August 8th, 2025

July Federal Tax Update

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Author: David S. De Jong

INDIVIDUALS

Public Law 119-21, the One Big Beautiful Bill Act (OBBBRA), contains the following provisions:

In Mennemeyer v. Commissioner, TC Memo 2025-80, the Tax Court concluded that a $1.5 million post-arbitration settlement was fully taxable to an ex-PNC employee who claimed no physical injury in her Complaint; the Court did allow her to deduct attorney fees under a broad statutory interpretation that Section 62(a) allows an “above the line” deduction in any case affecting any aspect of the employment relationship.

In Molinari v. Jockeys’ Guild, 136 AFTR2d 2025-________, a Massachusetts Federal District Court held that the Guild did not wrongfully issue him a Form 1099 as it found that payments from a state fund for disabled riders was taxable in the absence of a statutory exclusion.

In Cardulla v. Commissioner, 136 AFTR 2d 2025-5189, the Ninth Circuit Court of Appeals agreed with the Tax Court that raw land was held for investment rather than as a business despite an annual payment of $5,000 for an easement granted to a fish farm.

In Besaw v. Commissioner, TC Summary Opinion 2025-7, the Tax Court denied a deduction for non-cash charitable contributions where Form 8283 lacked dates and values of donations; the donee organizations on their receipts had also left blank sections that were supposed to identify the donated goods and values.

In Rock Cliff Reserve v. Commissioner, TC Memo 2025-73, the Tax Court valued conservation easements in LLCs at a total of $5.5 million, far less than the $62 million claimed; the Court noted that the valuator cut and pasted portions of his opinion from Wikipedia.

In Arden Row Assets v. Commissioner, TC Memo 2025-71, the Tax Court held that an exchange of letters between the Government and the taxpayer regarding a conservation easement did not result in a binding settlement agreement which would have allowed out of pocket amounts to be deducted, the Court indicating that a decision document must be filed to bind the parties and, in any event, there was a lack of clarity as to the meaning of certain language in the letters.

RETIREMENT AND ESTATE PLANNING

Public Law 119-21, the One Big Beautiful Bill Act (OBBBRA), contains the following provisions:

In Estate of Rowland v. Commissioner, TC Memo 2025-76, the Tax Court held that a decedent’s estate could not use portability from the first spouse’s estate as the return of that spouse filed within the “safe harbor” period lacked complete descriptions and valuation information and was not in substantial compliance with requirements.

BUSINESS

Public Law 119-21, the One Big Beautiful Bill Act (OBBBRA), contains the following provisions:

Proposed Regulations Under Code Section 338(h) related to built-in gain and loss were withdrawn by IRS; the Proposed Regulations would have severely limited the ability to enhance a net operating loss deduction through an acquisition.

In Anaheim Area Management v. Commissioner, TC Memo 2025-68, the Tax Court found that $51.4 million transferred to another entity was not a loan giving rise to a bad debt deduction as it had more characteristics of a capital contribution with no note, interest, fixed repayment terms or enforcement rights.

In Swift v. Commissioner, 136 AFTR 2d 2025-5160, the Fifth Circuit Court of Appeals agreed with the Tax Court that payments by a chain of urgent care centers to a captive insurance carrier were nondeductible as the arrangement did not constitute bona fide insurance as shown by the irregular handling of claims and the availability of commercial coverage at a fraction of the cost; in Kadau v. Commissioner, TC Memo 2025-81, the Tax Court reached a similar conclusion where $50 million in premiums were paid over a six-year period while there were $17,611 in payouts.

In Bank of America Corporation v. United States, 136 AFTR2d 2025 – __, the Fourth Circuit Court of Appeals agreed with a North Carolina Federal District Court that pre-merger losses by one merged company cannot offset gains of the other company to avoid paying interest on the profitable entity’s tax obligations.

In Bryan v Commissioner, 136 AFTR2d 2025 – ___, the Ninth Circuit Court of Appeals agreed with the Tax Court that an individual could not deduct losses from two LLCs as he had insufficient basis from each entity’s debt as it was recourse as to other members and not allocable to him.

