June 11th, 2025

May Federal Tax Update

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Author: David S. De Jong

INDIVIDUALS

In Stevens v. Commissioner, TC Memo 2025-45, the Tax Court concluded that a $34.2 million tax deduction for an interest accrual on a “loan” arrangement to offset a business sale for $36.2 million was a sham.

RETIREMENT AND ESTATE PLANNING

In Estate of Spizzirri v. Commissioner, 135 AFTR2d 2025 – ___, the Eleventh Circuit Court of Appeals affirmed a decision of the Tax Court denying a deduction for a claim against an estate for $1 million which was paid to three stepchildren of the decedent based on a Prenuptial Agreement eliminated from the decedent’s estate plan after separation from his fourth wife, the court opining that donative intent was determined at the time of entry into the Prenuptial Agreement.

In Estate of Griffin v. Commissioner, TC Memo 2025 – 47, the Tax Court concluded that an Estate failed to properly make a QTIP election but found a $300,000 bequest to qualify as a terminable interest under state law as a separate trust not part of the non-qualifying trust.

BUSINESS

In Norwich Commercial Group v. Commissioner, TC Memo 2025-43, the Tax Court applied the “claim of right” doctrine and permitted an accrual basis corporation to deduct over-reported income in the year that the errors were discovered, rejecting alternative IRS positions that the overpaid amounts should be treated as loans or that the deduction should have occurred in the years of repayment following the creation of a secured obligation.

In Khan v. Commissioner, TC Summary Opinion 2025-5, the Tax Court disallowed over $127,000 in “Other Expenses” related to operating a gasoline station in Pakistan, finding lack of substantiation and thus an inability to make an estimate under the Cohan rule; the taxpayer had entered a business code for health services.

In Sherman v. Commissioner, 135 AFTR2d 2025 – ___, the Ninth Circuit Court of Appeals agreed with the Tax Court that an emergency room physician did not have a subjective intent of making a profit from a music blog and film production company as evidenced by objective criteria and threw out a claimed loss.

In Soroban Capital Partners LP v. Commissioner, TC Memo 2025-52, the Tax Court determined that limited partners were subject to self-employment tax inasmuch as they acted in practice as if they were general partners in managing a hedge fund.

PROCEDURE

In Huang v. United States, 135 AFTR2d 2025 – _____,  a California Federal District Court, following a somewhat similar 2011 Tax Court decision, ruled that the failure of TurboTax to inform the taxpayer of the need to file Form 3520 to report gifts from her foreign parents may constitute reasonable cause for penalty abatement and denied summary judgement, making a factual determination necessary by concluding this was akin to bad professional advice.

In Stokey v. Commissioner TC Memo 2025-44, the Tax Court IRS determined that a Notice of Deficiency was sent to the “last known address” by IRS notwithstanding that the taxpayer had moved to another state; although the taxpayer resided in a state where the Third Circuit permitted “equitable tolling”, the Court still rejected the petition as the taxpayer could not prove late receipt of the notice and did not file until 135 days after the deadline.

In Garcia v. Commissioner, 164 T.C. No 8, the Tax Court held that new evidence may be introduced at trial and that the Court is not limited to the record established in IRS Appeals in a passport revocation/issuance matter based on being “seriously delinquent.”

In United States v. Stoll, 135 AFTR2d 2025 – 1528, a Washington Federal District Court allowed foreclosure on a principal residence of an individual who plead guilty to tax evasion and bank fraud and owed $1.26 million in unpaid taxes resulting from a losing argument that a personal ministry was tax exempt.

In Aiello v. Commissioner, TC Memo 2025-46, the Tax Court denied additional time beyond the 30 days for an appeal of an adverse CDP determination where the taxpayer sent his petition to the Appeals Office instead of the Tax Court but took no action after the misfiled petition was returned; the Court rejected old medical issues as an extraordinary circumstance which could have extended the 30-day period.

In Plotkin v. Commissioner, 135 AFTR2d 2025 -____, the Eleventh Circuit Court of Appeals affirmed a decision of the Tax Court rejecting the CDP appeal of a disbarred attorney who sought to throw out an entire $1.8 million assessment based on an improper $15,000 reversal of an assessment originally dropped due to expiration of the statute of limitations; the Court also refused to consider collection alternatives due to failure to submit a financial statement.

In Bauche v. Commissioner, TC Memo 2025-48, the Tax Court sent back an Offer in Compromise based on Effective Tax Administration (ETA) to Appeals for failure to consider hardship as well as the effect of Government misconduct in a dismissed criminal case against the taxpayer.

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