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Holding

The Court did not reopen the case. Instead, it ordered the plaintiffs to respond to a motion filed by 35 former federal judges who argue that the lawsuit and resulting settlement may have involved collusion, deception of the Court, and potential fraud on the judicial process. Plaintiffs must respond by June 12, 2026.

Why It Matters

• This is not a ruling on the merits of the settlement. It is a procedural order requiring an explanation of serious allegations.

• The Court signaled that claims of collusion and abuse of the judicial process are significant enough to warrant further scrutiny.

• The order raises the possibility of Rule 11 sanctions, which can apply when lawsuits are filed for improper purposes.

• The case illustrates that voluntary dismissal does not necessarily prevent a Court from examining alleged misconduct related to the litigation.

Key Facts

• President Donald J. Trump, Donald Trump Jr., Eric Trump, and The Trump Organization sued the IRS and Treasury Department.

• The plaintiffs voluntarily dismissed the case with prejudice in May 2026.

• Thirty-five former federal judges later moved to reopen the matter.

• The former judges contend that the lawsuit was collusive from the outset and that the settlement was used to provide legal cover for an agreement that otherwise would have faced judicial scrutiny.

• They also point to a settlement addendum that allegedly bars future government claims against the plaintiffs and argue that government attorneys failed to contest claims that the IRS had previously considered defensible.

Statutory or Regulatory Framework

• Rule 60 allows courts to consider requests to reopen judgments in certain circumstances.

• Rule 11 permits courts to address improper litigation conduct and sanction parties that file lawsuits for improper purposes.

• Courts retain authority to investigate potential abuse of the judicial process even after a case has been voluntarily dismissed.

Arguments

Movants argued:

• The lawsuit was not a genuine adversarial dispute.

• The dismissal was tied to a settlement that resulted from collusion.

• The Court may have been misled regarding the nature of the parties’ dispute.

• The settlement and dismissal should be scrutinized as a potential fraud on the Court.

Plaintiffs’ position:

• Not yet presented in the order.

• The Court directed plaintiffs to file a response addressing the allegations.

Court’s Reasoning

• Courts have authority to investigate allegations of litigation misconduct.

• Rule 11 allows courts to address filings made for improper purposes.

• A voluntary dismissal does not necessarily eliminate the Court’s ability to examine potential misconduct.

• The motion raises serious allegations involving collusion, deception, and fraud on the Court.

• Before deciding whether further action is warranted, the Court wants a direct response from the plaintiffs.

Result

The Court ordered the plaintiffs to respond to the motion by June 12, 2026, and permitted the movants to file a reply by June 19, 2026.

The Takeaway

This order does not invalidate the Trump-IRS settlement. It does, however, place the settlement under an unusual level of judicial scrutiny. The significance lies less in the procedural ruling and more in the Court’s willingness to require answers to allegations that the lawsuit itself may not have been a genuine dispute.

List of Citations

• Fed. R. Civ. P. 60: Basis for the motion seeking to reopen the case.

• Fed. R. Civ. P. 11: Governs sanctions and improper litigation conduct.

• Didie v. Howes, 988 F.2d 1097 (11th Cir. 1993): Court authority to investigate abuse of the judicial process.

• Willy v. Coastal Corp., 503 U.S. 131 (1992): Sanctions may remain available even where jurisdictional issues exist.

• Scott v. Vantage Corp., 64 F.4th 462 (3d Cir. 2023): Filing suit to force a settlement can support a finding of improper purpose.

Holding

The Department of Justice sued to turn Duplessis’s federal tax debts into a Court judgment, saying he owes $1,207,393.42 in taxes, penalties, and interest for 2008, 2009, and 2024. The government says the lawsuit is on time because settlement talks and collection alternatives extended the deadlines.

Why It Matters

• This is a collection case, not a dispute over whether the taxes were correctly assessed.

• The case shows how offers in compromise and installment agreement requests can significantly extend the IRS’s ten-year collection period.

• Taxpayers and practitioners often focus on the original collection statute expiration date. This filing demonstrates why every tolling event must be analyzed before concluding a liability is time-barred.

• The case involves a well-known music producer whose career spans more than three decades and includes work with artists such as Shakira, The Fugees, Michael Jackson, and Carlos Santana.

Key Facts

• Jerry “Wonda” Duplessis is a music producer who has worked in the music industry since the early 1990s.

• The IRS alleges he owes $1,207,393.42 as of February 27, 2026. The amount includes accrued penalties and interest, with additional amounts continuing to accrue.

• The liabilities relate to tax years 2008, 2009, and 2024.

• The complaint alleges Duplessis pursued multiple collection alternatives with the IRS over more than a decade.

• Since 2010, he has submitted three separate offers in compromise. According to the complaint, those offers were either withdrawn or rejected.

• The government filed the lawsuit on May 26, 2026.

Statutory or Regulatory Framework

• §6502 generally gives the IRS 10 years from the date of assessment to collect a tax liability.

• Certain taxpayer actions suspend, or toll, that period.

• Pending installment agreement requests suspend collection activity and extend the collection statute.

• Pending offers in compromise also suspend the collection statute, with additional extension periods after rejection or termination.

Government’s Arguments

The government argued:

• Duplessis has not paid the assessed liabilities.

• Multiple offers in compromise and installment agreement requests suspended the collection statute for thousands of days.

• The 2008 collection statute was extended by 2,317 days and remains open until August 30, 2026.

• The 2009 collection statute was extended by 2,173 days and remains open until August 5, 2026.

• The United States is entitled to a judgment for the unpaid balance.

The Takeaway

The celebrity angle draws attention, but the main tax lesson is about how the collection statute works. This case is a clear example of how repeated negotiations with the IRS can give the government many more years to collect, allowing the DOJ to go after debts over 15 years old.

List of Citations

• §6502(a) — Ten-year statute for IRS collections.

• §§6331(i)(5), (k)(1), (k)(2) — Tolling rules for installment agreements and offers in compromise.

• United States v. Duplessis, No. 2:26-cv-05956 (D.N.J. filed May 26, 2026) — DOJ suit seeking to reduce tax assessments to judgment.

