March 10th, 2026
February Federal Tax Update
Posted in: Tax Law Tagged: David S. De Jong
Author: David S. De Jong
INDIVIDUALS
In Pesarik v. Commissioner, TC Memo 2026-20, the Tax Court agreed with IRS that a retiree was ineligible for the exclusion on disposition of a principal residence in Massachusetts where he had a Texas driver’s license and could not convince the court through utility bills and otherwise as to his time in Massachusetts.
In Baturin v. Commissioner TC Memo 2026 – 12, the Tax Court concluded that a Russian research scientist received compensation for services not exempt from US taxation under the US-Russia Tax Treaty(which is currently suspended) when he did research which would otherwise have required the hiring of another qualified individual, the Court distinguishing compensation for services from a grant or allowance.
In North Donald LA Property v. Commissioner, TC Memo 2026-19, the Tax Court reduced a conservation easement deduction from $115 million to just over $175,000 noting that the property’s zoning classification did not permit clay mining on which the valuation was based and the partnership failed to establish a reasonable probability of rezoning, the Court stating that the valuation was “untethered from reality.”
RETIREMENT AND ESTATE PLANNING
In United States v. Kansas, 137 AFTR2d 2026 -__, a Kansas Federal District Court held that the deferral of estate taxes under Code section 6166 tolls the 10-year limitation on collecting from the beneficiaries where the estate fails to pay the tax.
BUSINESS
In Cilnco v. Commissioner, TC Memo 2026-16, the Tax Court adjusted gross receipts of a restaurant owned by a lawyer who claimed 90% of revenues came from credit cards and 10% in cash changing a loss of about $400,000 to a profit of about $100,000 (the taxpayer argued unsuccessfully that a Notice of Deficiency must be signed in ink by an IRS employee but that argument collapsed per the Court “like an overmixed souffle” because the cases that were cited were nonexistent and generated by artificial intelligence.
In Gravenstein 116 v. United States, 137 AFTR2d 2026 – , the US Court of Federal Claims agreed with IRS that a marijuana dispensary was ineligible to receive the Employee Retention Credit due to the language of Code Section 280 disfavoring controlled substances.
In Otay Project v. Commissioner, TC Memo 2026 – 21, the Tax Court disallowed all but $30 million of a $743 million deduction that a partnership claimed for a basis adjustment, the taxpayer failing to show economic substance after a technical termination of the partnership followed by a restructuring and liquidation, and the Court agreeing with IRS that the adjustment should be disregarded under anti-abuse and economic substance principles; the Court rejected the taxpayer claim that the Economic Substance Doctrine is not intended to apply to all provisions of the Internal Revenue Code (the Court dropped most penalties believing that the partnership acted in good faith in reliance on the recommendation of multiple advisors including a Big 4 accounting firm).
In Veeraswamy v. Commissioner, 137 AFTR2d 2026 – , the Second Circuit Court of Appeals agreed with the Tax Court that a former wife did not abandon her interest in an S Corporation and remained a part owner necessitating her reporting of pro-rata income; her position was inconsistent with prior assertions in bankruptcy proceedings.
In Kolar v. Commissioner, TC Memo 2026-15, the Tax Court found that a ranch between Houston and San Antonio that had been in the family since the late 1800’s was operated with the intention of making a profit, noting that the multiple activities on the property were carried on in a businesslike manner with a plan (although not in writing) and that there was expertise in all aspects with a full time commitment; the Court noted that bad weather and COVID affected the timeline to profitability.
Sullivan v. Commissioner, TC Memo 2026-13, the Tax Court found that two businesses of a couple were with the intention of making a profit, one for software development and the other for home construction, but concluded that the third, a purported mulching business without any revenue, was not an activity intended for profit.
In Lucas v. Commissioner, TC Memo 2026-22, the Tax Court concluded that a caregiver for a friend’s disabled adult child did not constitute a business when payments were not regular and totaled less than $200 per year; the taxpayer reported significant expenses and did not report the minimal income.
