Articles

September 2nd, 2026

August Federal Tax Update

Posted in: Tax Law    Tagged: David S. De Jong

INDIVIDUALS

Proposed Regulations under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 would limit the refundable part of individual tax credits including the Earned Income Credit, the Additional Child Tax Credit, and the American Opportunity Tax Credit to citizens and resident aliens, excluding not only illegal aliens but also those temporarily in the country, to be effective for the year in which Final Regulations are issued.

In SIH v. Commissioner, 167 TC No. 8, the Tax Court held that the “anti- abuse rule” is to be interpreted broadly and overrides an objective test — in this case to determine whether dividends received by a partnership from certain equities where long and short positions were held in the same securities were eligible for treatment as “qualified dividends.”

In Mill Road 36 Henry v, Commissioner, 2026 WL  443948, the Eleventh Circuit Court of Appeals agreed with the Tax Court that a conservation easement was worth $900,000 and not the $8.9 million that was deducted, holding further that the property should be considered as held for sale in the ordinary course of business as the contributing partners were in the real estate business; in Evans v. Commissioner, 2026 WL 2350241, the Eleventh Circuit Court of Appeals affirmed the Tax Court’s decision reducing a deduction for a conservation easement from about $14 million dollars to $1 million.

In Malibu Valley Land v. Commissioner, TC Memo 2026-68, the owner of 300 acres in the Santa Monica Mountains was allowed by the Tax Court to deduct $19.7 million out of a claimed deduction of $32.1 million dollars for granting valuable land for a conservation easement, IRS unsuccessfully arguing that there was no disinterested generosity in that the donor sought local transfer development credits.

In Deutsch v. Commissioner, TC Memo 2026-66, the Tax Court, applying Texas law which included deception as a type of theft, allowed a deduction of most of a claimed loss of $1.377 million in a scam despite not being able to determine if a former friend of 20 years was the scammer or was another victim; the Court disallowed the taxpayer’s payment of about $300,000 in living expenses for the ex-friend who may have been another victim rather than a scammer.

In Beacom v. Commissioner, TC Memo 2026-65, the Tax Court agreed with a denial of an alternative minimum tax credit carryforward from a pre-2008 year where the taxpayer could not provide the full history of when the credit was earned due to a flood in 2008; IRS could not locate any pre-2017 transcripts.

In Information Release 2026-95, IRS marked the end of its most recent standardized settlement program for conservation easement cases and announced the establishment of an Office of Conservation Easements to deal with unresolved cases.

RETIREMENT AND ESTATE PLANNING

Proposed Regulations under Section 128  allow employer Trump contributions only for dependents of employees and not for youthful employees themselves, also clarifying that the $2,500 limit applies per employee regardless of the number of dependents or employers and that dependents of partners and two percent S corporation shareholders are excluded and creating a safe harbor of coverage of 90 percent of non- highly compensated employees vis-a-vis highly compensated employees; the information in form W-2 will satisfy the employee notification and statement requirements.

Proposed Regulations under Code Section 530 set forth the types of mutual funds and other avenues that will be eligible to hold Trump Accounts until they become IRAs on January 1 of the year when the beneficiary becomes age 18; funds must be invested at least 90 percent in US companies and may not track an environmental, social or government index.

Proposed Regulations under Code Section 401 expand on statutory language governing single employer defined benefit plans including permitting use of mortality tables by sex in the context of present value determinations for distributions.

In Palermo v. United States, 2026 WL -___, a Florida Federal District Court held that a 99-year lease after termination of the period of years in a Qualified Personal Residence Trust (QPRT) was not the equivalent of ownership despite an under market lease, denying a step up in basis for heirs of a Magistrate Judge who retired from that same court after his 90th birthday.

In Notice 2026-49, IRS provided model forms for employers to use in facilitating employee rollovers from one qualified plan to another or to an IRA; the forms do not cover transfers between IRAs.

BUSINESS

In Sami v. Commissioner, TC Memo 2026-69, an IT manager with several side businesses was denied deductions attributable to his alleged business as an “influencer”, reporting no gross receipts for the year in issue and claiming without substantiation that he had receipts in subsequent years; the Court found that his expenses such as attendance at the Emmys and Grammys and paid appearances with Tom Brady (in which he dropped a pass) and John McEnroe (at which he flubbed a return) were also not tied to his side businesses of chauffeuring and ticket reselling. 

In Aimiuwu v. Commissioner, TC Summary Opinion 2026-7, the Tax threw out an entire Schedule C which showed zero receipts and a $50,000 donation plus $30,000 of other expenses; the taxpayer who held several postgraduate degrees produced no receipts or other proof at trial and put the blame on an “old and sick” preparer.

In Dieffenbach v. Commissioner, TC Memo 2026-67, the Tax Court sustained all IRS determinations in a Notice of Deficiency for a marijuana dispensary when it produced no evidence rebutting the deficiency and instead making arguments of multiple examinations and IRS misconduct.

In Reed v. Commissioner, TC Memo 2026-64, the Tax Court determined on the facts that a partner’s payments of partnership expenses under a guarantee were not deductible by the partner but constituted a loan, as shown on the books, the Court noting that the payments could have been considered as partner business expenses if responsibility for payment has been set forth in an agreement.