The result is predictable. When large sporting events occur, the movement of athletes and staff intersects with multiple tax systems at once. The event becomes not only a competition on the field but also an administrative exercise in cross-border compliance.

The Tournament

The 2026 FIFA World Cup will take place across the United States, Canada, and Mexico. The tournament will be the first to include 48 national teams. Matches will be held in multiple cities across the three host countries, bringing thousands of players, coaches, and support staff into temporary work arrangements in those jurisdictions.

Players remain under contract with their professional clubs but are released to represent their national teams during the tournament period. Coaches and support staff may be employees of national federations, fixed-term contractors, or independent specialists. Many do not reside in the countries they represent. Roughly 40% of national team coaches are of a different nationality than the team they manage.

These arrangements create uncertainty for tax and social security authorities. National team participants do not fit cleanly into standard employment categories. Their work is temporary, highly specialized, and performed across multiple jurisdictions in a short period.

The Pattern Beneath the Event

Tax systems operate on geographic authority. Income earned within a country is generally taxable there. This principle applies even when the individuals involved live and work elsewhere most of the year.

Athletes illustrate the consequences of that rule. When players perform in host countries during the World Cup, the income from those performances can become taxable in those jurisdictions. Match fees, performance bonuses, endorsement payments tied to tournament appearances, and compensation for media or promotional activity may all fall within host-country tax rules.

Tax treaties modify this framework but rarely remove it entirely. Most treaties contain a specific provision for athletes and entertainers. This provision typically allows the host country to tax income derived from performances that occur within its borders.

For example, consider a French player who resides in Germany and competes in the United States during the tournament. Under the income tax treaty between the United States and Germany, many types of service income might otherwise fall under provisions governing employment income or business profits. Those provisions often restrict the host country’s right to tax.

The treaty’s athlete provision changes that result. Article 17 of the U.S.–Germany treaty permits the United States to tax income derived from athletic performances that occur in the country when the income exceeds a defined threshold. That rule overrides the broader treaty provisions that might otherwise allocate taxing rights to the athlete’s country of residence.

Treaty provisions can also introduce exceptions. The U.S.–Germany treaty contains a clause that exempts income when the activity is substantially supported by public funds of the athlete’s home country. Determining whether that condition is met requires analysis of how national teams are funded and how payments flow through federations.

Even when federal tax obligations are resolved, additional layers remain. Some U.S. states do not recognize treaty exemptions for state income tax purposes. If matches occur in those states, athletes may still face state-level tax liabilities even when federal tax relief applies.

Social security rules add another dimension. Totalization agreements between countries sometimes allow individuals to remain in their home country’s social security system while temporarily working abroad. These agreements prevent duplicate contributions in multiple systems. However, not every country pair has such agreements, and the rules vary by employment status.

Managers and support staff face similar issues but under different treaty provisions. They are usually not covered by the athlete-specific treaty article. Their taxation depends on whether they are treated as employees or independent contractors. The classification affects both tax obligations and social security coverage.

Lessons for Practitioners

• International events expose how national tax systems assert jurisdiction over short-term cross-border work.

• Athlete-specific treaty provisions often override broader treaty protections that apply to other professions.

• State and provincial tax systems can operate independently from federal treaty obligations.

• Employment classification affects both tax treatment and social security liability for coaches and staff.

• Compliance planning becomes essential when large numbers of individuals work temporarily across several jurisdictions.

The Human Element

National teams operate under intense time pressure. Players and staff focus on preparation and competition while advisers manage the regulatory framework behind the event. The administrative burden often falls on federations and professional advisers who must reconcile multiple legal systems within a short tournament schedule.

Forward View

Global sporting events continue to expand in scale. Larger tournaments increase the number of participants and the jurisdictions involved. Each additional host country adds another layer of tax and regulatory rules.

Tax authorities are also paying closer attention to cross-border labor mobility in sports. Recent inspections and enforcement actions connected to major international events reflect this trend. As the movement of athletes and staff grows more frequent, governments increasingly treat these activities as standard taxable employment rather than exceptional circumstances.

The administrative challenge, therefore, becomes structural. International sports organizations create global events, but the underlying regulatory framework remains national.

Closing Thought

Global competitions operate on international stages, but the tax system remains organized by borders.

Holding

The Court of Federal Claims threw out a taxpayer’s refund lawsuit for $152,871 from 2020 because her claim was based only on the argument that she was a citizen of California, not the United States, which is not a valid legal reason.

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Why It Matters

• This is a routine rejection of a long-discredited tax protester argument.

• The decision reinforces that state citizenship and U.S. citizenship are not mutually exclusive under the Fourteenth Amendment.

• Courts continue to dismiss refund claims that rely on sovereignty-style theories rather than substantive tax law arguments.

• The case highlights that even pro se taxpayers must present a legally cognizable basis for a refund claim.

Key Facts

Sophirian Kim filed an amended 2020 return seeking a refund of $152,871. She reversed all previously reported income and deductions and asserted that she had no taxable income from U.S. sources because she had “never been a U.S. citizen” and was instead a “Citizen of California” or “Californian.”

Kim also submitted materials to a congressional office asserting that her citizenship status exempted her from federal tax obligations.

The government moved to dismiss, arguing that federal courts have repeatedly rejected the theory that state citizenship exempts an individual from federal taxation.

Statutory or Regulatory Framework

• The Fourteenth Amendment provides that persons born or naturalized in the United States are citizens of both the United States and the state where they reside.

• Federal income tax applies to U.S. citizens regardless of how they characterize their citizenship status.

• To obtain a tax refund, a taxpayer must show that the IRS collected tax that was not legally owed.

• A complaint must state a plausible legal claim to survive a motion to dismiss.

Arguments

Taxpayer argued:

• She was a citizen of California but not a citizen of the United States.

• Because of that status, she was not subject to federal income tax.

• The government was improperly holding her money and should return it.

• Her allegations were sufficient to satisfy the pleading standard at the motion-to-dismiss stage.