In Notice 2026-16, IRS announced that future Proposed Regulations will have a broad definition of “Qualified Production Property” (QPP) eligible for bonus depreciation to be defined as any non-residential real property that is an integral part of manufacturing, refining or other production activity; the Notice sets forth procedures to be followed in claiming QPP
In an Email to IRS employees, IRS decertified the National Treasury Employees Union as a bargaining union pursuant to an Executive Order that employees of agencies engaged primarily in intelligence and national security matters have no collective bargaining rights.
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PROCEDURE
In Centro de Trabajadores Unidos, 137 AFTR2d 2026 -, the District of Columbia Court of Appeals agreed with the local Federal District Court that the providing of addresses to Immigration and Customs Enforcement without a court order is permissible; in Community Economic Development Center of South Eastern Massachusetts v. Bessent, 137 AFTR 2d 2026- , a Massachusetts Federal District Court reached the opposite result.
In Center for Taxpayer Rights v. Internal Revenue Service, 137 AFTR2d 2026 -, a District of Columbia Federal District Court held, even if the IRS can share data, that it violated the Internal Revenue Code provision on confidential information as ICE in this case was required to provide name and address for confirmation and the procedure was not followed.
In Supreme Linen Services v. United States, 137 AFTR2d 2026 -, a Florida Federal District Court held that IRS had the ability to assess the Employer Shared Responsibility Payment for failing to offer required health insurance upon certification by IRS; the business had argued that the certification must come from Health and Human Services. In Estate of Ehrlich v. United States, 137 AFTR2d 2026-, a Texas Federal District Court found that an estate was liable for penalties where the decedent promoted an abusive tax shelter by having clients purchase art, hold it for just more than a year and then donate it for a purported value well in excess of the acquisition price.
In Goodwill- Oikerhe v. Commissioner, TC Memo 2026-18, the Tax Court agreed with imposition of a civil fraud penalty against a part time tax preparer (and part time cargo shipper and car dealership employee) who claimed support of two nephews but could only show $1,100 of receipts, claimed nonexistent personal property taxes and at trial said they were real property taxes for his home which he did not own and claimed bad debt for income not received as a cash basis taxpayer.
In Mossy Flats Property v. Commissioner, TC Memo 2026-14, the Tax Court found that a taxpayer was unable to prove that the second signature on a penalty assessment was not the agent’s immediate supervisor at that time where there were multiple changes in the team managers in a large conservation easement case.
In Safdieh v Commissioner, 137 AFTR2d 2026- , The Second Circuit Court of Appeals agreed with an earlier decision of the DC Circuit Court of Appeals and reversed the Tax Court in holding that IRS can levy FBAR penalties without bringing an action in Federal District Court.
In United States v. Goldstein, No 8: 25-cr-00006-LKG, a Maryland Federal District Court jury convicted renowned attorney and Supreme Court blogger Tom Goldstein on 12 of 16 criminal counts including tax evasion, willful failure to timely pay taxes and aiding and assisting in preparation of a false tax return related generally to poker playing activities, rejecting the defendant’s testimony that errors were to be blamed on staff and outside accountants.
In United States v. Cullifer, 137 AFTR2d 2026 -__, a Florida Federal District Court concluded that the ten years in which IRS can allege transferee liability from a business to a individual begins only on final determination that the individual is a transferee in cases where status as a transferee is being challenged.
In El v. Commissioner, TC Memo 2026-17, the Tax Court concluded that an erroneous refund of the Child Tax Credit as the result of a computer error is treated as a negative tax amount for purpose of calculating a deficiency and that the taxpayer was liable for the correction of a computer error.
In Diversified Group v. Commissioner, 166 TC No. 2, the Tax Court agreed with IRS that taxpayers who failed to exercise their administrative appeal rights regarding $25 million in penalties could not bring up the issue in a Collection Due Process proceeding, throwing out the argument that the result of the Appeals conference would have been “precooked.”
In Revenue Procedure 2026-12, IRS issued guidance as to proper disclosures in various situations for the purpose of reducing the understatement aspect of the accuracy related penalty and for avoiding the tax return preparer penalty.
