A decision issued by the U.S. Court of Appeals for the Fifth Circuit rejects the IRS’ “passive investor” test and holds that limited partner status under Section 1402(a)(13) of the Internal Revenue Code turns on limited liability under state law, not on a partner’s level of involvement in the partnership’s business. Two cases in the First and Second Circuits will determine whether the ruling gains national traction or sets the stage for U.S. Supreme Court review. In a guest article, Skadden attorneys Kat Saunders Gregor, Elizabeth J. Smith and Theodore B. Galvan summarize the Fifth Circuit’s decision, forecast future potential legal developments in this area and highlight the key takeaways for investment management firms. See “Trends in IRS Audit Efforts and Tips on Surviving an IRS Examination” (Apr. 3, 2025).