Government argued:

• The refund claim depended entirely on a legally frivolous theory.

• Federal courts have consistently rejected claims that state citizenship exempts taxpayers from federal tax laws.

• The Fourteenth Amendment forecloses the taxpayer’s position.

• Because no viable legal basis for a refund existed, the complaint should be dismissed.

Court’s Reasoning

• The Fourteenth Amendment makes clear that a person born in California is both a California citizen and a U.S. citizen.

• Federal courts have repeatedly rejected arguments that state citizenship alone removes an individual from federal tax jurisdiction.

• The taxpayer’s theory could not be reconciled with the Constitution or established precedent.

• Federal tax obligations apply to U.S. citizens regardless of how they describe their citizenship status.

• The taxpayer identified no alternative legal basis showing that the disputed tax was improperly collected.

• A refund claim requires more than an assertion that the government possesses the taxpayer’s money. The taxpayer must show the tax was not legally owed.

• The amendment would be futile because the defect was legal rather than factual. Additional facts could not cure the underlying theory.

Result

The Court of Federal Claims agreed with the government’s request to dismiss the case and ruled against the taxpayer.

The Takeaway

There was nothing new in the law here. This decision just adds to the many cases that have already rejected the idea that federal tax laws only apply to federal citizens and not to state citizens.

For lawyers and tax professionals, this case is a reminder that refund lawsuits need a solid legal argument to start. Courts will not let claims go forward if the main argument has already been rejected by the Constitution, laws, or past cases.

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List of Citations

• Kim v. United States (Ct. Fed. Cl. 2026) — dismisses refund claim based on California-only citizenship theory.

• U.S. Const. amend. XIV, §1 — establishes dual U.S. and state citizenship.

• Walby v. United States — rejects state-citizenship exemption arguments.

• Brown v. United States — confirms state citizenship does not avoid federal tax obligations.

• Lonsdale v. United States — characterizes similar arguments as patently frivolous.

• Rev. Rul. 2007-22 — identifies state-sovereignty tax arguments as frivolous positions.

Holding

The Tax Court agreed with the IRS’s plan to levy for the 2015 to 2018 tax years. The Court said IRS Appeals acted properly because the taxpayer did not provide the required financial information or properly challenge the tax bills.

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Why It Matters

• This is a routine but important reminder that Collection Due Process (CDP) hearings require taxpayer participation.

• Appeals is not required to consider collection alternatives when a taxpayer fails to submit requested financial disclosures, including Form 433-A.

• Taxpayers cannot relitigate issues that have already been finally resolved in prior Court proceedings.

• The decision reinforces that courts generally defer to the appeals when the administrative record shows procedural compliance and a reasonable balancing analysis.

Key Facts

• The taxpayer filed Forms 1040 for 2015 through 2018 but did not pay the reported tax liabilities.

• After receiving a notice of intent to levy, he requested a CDP hearing and indicated that he could not pay the balances due.

• Appeals requested extensive financial information, including Form 433-A, bank statements, amended returns, and proof of estimated tax payments.

• The taxpayer did not provide the requested documents and initially failed to participate in the scheduled hearing.

• During a later hearing, he acknowledged that the assessed liabilities were correct but argued that an alleged overpayment from 2013 should offset the liabilities.

• Both the Tax Court and the First Circuit had already rejected his 2013 overpayment arguments in prior litigation.

• Appeals ultimately sustained the proposed levy.

Statutory or Regulatory Framework

• §6331 authorizes the IRS to levy property when taxes remain unpaid after notice and demand.

• §6330 gives taxpayers the right to a CDP hearing before levy action proceeds.

• A taxpayer may challenge the underlying liability during a CDP hearing only in limited circumstances.

• Appeals must consider:

  • Whether legal and procedural requirements were satisfied.

  • Issues properly raised by the taxpayer.

  • Whether the collection action balances efficient tax collection against unnecessary intrusiveness.

Arguments

Taxpayer argued:

• He needed additional time while related litigation involving tax year 2013 proceeded.

• An alleged overpayment from 2013 should be applied against the liabilities for 2015 through 2018.

Government argued:

• The taxpayer failed to submit the requested financial information.

• The 2013 overpayment issue had already been finally decided.

• Appeals properly followed all statutory and administrative requirements before sustaining the levy.

Court’s Reasoning

• The taxpayer had an opportunity to raise liability issues during the CDP process.

• He did not properly challenge the liabilities for 2015 through 2018 and provided no amended returns or supporting evidence.

• His arguments focused on an alleged 2013 overpayment, even though that issue had already been resolved against him.

• Because the liabilities were not properly raised, the Court reviewed the determination under the abuse-of-discretion standard.

• Appeals repeatedly requested financial information needed to evaluate collection alternatives.

• The taxpayer failed to provide the requested Form 433-A and supporting documentation.

• Appeals verified that legal and procedural requirements were satisfied and performed the required balancing analysis before sustaining the levy.

Result

The Tax Court agreed with the IRS’s decision to levy for the 2015, 2016, 2017, and 2018 tax years.

The Takeaway

There was nothing new in this case, and that is exactly why it is important. CDP hearings are often the best chance for taxpayers to work out collection alternatives, but that cannot happen if they do not provide the needed financial information. Appeals cannot judge claims of inability to pay without real documents. People often keep arguing about old issues instead of dealing with the paperwork needed now.

List of Citations

• §6330 — Governs CDP hearings and Appeals review before levy actions.

• §6331 — Authorizes IRS levy collection procedures.

• Sego v. Commissioner, 114 T.C. 604 (2000) — Addresses liability challenges and abuse-of-discretion review in CDP cases.

• Giamelli v. Commissioner, 129 T.C. 107 (2007) — Explains that liability issues must be properly raised during the CDP hearing.

• McLaine v. Commissioner, 138 T.C. 228 (2012) — Supports sustaining collection actions when taxpayers fail to provide requested financial information.

• Woodral v. Commissioner, 112 T.C. 19 (1999) — Defines abuse-of-discretion review.

