limited partner” next to someone’s name is not enough either.

The question is increasingly becoming:

What role does this person actually play in running the business?

Apparently, Section 1402(a)(13) still has a few plot twists left.

Sources

K Alain, L.L.L.P. v. Commissioner*, No. 24-60240 (5th Cir. Aug. 12, 2026).

Sirius Solutions, L.L.L.P. v. Commissioner*, 165 F.4th 374 (5th Cir. 2026), opinion withdrawn and superseded by *K Alain*.

Soroban Capital Partners LP v. Commissioner*, 161 T.C. 310 (2023).

Denham Capital Management LP v. Commissioner*, T.C. Memo. 2024-114, appeal pending in the First Circuit.

 

What Records Should Micro Business Owners Keep?

Hi, friends, and welcome back to Tax Tribe!

I’m Wendy Uken, an Enrolled Agent and tax resolution specialist.

In the last article, we talked about why good record-keeping matters. Today, we’re going to talk about what kinds of records you should keep.

The good news is that you don't need to save every scrap of paper you've ever come across. What you do need is a record-keeping system that clearly documents three things:

• Money coming into the business

• Money going out of the business

• Assets owned by the business

Let’s break those down.

Income Records

Let’s pretend you have a podcast, and you’re doing so well that a company sponsors an episode and you begin earning advertising revenue.

Then, bam!, listeners start purchasing your products.

Depending on the nature and amount of those payments, you may receive an information return such as a Form 1099.

If you have never heard of a Form 1099, that is okay.

A 1099 is somewhat similar to a W-2 in that it reports money paid to you. The difference is that, with certain types of 1099 income, you are generally being paid as an independent contractor rather than as an employee, so taxes are not typically withheld from those payments.

If you receive an information return, make sure you keep it with your tax records.

And remember: if you earned income, you still need to report it even if nobody sends you a 1099.

Because “I don’t think I got a 1099 for that” is not going to hold up well in an audit.

Along with any tax forms you receive, keep records that help establish where your business income came from. Depending on your business, that may include invoices, payment processor reports, sales records, and bank statements.

Expense Records

Next, let’s talk about the other side of the equation: expenses.

This is where good record-keeping can directly affect how much of your income ultimately becomes taxable and whether you are able to claim all the deductions you're legally entitled to.

For expenses, you will want to keep documents such as:

• Invoices

• Receipts

• Bills

• Credit card statements

• Bank statements

And because the IRS is strict about substantiating expenses, you want records that establish two important things: first, that the expense actually occurred, and second, that you paid for it.

For example, let’s say you pay $20 a month for a podcast-hosting subscription.

Your bank statement may show a recurring $20 debit from your account, but that, by itself, does not necessarily tell us what you purchased or why it was a business expense.

The invoice or receipt helps establish what the expense was.

The bank or credit card record helps establish that you paid it.

And your records, together, help establish the business connection.

At the end of the day, your documentation should help answer questions such as:

Who did you pay? How much did you pay? When did you pay it? What did you purchase? And how is that purchase connected to your business?

That is why one document is not enough to tell the full story.

Business Asset Records

Finally, you want to keep records for your business assets.

A business asset is property that has value, that is used in the business, and that is generally expected to remain in use for a few years.

For podcasters or content creators, that could include equipment such as your microphone, computer, camera, mixer, or other production gear.

When you buy a business asset, keep documents showing:

• When you acquired it

• How you acquired it

• What you paid for it

These amounts may become important when determining the asset’s tax basis.

Receipts, invoices, purchase confirmations, and purchase agreements can therefore become very important records.

If you eventually sell or otherwise dispose of an asset, keep documentation showing when and how you disposed of it and what you received for it. You may need those records to determine whether the transaction resulted in a gain or loss.

Keep It Simple

I know this is a lot of information that may seem overwhelming and daunting, especially when you hear terms like “tax basis and gains or loss”.

Don't panic. The most important thing to remember is this:

For income, keep records showing where your money came from.

For expenses, keep records showing the amount you spent, what you spent it on, and the business connection.

And for assets, keep records showing what you acquired, what it cost, and what happened to it if you later disposed of it.

What Comes Next?

Now that we know what kinds of records to keep, the next question is the age-old one:

How long do we have to keep this for?

