April 13th, 2026
March Federal Tax Update
Posted in: Tax Law Tagged: David S. De Jong
Author: David S. De Jong
INDIVIDUALS
In Smith v. Commissioner, TC Memo 2026-25, the Tax Court once again reiterated that amounts received by an individual that are unrestricted and not excluded by statute are reportable as in income notwithstanding that they are subject to future payback, this case involving Social Security disability for which the recipient was ineligible.
In Roman v. Commissioner, 137 AFTR2d 2026 -__, the Ninth Circuit Court of Appeals agreed with the Tax Court that $700,000 paid by a landlord to a formerly married couple still living together for vacating their shared apartment was not paid for physical injury despite the poor medical condition of the former husband and that each should be taxed on $350,000 despite the former wife by agreement receiving the entire amount.
In Perry v. Commissioner, the Tax Court in a bench opinion held that settlement payments for wrongful termination of an employee for exercising rights under the Family Medical Leave Act (FMLA) after suffering an injury on the job to her back were not taxfree as the source of the claim was the termination and not the injury itself.
In Gyarmati v. Commissioner, TC Memo 2026-27, the Tax Court, also finding a lack of substantiation as to most improvements claimed on disposition of a second home, held that no allocation could be made to a sale of the contents of a furnished home as there was no contract and no separate bill of sale for the furnishings, the Court doubting that a buyer would have given value to old furnishings in contrast to the taxpayer’s claim of a $250,000 cost and a fair market value of $62,500.
In Jackson Crossroads v. Commissioner, 137 AFTR2d 2026- __, the Eleventh Circuit Court of Appeals concluded that the Tax Court acted well within its discretion in finding that the conservation easement deduction of $37 million claimed by two partnerships should be valued at less than $3 million.
In Harmon Road Property v. Commissioner, TC Memo 2026-23, the Tax Court reduced a $32 million deduction for a conservation easement to $226,000, after rejecting assertions that a mineral quarry (for which rezoning would be required with likely objection) was the highest and best use of the property; the Court also disagreed with the partnership on a number of other issues including the marketplace holding that the partnership did not prove that development of the property as a granite quarry was financially feasible.
In Revenue Procedure 2026-16, IRS indicated that the time limits in the Foreign Earned Income Exclusion will be waived for 2025 for individuals required to leave Haiti or Ukraine at any point during the year and for the Congo, South Sudan, Iraq, Lebanon and Mali from various dates later in the year.
RETIREMENT AND ESTATE PLANNING
Proposed Regulations under Code Section 530A gave guidance on creation and management of Trump accounts which must be invested in United States equity indices; standard IRA rules including contribution limits, Roth conversions and distribution rules would apply after December 31 of the year in which the beneficiary turns age 17.
BUSINESS
Final Regulations under Code Section 6011 rescind prior regulations requiring partnerships to report large upward basis adjustments caused by transactions with related parties.
In CIC Services v. Internal Revenue Service, 137 AFTR 2d 2026-__, a Tennessee Federal District Court ruled that the IRS regulation requiring identification of certain captive insurance arrangements on business tax returns is not abusive even if it discourages legitimate arrangements.
In Royalty Management Insurance Company v. Commissioner, TC Memo 2026-26, the Tax Court, which had previously determined that payments to a captive insurance company were “bereft of evidence pointing to the existence of true insurance”, separately considered the penalty and held that the 40 percent accuracy penalty applied rather than the more typical 20 percent due to a “nondisclosed noneconomic substance transaction.”
In Continental Grand Limited Partnership v. Partnership, 166 TC No. 3, the Tax Court held that a company which contributed a promissory note of its parent entity to a partnership in exchange for a limited partnership interest had no basis in the partnership, rejecting arguments both that the repayment obligation created basis or, alternatively, that there was basis in the fair market value of the note.
In National Religious Broadcasters v. Bessent, 137 AFTR2d 2026 -___, a Texas Federal District Court denied declaratory relief as to the extent a church could communicate to its congregation about politics without jeopardizing 501(c)(3) status; in July 2025 IRS had indicated that communicating through customary channels did not jeopardize exempt status.
In Letter Ruling 202612004, IRS permitted five trusts which acquired stock in an S corporation to make late elections to be Qualified Subchapter S Trusts (QSSTs).
PROCEDURE
In Erc Today v. McInelly, 137 AFTR2d 2026 – __, the Ninth Circuit Court of Appeals agreed with an Arizona Federal District Court that two tax preparation firms assisting businesses in applying for the Employee Retention Credit on a percentage basis had no “standing” and “no clear injury” to obtain an injunction against use by IRS of automated software called Disallowance During Processing that issued denials based on unlikelihood of qualification.
In United States v. Stratics Networks, 137 AFTR2d 2026 -__, a California Federal District Court, noting that the tax practitioner privilege does not apply to communications related to tax return preparation, declined to seal an exhibit containing tax advice from public viewing.
In United States v. Schwarzbaum, 137 AFTR2d 2026 -___, a Florida Federal District Court refused to set aside penalties of almost $20 million against an individual dividing his time between the United States, Costa Rica and Switzerland resulting from FBAR violations, rejecting the frequent litigant’s new argument that his due process rights were violated by his inability to obtain a jury trial, the new argument based on a 2024 Supreme Court decision narrowing the power of another Federal agency.
In United States v. Tenpenny, 137 AFTR2d 2026 -___, an Ohio Federal District Court held that IRS could still collect from an Ohio physician on a timely 2008 assessment for the year 2001 as the ten-year statute of limitations on collection had been extended for just short of another ten years by three Offers in Compromise and one request for an installment agreement.
In Daugerdas v. Commissioner, 137 AFTR2d 2026 -__, the Seventh Circuit of Appeals agreed with the Tax Court that IRS was not bound by a Federal District Court’s restitution schedule ordered following criminal conviction.
United States v. Hatch, 137 AFTR2d 2026 -__, a Rhode Island Federal District Court declined to allow Richard Hatch, the first winner of the “reality” television show “Survivor”, to renew his passport while owing almost $3 million in back federal taxes.
Notice 26-20 extends through 2026 relief from the requirement of communicating identifications of digital assets to the broker or be held to the first in first out (FIFO) method.