• Lunsford v. Commissioner, 117 T.C. 183 (2001) — Discusses the balancing test required under §6330(c)(3).

Holding

The Fourth Circuit decided that an erroneous refund of underpayment interest counts as a liability for “unpaid tax” under §6015(f). This meant the taxpayer could request equitable innocent spouse relief, and the IRS had the authority to review the request. The Court overturned the Tax Court’s decision and sent the case back for further review.

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Why It Matters

• This is a significant taxpayer-favorable interpretation of §6015(f).

• The decision expands access to innocent spouse relief in cases involving erroneous refunds of underpayment interest.

• The IRS can no longer rely on the argument that an erroneous refund automatically falls outside the scope of §6015(f), at least within the Fourth Circuit.

• The ruling focuses on eligibility for relief, not whether relief must ultimately be granted.

• The decision may affect other cases involving long-standing collection actions tied to erroneous refunds and interest computations.

Key Facts

• Catherine LaRosa and her late husband filed joint returns for many years.

• The IRS assessed tax deficiencies for 1981 through 1983 and acknowledged overpayments for 1984 and 1985.

• The dispute centered on the proper calculation of interest associated with those underpayments and overpayments.

• In 1994, the IRS recalculated the interest and issued a refund to the LaRosas.

• The IRS later determined the refund was erroneous and successfully sued to recover it.

• After the government sought to foreclose on the family’s home in 2019, Catherine LaRosa requested equitable innocent spouse relief under §6015(f).

• The IRS refused to process the request, asserting that §6015(f) does not apply to erroneous refund liabilities.

• The Tax Court agreed with the IRS, prompting the appeal.

Statutory Framework

• §6015(f) allows the IRS to grant equitable innocent spouse relief when it would be inequitable to hold a taxpayer liable for unpaid tax or a deficiency.

• §6601 imposes interest on underpaid taxes.

• §6601(e)(1) provides that references to “tax” throughout the Internal Revenue Code generally include underpayment interest unless a specific exception applies.

• One exception applies to certain deficiency procedures in Chapter 63, but §6015 is not in that chapter.

Arguments

Taxpayer argued:

• The liability resulting from the erroneous refund represented unpaid tax because underpayment interest is treated as tax under §6601(e)(1).

• Therefore, the liability qualified for equitable relief under §6015(f).

Government argued:

• An erroneous refund does not create an unpaid tax eligible for §6015(f) relief.

• Once the original liability was paid, it was extinguished and could not later be treated as unpaid tax.

• Only certain types of erroneous refunds, known as rebate refunds, could potentially revive tax liability for these purposes.

Court’s Reasoning

• Section 6015(f) applies to liabilities for unpaid tax.

• Section 6601(e)(1) explicitly states that references to tax generally include underpayment interest.

• Because §6015(f) refers to unpaid tax, the statute also encompasses underpayment interest.

• The Chapter 63 exception in §6601(e)(1) does not apply because §6015 is located elsewhere in the Code.

• The government’s argument that payment permanently extinguished the liability focused on collection procedures rather than the existence of the underlying tax obligation.

• The Court distinguished prior cases involving assessments and collection procedures because those cases did not interpret §6015(f).

• The Court rejected the IRS’s attempt to make the outcome depend on the rebate versus nonrebate refund distinction, finding no support for that distinction in the text of §6015(f).

• Plain statutory language controlled the outcome.

Result

The Fourth Circuit overturned the Tax Court’s decision and sent the case back for more review of the taxpayer’s request for equitable innocent spouse relief.

The Takeaway

This decision does not determine whether LaRosa will receive innocent spouse relief. It only says the IRS has to consider her request.

For tax professionals, the main takeaway is simple: debts from erroneous refunds of underpayment interest can be covered by §6015(f). The IRS cannot automatically rule out these debts from innocent spouse relief just because they come from an erroneous refund.

List of Citations

• §6015(f) — Equitable innocent spouse relief provision at issue.

• §6601(a) — Imposes interest on underpayments of tax.

• §6601(e)(1) — Treats underpayment interest as tax for most Code provisions.

• Greer v. Commissioner, 557 F.3d 688 (6th Cir. 2009) — Recognized that an erroneous refund can revive an unpaid tax liability.

• Bilzerian v. USA, 86 F.3d 1067 (11th Cir. 1996) — Collection procedure case distinguished by the Court.

• Singleton v. United States, 128 F.3d 833 (4th Cir. 1997) — Assessment procedure case distinguished by the Court.

• LaRosa v. Commissioner, No. 24-1455 (4th Cir. May 18, 2026) — Holds that erroneous refunds of underpayment interest may qualify for §6015(f) relief.

Holding

The Court of Federal Claims decided that Selwyn and Barbara Karp made a reasonable estimate of their 2016 tax when they asked for a six-month extension. Because of this, their extension was valid, their 2016 return was filed on time, and they could claim their refund. The Court ruled in favor of the taxpayers and against the government.

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Why It Matters

• The decision limits the IRS’s ability to invalidate a filing extension based on a technical error that did not affect tax payment.

• The Court focused on whether the estimate was reasonable and made in good faith, not whether it was mathematically perfect.

• The case distinguishes between taxpayers who understate liability and underpay tax and those who have already paid more than enough tax.

• The opinion recognizes that modern IRS extension procedures place greater emphasis on payment than on precise liability estimates.

• This is not a broad relaxation of extension requirements. The ruling is tied closely to the fact that the IRS already held sufficient funds to satisfy the taxpayers’ liability.

Key Facts

• The Karps consistently overpaid their taxes and elected to carry excess payments forward to future years.

• In April 2017, they filed Form 4868 requesting an extension for their 2016 return. The form reported:

  • Estimated tax liability: $0

  • Payments and credits: $511,788

  • Balance due: $0

• Their actual 2016 tax liability was approximately $131,201.

• Their payments and carryforwards exceeded that liability, producing an overpayment of $336,558.

• They filed their 2016 return on October 15, 2020, the extended due date.

• The IRS initially denied the refund on timeliness grounds, later acknowledged the return was filed by the deadline, issued a refund, and then changed course by arguing that the extension itself was invalid.