That is exactly what we will tackle next.

If you have not already, subscribe to Tax Tribe so you don't miss any upcoming episodes or deductions that could help you keep more money in your pocket.

Why Good Record-keeping Matters for Micro-Business Owners

Hi Friends! 

And welcome! Or welcome back, to Tax Tribe.

I’m Wendy Uken, an Enrolled Agent, tax resolution specialist, and the sole proprietor of Tax Tribe.

Being an Enrolled Agent means that I am a licensed tax professional authorized to represent taxpayers before the Internal Revenue Service and state taxing authorities. 

My primary area of expertise is income tax resolution.

For more than a decade, my work has included reviewing tax notices, communicating with government agencies, helping taxpayers return to compliance, and negotiating formal, binding resolutions that champion my clients’ goals; whether that means affordability, asset protection, or privacy.

Through Tax Tribe, I want to help micro-business owners keep more money in their pockets by showing you how to maximize the deductions you are legally entitled to and helping you prepare your businesses in case of an audit.

But before we get into the nitty-gritty, I want to take a moment to introduce myself to my new readers and catch up with those of you who have been here before.

Where Have I Been?

Around 2020, as my professional workload increased, content creation decreased.

Then, in 2023, I experienced a scary medical emergency.

At that point, I knew that I urgently needed to prioritize my well-being. That meant finding a more stable source of income, so at the end of 2024, I accepted a position with an accounting firm as a staff accountant.

My experience there was positive, and I learned a great deal. But I eventually realized how much I missed resolution work.

I resigned from the position, and about a year later, I was offered the opportunity to return to the same firm as a tax resolution specialist.

But alas, as life would have it, that position was eliminated in July 2026.

Losing a position is never easy, but it also created an opportunity for me to reconsider where I want to be.

Which brings us back to here and now.

I want to share my knowledge with entrepreneurs, side hustlers, creators, and dreamers who are just beginning to build something of their own.

Starting a business can be exciting, but accounting and taxes can feel intimidating. For many new business owners, they are among the greatest sources of confusion and some of the most common obstacles on the path toward financial freedom.

But they don't have to be.

You do not need to become an accountant overnight.

You do, however, need to understand the basics so that you can make informed decisions, protect what you are building, and avoid preventable problems.

So, as with any good adventure, let’s start at the beginning.

Why Must Small Businesses Keep Records?

If you’re anything like me, knowing what to do isn’t enough. You also need to understand why you’re doing it.

Complete and accurate records help you determine whether your business is actually improving.

For example, listenership is important for a podcast. But if your number of listeners doubled, did your income also double? What about your expenses?

Did it lead to sponsorship opportunities, product sales, subscriptions, or other measurable growth?

Audience growth is important, but records help you understand whether that growth is also improving the financial health of your business.

Records can also show you which products or services are selling.

For example, let’s say you offer merch in connection with your podcast or brand.

• Which products are popular?
• Which products are sitting unsold?
• Which items generate the strongest profit margin?
• In other words: what’s hot, and what’s not?

Without records, your money may be moving, but you won’t actually know if you're generating a profit.

Accurate records also allow you to prepare reliable financial statements, which may be important when dealing with banks, lenders, investors, business partners, or creditors.

• A bank may want to know whether your business earns enough income to repay a loan.
• A potential business partner may want to understand the company’s financial performance.
• A creditor may ask for documentation showing your ability to meet an obligation.

When your records are complete and organized, you are in a stronger position to make confident decisions.

And last, but certainly not least, good record-keeping is essential when preparing your tax returns.

You, of course, want to report all of your income accurately.

But reporting income is only half of the equation.

You also want to identify and claim all of the business expenses you are legally entitled to.

Without proper records, you may forget deductible expenses or be unable to support them if your return is audited.

At the end of the day, record-keeping is not simply busywork to be completed for the government. It is a powerful tool for understanding your business, measuring your progress, and protecting what you are building.

Now that we understand why good record-keeping matters, in the next article we will explore which records micro-business owners should keep.

Make sure to subscribe so you do not miss any upcoming articles or any deductions that could help you keep more money in your pocket.

Thank you for joining me, and welcome, or welcome back, to Tax Tribe!