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Over the years, I have heard people argue that the tax laws should be a few pages long. Perhaps a bit longer, but certainly not thousands of pages.

Those people 鈥� meaning the ones who argue for short, simple laws 鈥� say the length is the fault of people like me.

Me? What did I do? They mean a broad class of people who make a living from interpreting the tax laws.

They say that by making complex laws we create a market for our services. Our master could be Humpty Dumpty.

Humpty was known for his use of words. Words that he himself would define. But such a master does us no favors.

Laws that fail to define what is meant simply create confusion. Our inability to define a word makes us look like novices rather than experts.

Such is the current state of the tax-law definition of a 鈥渓imited partner.鈥� It can be good to be a limited partner, but how does one achieve this state?

The tax law imposes a tax as high as 15.3% of net earnings from self-employment.

This tax has an exception. A limited partner avoids the tax unless he receives a fixed payment for services rendered to a partnership.

In today鈥檚 world, partners want to avoid this tax on self-employment. This can be achieved if the partner is a limited partner.

Why is this so hard? State laws allow someone to be classified as a limited partner. That would seem to settle the matter.

There are a few problems. First, federal tax law should not be determined by differences in state law.

If state laws could determine federal tax results, people could be taxed differently based on which state they live in or operate a business from.

Second, people can be both limited and general partners in the same partnership. State laws allow for differences in management rights based on status.

The person who holds both limited and general partnership interests can run the partnership from their general partner perch.

They can also claim an exemption from self-employment tax for any income said to be attributable to their limited partner status.

This is happening with large investment partnerships, hedge funds and private equity funds.

The income said to be for the limited partnership interest can be hundreds of millions of dollars.

The Tax Court has said that the limited partner exception applies only if the partner 鈥渇unctions鈥� like a limited partner.

A limited partner, the Tax Court says, is a passive investor. We must look to the functions of that investor to determine their true status.

The Fifth Circuit Court of Appeals said no, we do not. They said a limited partner is a partner in a state law limited partnership who has limited liability.

Well, that is what two of their judges said in a 2-1 decision. This decision opened the door to massive avoidance of self-employment tax.

The IRS said we want the entire Fifth Circuit to rehear this case. No, the court said, but the three judges said they would reconsider their prior holding.

Now the same three judges, again by a 2-1 vote, say that a limited partner does not play a significant role in managing or running the business.

Forget about that state law thing. The Fifth Circuit also said our view is not the same as the Tax Court and is 鈥渄ifferent and more refined.鈥�

You can be involved in nonmanagerial decision-making. But not managerial decision-making.

The Fifth Circuit says it defines a limited partner by using 鈥渢he ordinary public meaning of this phrase.鈥�

I have never known there to be an ordinary public meaning of 鈥渓imited partner.鈥� The ordinary public seldom uses the phrase.

The failure of Congress to write a clear law that defines a limited partner has led to courts creating their own Humpty Dumpty meanings.

This is likely to get worse because two other appellate courts are currently weighing the issue. We may have two more definitions to deal with.

The solution is obvious. Congress can clarify what the term means. That requires a thoughtful, functioning Congress. Give us more words, not less.

As Winnie the Pooh would say, 鈥淥h, Bother.鈥� Not even the Owl can help us with this one.

Jim Hamill is the director of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.