Regulatory Framework

• §6511 governs refund claim timing.

• §6511(b)(2)(A) limits the amount recoverable based on the lookback period, including any valid filing extension.

• §6081 authorizes extensions of time to file returns.

• Treas. Reg. §1.6081-4 provides an automatic six-month extension for individuals who satisfy the requirements.

• An extension delays filing, not payment. Tax generally must still be paid by the original due date.

Arguments

Taxpayer argued:

• The Form 4868 estimate was reasonable based on the information available at the time.

• Existing overpayments and estimated payments more than covered the 2016 liability.

• The extension, therefore, remained valid, and the refund claim was timely.

Government argued:

• Reporting zero tax liability was not a reasonable estimate because the actual gross liability exceeded zero.

• An unreasonable estimate voids the automatic extension.

• Without a valid extension, the 2016 return was untimely, and the refund claim failed.

Court’s Reasoning

• Form 4868 requires a reasonable estimate, not exact accuracy. The governing standard is a bona fide estimate based on information available at the time.

• The Karps incorrectly estimated net tax liability rather than gross tax liability, but they reasonably believed that prior overpayments and estimated payments fully covered their 2016 taxes.

• Unlike taxpayers in prior Tax Court cases, the Karps did not underpay taxes or conceal income.

• The government incurred no payment delays because it already held funds exceeding its eventual tax liability.

• The Court viewed the purpose of the extension rules as protecting timely tax payment rather than policing harmless technical errors.

• The Court found it reasonable for the taxpayers to account for expected carryforwards when estimating whether additional tax would be due.

• Modern extension procedures further supported the taxpayers’ position because at least one IRS extension method permits taxpayers to obtain an extension without providing a tax estimate.

Result

The Court confirmed that the extension was valid, ruled in favor of the taxpayers, and held that the refund claim was timely.

The Takeaway

This decision is not about being easy on late filers. It is about focusing on the real facts, not just technicalities. The Court would not revoke an extension when the taxpayers had already paid enough and had made an honest estimate based on the information they had.

For tax professionals, this case helps push back against IRS efforts to cancel an extension after the fact when the estimate mistake did not cause underpayment or harm the government.

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List of Citations

• Crocker v. Commissioner, 92 T.C. 899 (1989) – Extension invalid where taxpayers materially understated liability and underpaid tax.

• Clayton v. Commissioner, 102 T.C. 632 (1994) – Extension denied where taxpayers knowingly omitted substantial income from estimate.

• FleetBoston Financial Corp. v. United States, 483 F.3d 1345 (Fed. Cir. 2007) – Treatment of overpayments assigned to specific tax years.

• §6511 – Refund claim timing and lookback limitations.

• §6081 and Treas. Reg. §1.6081-4 – Authority and requirements for automatic filing extensions.

The challenge is that wealth is different from income. It does not always generate cash, it can be difficult to measure, and owners may move it if taxes give them a reason.

Denmark’s proposed tax highlights this problem.

The prime minister suggested a 0.5% annual tax on net assets exceeding 25 million kroner, or about $3.9 million, to reduce the wealth gap. Some left-leaning parties want an even higher tax.

It sounds straightforward, but implementing the tax is complicated.

Wealth taxes cover all net assets, such as shares, securities, and property, even if they do not generate cash. This means assets must be valued every year, which can lead to disagreements and sometimes force people to sell assets to pay the tax. The paperwork involved can become a burden.

Other countries’ experiences show why there is resistance. France, Germany, and Sweden dropped wealth taxes because of tax avoidance, capital flight, and low revenue. These taxes usually accounted for less than 1% of total tax revenue.

Get 60% off forever

The real driver is not just ideology. Denmark already taxes its citizens heavily. A new 'top-top tax' raises the highest tax rate for top earners to just over 60%. There is also a 25% VAT on most goods and services. Adding a wealth tax would put even more pressure on a small group of wealthy people who could choose to move elsewhere. to relocate.

That is the constraint. The tax base is narrow and mobile. Denmark’s proposal would fall on roughly 20,000 taxpayers. If even a small number leave, the expected revenue can shrink quickly. Norway’s 2022 experience points to the same risk. When business owners leave, they do not just take personal wealth. They can take economic activity and future tax revenue. People often mention Switzerland as an exception, but it actually shows the limits of wealth taxes. Switzerland uses low rates, taxes a wide group of people, and lets its regions compete. This is very different from targeting only a small, wealthy group.

The overall trend is clear. Wealth taxes are popular in politics because they focus on people who do not have many supporters. But in practice, they are hard to manage because assets must be valued, owners can avoid the tax, and money can leave the country.

A better approach is to tax wealth when it is easier to measure. For example, capital gains can be taxed when they are realized, and inheritances can be taxed when wealth is passed on. Real estate and land can be taxed based on updated values, since these assets cannot be moved to another country.

People and organizations react to the rules they face. Politicians often choose taxes that seem to affect others. Asset owners may respond by moving, changing how they own things, or adjusting the timing of their actions. Tax officials are left to handle the difficult details.

Looking ahead, governments are unlikely to stop focusing on wealth, since wealth concentration and budget pressures will continue. The real question is whether they will tax wealth at points that are easier to manage, or keep trying a method that many developed countries have already tried and dropped.

A tax can be widely supported but still be a poor tool.

Holding

Randy Jackson filed a Tax Court petition to challenge an IRS notice that denied his $280,000 alimony deduction for 2022 and added a §6662(a) accuracy-related penalty.

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Why It Matters

• The case highlights continuing disputes over the Tax Cuts and Jobs Act's elimination of the alimony deduction for post-2018 divorce agreements.

• The factual issue is narrow but important: whether the marital settlement agreement was executed before January 1, 2019, and remained unmodified afterward.

• The petition shows how IRS examinations continue to scrutinize older divorce agreements that contain stepped-up support obligations beginning after 2018.

• The dispute appears procedural rather than novel. The taxpayer claims he already provided the operative agreement and bank records substantiating payment. Humans and institutions both excel at losing documents while insisting they never existed. Civilization marches on.