In JM Assets v. Commissioner, 165 TC No. 1, the Tax Court determined that an IRS Regulation was contrary to the statute and threw out a Final Partnership Adjustment in that the 270-day time limit for issuance by IRS is measured from the date that the partnership submitted its modification request and not from the later date when the partnership’s separate 270-day period for seeking modifications expired.

In Maxon Corporation v. Commissioner, 165 TC No. 2, the Tax Court in an appeal from a Collection Due Process hearing held that penalties determined at the partnership level stand even when IRS cannot assess a tax deficiency due to the statute of limitations running out following mailing the Notice of Deficiency to an incorrect address as the penalty assessment is not subject to a deficiency procedure.

In Williams v. United States, 136 AFTR2d 2025-5174, an Arkansas Federal District Court threw out a jury verdict which found that a Chief Financial Officer did not act willfully in failing to pay over payroll taxes based on precedent in the Eighth Circuit that mere knowledge of the unpaid taxes while other creditors are paid constitutes willfulness; the jury had found that the CFO was a “responsible person” which is the other factor required for personal assessment.

In Mayo Clinic v. United States, 146 AFTR2d 2025 – ___, the Eighth Circuit Court of Appeals agreed with a Minnesota Federal District Court that the clinic qualified as an educational organization exempt from tax on unrelated business income, holding that the patient care activities were educational and part of the organization’s integration of education and research with clinical practice.            

In National Religious Broadcasters v. Long, 136 AFTR2d 2025- ___, a Texas Federal District Court held that a religious group does not lose its status as a 501(c)(3) organization by one of its leaders espousing political views to the congregation; the Government withdrew it opposition upon the change in administrations.

PROCEDURE

Public Law 119-21, the One Big Beautiful Bill Act (OBBBRA), provides that the threshold for most reporting through 1099s will be increased from $600 to $2,000 indexed for payments made after 2025.

In Beleiu v. Commissioner, TC Memo 2025-70, the Tax Court concluded that a return with only small portions of schedule C gross sales actually reported coupled with inadequate records and inconsistent explanations supported a civil fraud penalty against a taxpayer who had an accounting degree but claimed to be confused by the difference between net and gross income; in Muhammad v Commissioner, TC Memo 2025 – 77, the Tax Court upheld civil fraud penalties against an IRS management and program analyst with an MBA who had a side business providing consulting services with unreported gross income and grossly overstated expenses for which there was no substantiation (he failed to cooperate with the Revenue Agent claiming records were destroyed in a flood).

In Davis v. Commissioner, TC Memo 2025-72, the Tax Court once again declined to extend the 90-day period for responses to Notices of Deficiency outside of the Third Circuit which has interpreted the law as allowing causal exceptions.

In Nicholson v. United States, 136 AFTR2d 2025-_____, a Florida Federal District Court threw out a claim for refund where the taxpayer incorrectly filed Form 843 for two years instead of the required form 1040-X, rejecting the argument that the wrong form still constituted a permissible informal claim.

In Mock v. United States, 136 AFTR2d 2025-______, a Michigan Federal District Court permitted reinstatement of IRS tax liens improperly discharged following bankruptcy as the reinstatement was within the statute of limitations on collection.

In Society of Apostolic Church Ministries v. United States, 136 AFTR2d 2025-___, a divided Ninth Circuit Court of Appeals panel upheld a decision of an Arizona Federal District Court which allowed a lien and levy on the bank account of a church to satisfy the tax debts of its ministers, the Courts having found that the church was a nominee and/or alter ego for the husband and wife couple.

In United States v. Joel, 136 AFTR2d 2025-5027, a Kentucky Federal District Court allowed IRS to seize and sell a principal residence of an optometrist delinquent on his taxes for many years, rejecting an argument that a wholly owned limited liability company had an interest in the property through “certificates of delinquency” related to property taxes as the LLC was found to be an alter ego of Dr. Joel.

Commissioner Billy Long announced the termination of the free tax-filing tool, Direct File, as unnecessary.

A Memorandum of the Department of Justice prioritizes the denaturalization of naturalized citizens convicted of any form of financial fraud as well as other cases referred with pending criminal charges, appearing to cover any tax crime.

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