In K Alain, 2026 WL 2333930, the Fifth Circuit Court of Appeals, by a divided vote of the panel upon rehearing a case previously entitled Sirius Solutions v. Commissioner, modified a decision of the Tax Court which had held that only passive investors qualify as limited partners with the ability to avoid self-employment tax and found that some participation is allowed as long as the partner does not exercise significant control or management over the business; the Fifth Circuit had previously held that nomenclature was the proper basis for determination while the First and Second Circuit Courts of Appeal had joined the Tax Court in its position that no management participation was permitted. 

In OWOC v. Liquidating Trust, 2026 WL  2294569, the Eleventh Circuit Court of Appeals reversed a Florida Federal District Court and held that S corporation shareholders and not a trustee in bankruptcy control the election as to tax status based on their role of electing and terminating S status under federal tax law.

In Chepin v. Commissioner, TC Memo 2026-76, the Tax Court found that a couple, each with a farming background, engaged in horse breeding with the intention of making a profit despite modest annual losses; however the Court determined a significant overstatement of expenses in that business and others, one being tax preparation, and an understatement of income in a couple businesses.

PROCEDURE

In Janagelo v. Commissioner, TC Summary Opinion 2026-8, the Tax Court sustained a civil fraud penalty against an attorney- CPA who worked as an IRS revenue agent and who deducted miscellaneous itemized deductions after 2017 and filed a Schedule C with significant deductions for a private law practice, the only income being from 2 ½ hours billed to his wife at $325 per hour for assistance in a disability claim; the Court in a footnote noted that the taxpayer filed frivolous motions, failed to appear at a hearing and disparaged a foreign-born witness consistent with a work record of using ethnic slurs.

In Ballengee v. Commissioner, TC Memo 2026-73, the Tax Court denied a challenge to a closing agreement where the taxpayer argued that he never received all referenced documents, the Court noting that he was a CPA and the references were sufficient to put him on notice.

In BMW Holding Corporation v. United States, 2026 WL 2516895, the Court of Federal Claims held that the three-year statute of limitations for refunds began with the filing of the original return and not a superseding return, both returns being filed during the period of a lawful extension; the Court passed on rendering a final decision pending an appellate court determination regarding the effect of COVID relief on the statute of limitations.

In Maniktala v. Commissioner, 2026 WL  2320396, the Eighth Circuit Court of Appeals, reversing the Tax Court, became the fourth appellate court to opine that the 90-day deadline to file a  petition in deficiency matters is not jurisdictional allowing a showing of good cause for a late filing; two appellate courts have backed the contrary Tax Court position.

In Kyick Holdings v. Commissioner, 2026 WL 2389513,  affirming the Tax Court, the First Circuit Court of Appeals held that the 90-day filing deadline is a mandatory deadline and not subject to equitable tolling but taking the position that the deadline is not jurisdictional but statutory; the Courts now tilt in three different directions.

In United States v. Graham, 2026 WL 2287731, an Indiana Federal District Court concluded that an individual was both nominee and alter ego of an LLC, the former based on entity payment of individual liabilities and the latter based upon administrative dissolution of the entity and commingling of assets; accordingly the Court allowed IRS enforcement through sale of individually titled property for debts of the LLC.

In Big Apple Tompkins Realty v. Commissioner, 167 TC No. 7, the Tax Court concluded that the 90-day deadline for filing a Tax Court petition by a partnership under the revised rules of the Bipartisan Budget Act of 2015 is not jurisdictional which gives an opportunity for the partnership to show good cause for the late filing: the Court noted that the prior TEFRA deadline was jurisdictional.

In United States v. Morris, 2026 WL 2267826, an Illinois Federal District Court stated that federal tax liens, including those erroneously dropped and reinstated, applied to a debtor’s social security and pension benefits post- bankruptcy as they were exempt property, the Court concluding that future rights to social security constitute “property.”

In Squire v. Commissioner, TC Memo 2026-71 and in Percy Squire Company v. Commissioner, TC Memo 2026-72, the Tax Court sustained liens and levies filed against a previously suspended attorney, the Court noting his repeated filings (he was subsequently sanctioned by the Sixth Circuit Court of Appeals for “striking legal emptiness in a brief due to 15 pages of argument that had no bearing on the issue before the Court).

In Boechler, P.C. v. Commissioner, 2026 WL 2293279, the Eighth Circuit Court of Appeals agreed with the Tax Court that a Collection Due Process petition filed one day late lacked sufficient grounds for “equitable tolling” despite the sole attorney’s claim that she was overwhelmed and missed the 30-day deadline by a single day; this case had originally gone up to the US Supreme Court which in 2022 ruled that equitable tolling applied as the time window on a CDP appeal was non-jurisdictional.

In Laborde v. Commissioner, TC Memo 2026-74, the Tax Court in a CDP appeal rejected a “boilerplate” statement from IRS Appeals that the mailing of a CDP notice was to the “last known address”, the Court remanding the matter for specificity in order to be a valid notice.

In United States v. Stanley, 2026 WL 2255873, the Fifth Circuit Court of Appeals agreed with a Texas Federal District Court that an individual who claimed no assets by leaving that portion of an innocent spouse claim blank could not subsequently assert an ownership interest in property seized to satisfy her former spouse’s tax liability, the Court applying the  ”duty of consistency”  doctrine.

IRS Criminal Investigation Chief Jarod Koopman announced that IRS will roll out a reduced penalty criminal voluntary disclosure program in the next two months dealing with both domestic and foreign disclosures.