Key Facts

• Jackson and his former spouse, Erika Jackson, dissolved their marriage under a California stipulated judgment entered on December 27, 2018.

• The marital settlement agreement required Jackson to pay spousal support beginning January 1, 2018.

• The agreement increased the support obligation beginning January 1, 2022.

• Jackson alleges he paid $280,000 of spousal support during 2022.

• The petition states the agreement “was neither amended nor modified” after execution in 2018.

• The IRS issued an audit letter in April 2025 stating that alimony paid under agreements executed after December 31, 2018, or agreements modified afterward, is not deductible.

• The IRS later issued a notice of deficiency asserting $103,600 in additional tax and a $20,720 accuracy-related penalty.

Statutory or Regulatory Framework

• Before the Tax Cuts and Jobs Act, alimony generally was deductible by the payor under former §215 and includible in income by the recipient under former §71.

• The Tax Cuts and Jobs Act repealed the deduction for divorce or separation instruments executed after December 31, 2018.

• Pre-2019 agreements can remain grandfathered into the old rules unless later modified and the modification expressly adopts the new treatment.

• §6662(a) imposes a 20% accuracy-related penalty for certain underpayments, including negligence or substantial understatement of income tax.

• §7491(a) can shift the burden of proof to the IRS if the taxpayer introduces credible evidence and satisfies substantiation and recordkeeping requirements.

Arguments

Taxpayer argued:

• The marital settlement agreement was executed in 2018 before the statutory cutoff date.

• The agreement was never amended or modified after execution.

• The increased support obligation beginning in 2022 arose from the original agreement itself, not from a later modification.

• Jackson substantiated payment through bank records and ACH transfer documentation.

• The accuracy-related penalty should not apply.

Government argued:

• The IRS examination correspondence stated that alimony paid under agreements executed after December 31, 2018, or modified after that date, is nondeductible.

• The notice of deficiency disallowed the deduction and imposed a §6662(a) penalty.

Court’s Reasoning

The Tax Court has not yet issued a substantive opinion. The filing only reflects the taxpayer’s allegations and requested relief. Still, the petition frames the likely issues the Court will evaluate:

• Whether the operative divorce instrument qualifies for grandfathered treatment under pre-2019 alimony rules.

• Whether the 2022 increase in support obligations was built into the original agreement or resulted from a later modification.

• Whether the taxpayer adequately substantiated actual payment of the support amounts claimed.

• Whether the IRS properly applied the accuracy-related penalty.

• Whether the taxpayer satisfied the requirements for burden shifting under §7491(a).

Result

The case is still pending in the United States Tax Court. Jackson is asking the Court to reverse the tax and penalty fully.

The Takeaway

Most current alimony deduction disputes involve agreements made before 2019. This case shows that taxpayers must prove when the agreement was signed and that it was not changed later in a way that would trigger the new rules. An increase in support does not end the old treatment if it was already part of the original agreement. Small details in these agreements can have big tax effects. People created romance, divorce, and complex tax laws. It’s quite something.

List of Citations

• §215 (pre-TCJA) — formerly allowed deductions for qualifying alimony payments.

• §71 (pre-TCJA) — formerly required recipients to include alimony in income.

• Tax Cuts and Jobs Act of 2017 — repealed alimony deductions for post-2018 divorce instruments.

• §6662(a) — imposes accuracy-related penalties.

• §7491(a) — governs burden shifting when taxpayers provide credible evidence.

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Holding

The Trump family filed a notice under Rule 41(a)(1)(A)(i) to voluntarily dismiss the case with prejudice. Since the IRS and Treasury had not yet responded or sought summary judgment, the dismissal took effect immediately and did not require Court approval.

Why It Matters

• This is a procedural termination, not a judicial ruling on whether the IRS or Treasury violated taxpayer privacy rules.

• "With prejudice" means the same people cannot bring these claims to Court again.

• The timing is important because Rule 41 lets them dismiss the case automatically before the government responds.

• Each side pays its own fees and costs, so this notice also prevents any arguments over legal fees.

Key Facts

President Donald J. Trump, Donald Trump Jr., Eric Trump, and The Trump Organization sued the IRS and the Treasury in the Southern District of Florida in January this year, seeking $10 billion.

They claimed the IRS failed to protect confidential tax return information and asked for $10 billion in damages from American taxpayers because an IRS contractor, Charles Littlejohn, shared information with news outlets.

On May 18, 2026, they filed a notice to dismiss the case with prejudice, which was recorded as a voluntary dismissal in the Court records.

The notice says the defendants had not yet responded or asked for summary judgment.

Statutory Framework

Federal Rule of Civil Procedure 41(a)(1)(A)(i) lets a plaintiff dismiss an action without a Court order before the opposing party serves either an answer or a motion for summary judgment. A dismissal “with prejudice” operates as a final abandonment of the claims.

Court’s Reasoning

There is no Court reasoning in this filing. The plaintiffs used a rule that lets them dismiss the case on their own, so no judge needed to take action.

Result

The lawsuit ended with prejudice on May 18, 2026.

The Takeaway

This matters because it ends a high-profile tax confidentiality lawsuit without settling the main legal questions.

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Overview

The IRS issued Revenue Ruling 2026-11, setting the federal rates for June 2026. This ruling updates the following:

• Applicable Federal Rates (AFRs) under §1274

• Adjusted AFRs under §1288

• §382 long-term tax-exempt rates

• Low-income housing credit percentages under §42

• The §7520 valuation rate used in estate and gift tax planning

These monthly rate rulings are routine, but they have a real impact. They directly affect pricing assumptions, valuation discounts, financing structures, and tax modeling in many areas. Each month, a single update can change estate freezes, installment sales, and distressed M&A modeling across the industry.

Key June 2026 Rates

Applicable Federal Rates (AFRs)

IRS published the following annual AFRs for June 2026:

• Short-term AFR: 3.85%

• Mid-term AFR: 4.13%

• Long-term AFR: 4.87%

The long-term AFR with monthly compounding is 4.76%.

These rates apply to:

• Related-party loans

• Installment sales

• Below-market loan calculations

• Certain deferred compensation arrangements

• Imputed interest computations

Adjusted AFRs

IRS also published adjusted AFRs under §1288:

• Short-term adjusted AFR: 2.91%

• Mid-term adjusted AFR: 3.13%

• Long-term adjusted AFR: 3.68%

§382 Limitation Rates

The adjusted federal long-term rate for June 2026 is 3.68%.

That rate affects:

• §382 limitation calculations after ownership changes

• NOL utilization modeling in acquisitions

• Distressed company tax attribute valuations

The long-term tax-exempt rate also remains 3.68%.

Low-Income Housing Credit Percentages

IRS published the June 2026 applicable percentages for the low-income housing credit under §42:

• 70% present value credit: 8.05%

• 30% present value credit: 3.45%

The ruling also reiterates the statutory floor, which provides that the applicable percentage for certain non-federally subsidized new buildings cannot fall below 9%.

§7520 Rate Increases to 5.0%

The June 2026 §7520 rate is 5.0%.

This rate is especially important for:

• Grantor retained annuity trusts (GRATs)

• Charitable remainder trusts

• Split-interest transfers

• Life estate and remainder valuations

• Intra-family wealth transfer planning

Higher §7520 rates generally:

• Favor GRAT structures

• Reduce the present value of retained interests

• Affect actuarial valuation assumptions

• Change the economics of estate freeze techniques

Why It Matters

• This is a routine monthly release, not a policy shift.

• The 5.0% §7520 rate continues the higher-rate environment, which materially changes estate-planning assumptions compared to the near-zero-rate years.

• Tax practitioners modeling installment transactions or related-party lending must update June transactions to use the new AFRs.

• §382 practitioners and M&A advisors should update NOL limitation calculations using the new 3.68% long-term rate.

The Takeaway

June 2026 continues a period of higher interest rates, which affects estate planning, tax attribute valuations, and related-party financing across the market.

Holding

The government asked the Sixth Circuit to reverse a district Court ruling that allowed FedEx Corporation to claim foreign tax credits tied to “offset earnings” under §965. DOJ argues Treasury validly barred those credits through Treas. Reg. §1.965-5(c)(1)(ii) and that the Internal Revenue Code independently disallows them.

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Why It Matters

• The case could determine whether multinational corporations can claim additional foreign tax credits on earnings that Congress already removed from U.S. taxation under the TCJA's transition tax.

• DOJ is pushing an aggressive post-Loper Bright Enterprises v. Raimondo defense of Treasury regulatory authority. The government argues §965(o) expressly delegated broad anti-avoidance authority to the Treasury.

• The dispute affects large multinational groups with foreign deficits and foreign earnings pools during the §965 transition tax years.

• The government repeatedly frames the taxpayer position as producing a “windfall” and a “double benefit,” signaling the IRS's continued resistance to structures that separate foreign tax credits from actual U.S. taxation.

Key Facts

The dispute centers on the TCJA transition tax enacted under § 965.

Congress imposed a one-time transition tax on accumulated offshore earnings as the United States moved toward a quasi-territorial international tax system.

Under §965(b), profitable foreign subsidiaries could offset earnings with deficits from unprofitable foreign subsidiaries. The resulting exempted earnings are referred to in the litigation as “Offset Earnings.”

FedEx claimed foreign tax credits tied to those Offset Earnings.

Treasury issued Treas. Reg. §1.965-5(c)(1)(ii), called the “disallowance rule,” which bars credits for foreign taxes associated with Offset Earnings.

The District Court invalidated the regulation and allowed the credits. DOJ appealed to the Sixth Circuit.

Regulatory Framework

• §965 imposed the transition tax on accumulated foreign earnings.

• §965(g) reduced foreign tax credits tied to transition-taxed earnings to prevent over-crediting.

• §965(o) authorized Treasury to issue regulations preventing avoidance of §965’s purposes.

• §959 generally excludes previously taxed earnings from income upon later distribution.

• §960 governs deemed-paid foreign tax credits connected to subpart F inclusions and related distributions.

• Treas. Reg. §1.965-5(c)(1)(ii) disallows credits for foreign taxes associated with Offset Earnings.

Taxpayer argued

• §960(a)(3) allows foreign tax credits tied to Offset Earnings distributions.

• Treasury exceeded its authority by effectively rewriting the statute through regulation.

• Congress intentionally left these credits available when enacting the TCJA.

• The disallowance rule improperly overrides statutory text.

Government argued

• Congress never clearly authorized credits for earnings exempt from U.S. tax.

• §965(o) expressly delegated authority to Treasury to prevent avoidance of §965’s purposes.

• Allowing credits for Offset Earnings would undermine §965(g)’s anti-double-benefit framework.

• Offset Earnings taxes were already treated as deemed paid under §960(a)(1), which independently bars additional credits under §960(a)(3).

• Tax credit statutes must be strictly construed in the government’s favor.

Court’s Reasoning at Issue

The filing is a government appellate brief, not a judicial opinion. DOJ’s reasoning focuses on several themes:

• Congress carefully limited foreign tax credits associated with the transition tax through §965(g).

• Offset Earnings are permanently exempt from U.S. tax, so DOJ argues there is no double taxation requiring relief through credits.

• Treasury acted within the explicit delegated authority under § 965(o).

• The government argues FedEx selectively reads §960(a)(3), applying §965(b)(4)(A) only where beneficial to the taxpayer.

• DOJ repeatedly emphasizes that the statutory provisions must be interpreted as part of an integrated international tax regime rather than as isolated sections.

• The brief relies heavily on structural arguments and legislative purpose rather than a single explicit statutory prohibition.

• DOJ also argues the taxpayer interpretation would create a “massive giveaway” benefiting corporations with historically unprofitable foreign subsidiaries.

Result

DOJ asked the Sixth Circuit to reverse the district Court, uphold Treasury’s disallowance rule, vacate the judgment, and remand the case.

The Takeaway

This appeal matters because it tests how far Treasury’s anti-avoidance authority extends after Loper Bright and whether courts will permit foreign tax credits detached from actual U.S. taxation.

The government is framing the issue as one of structural coherence, not technical ambiguity. Its position is simple: if Congress exempts the income from U.S. tax, taxpayers should not also receive full credits tied to that exempt income. International tax lawyers, meanwhile, continue their sacred cultural tradition of turning one transition rule into twelve years of litigation.

List of Citations

• §965(g) → Limits foreign tax credits associated with transition-taxed earnings.

• §965(o) → Delegates anti-avoidance regulatory authority to Treasury.

• §959 → Excludes previously taxed foreign earnings from later U.S. taxation.

• §960(a)(1) and §960(a)(3) → Govern deemed-paid foreign tax credits tied to subpart F income.

• Loper Bright Enterprises v. Raimondo → DOJ cites the case to support judicial respect for explicit congressional delegations to agencies.

• Moore v. United States → Referenced for the TCJA transition tax’s purpose and structure.

• Summa Holdings, Inc. v. Commissioner → FedEx relies on the case to argue agencies cannot rewrite statutes.

• Varian Medical Systems, Inc. v. Commissioner → DOJ cites the case regarding Congress’s effort to prevent excessive foreign tax credits under §965.

Holding

The Court threw out several wire fraud charges based on electronically filed tax returns because those returns were already charged under §7206(2), which requires proof of willfulness. However, the Court allowed other wire fraud charges related to fee and valuation payments in the alleged tax shelter scheme to proceed.

Why It Matters

• This is an unusual and potentially significant limitation on the DOJ's charging strategy in criminal tax cases.

• The ruling focuses on mens rea, meaning the required mental state for conviction. Tax crimes generally require proof that the defendant knowingly violated a known legal duty. Wire fraud requires only intent to defraud.

• The Court treated the electronic filing of returns as compelled conduct because professional preparers must e-file returns under §6011(e)(3). That weakened the government’s argument that the wire transmissions independently supported a wire fraud charge.

• The decision does not broadly eliminate wire fraud theories in tax shelter cases. It only limits wire fraud counts that directly overlap with charged false return conduct.

• The ruling comes from a district Court and addresses what the judge described as a question of first impression in the Fifth Circuit. Humans continue building overlapping criminal statutes like a Jenga tower and then act surprised when courts start asking which block actually matters.

Key Facts

The government charged four defendants in a 47-count superseding indictment alleging a fraudulent tax shelter scheme.

The indictment included:

• Wire fraud charges under 18 U.S.C. §1343

• Conspiracy to commit wire fraud under §1349

• Aiding and assisting in the preparation of false tax returns under §7206(2)

• Conspiracy to defraud the United States under 18 U.S.C. §371

The wire fraud counts relied on two categories of conduct:

• Electronic filing of allegedly false tax returns

• Wire payments for valuation services and client fees

The tax fraud counts focused on approximately 25 allegedly false returns.

Thirteen wire fraud counts were based on electronically filed tax returns. Twelve of those same returns also supported separate §7206(2) tax fraud charges.

Statutory or Regulatory Framework

Section §7206(2) criminalizes willfully assisting in the preparation or presentation of a false tax return.

Under Supreme Court precedent, criminal tax offenses generally require proof of willfulness, meaning a voluntary and intentional violation of a known legal duty.

Wire fraud under 18 U.S.C. §1343 requires proof of a scheme to defraud and intent to defraud, but not knowledge of the specific law being violated.

The Court focused heavily on the difference between:

• Tax fraud’s heightened willfulness requirement

• Wire fraud’s lower intent-to-defraud standard

Arguments

Taxpayer argued:

• The government improperly used wire fraud charges to avoid proving the willfulness required under tax law.

• The tax fraud statute should control over the more general wire fraud statute when both rely on the same conduct.

• Wire fraud law should not extend to tax fraud against the federal government.

Government argued:

• Prosecutors have discretion to charge conduct under multiple criminal statutes.

• Wire fraud and tax fraud statutes can coexist.

• Fraud against the federal government falls within the scope of the wire fraud statute.

Court’s Reasoning

• The Court held that due process requires the government to prove every element necessary for tax fraud convictions when prosecuting false return conduct.

• Section §7206(2) imposes a heightened willfulness standard because of the complexity of tax law.

• Wire fraud requires only intent to defraud and does not require proof that the defendants knew they were violating tax law.

• Charging the same false returns under wire fraud effectively lowered the government’s burden of proof.

• The Court viewed the overlap as an unconstitutional “end-run” around the willfulness requirement recognized in cases such as Cheek v. United States.

• The judge emphasized that the defendants were legally required to file returns electronically, so the wire transmissions themselves did not constitute separate culpable conduct.

• The surviving wire fraud counts involved payments for valuations and fees tied to the broader tax shelter promotion activity, not merely the filing of returns.

Result

The Court dismissed Counts Two, Five through Eight, and Eleven through Eighteen of the superseding indictment, while allowing the remaining wire fraud and conspiracy counts to proceed.

The Takeaway

This ruling makes a clearer distinction between criminal tax enforcement and general fraud laws. Prosecutors can still use wire fraud charges in tax shelter cases, but the Court made it clear they cannot use wire fraud to lower the intent standard that Congress set for false return crimes.

Tax professionals working on promoter investigations or related criminal cases should watch how closely prosecutors link wire fraud charges to the filing of returns rather than to other business activities. This difference was key to the Court’s decision.

List of Citations

• Cheek v. United States

  • Established that criminal tax violations generally require proof of intentional violation of a known legal duty.

• Sandstrom v. Montana

  • Addressed the unconstitutional reduction of the government’s burden of proof on mental state.

• United States v. Batchelder

  • Recognized prosecutorial discretion but noted constitutional limits.

• §7206(2)

  • Criminal statute governing willful assistance in preparing false returns.

• 18 U.S.C. §1343

  • Federal wire fraud statute.

• 18 U.S.C. §1349

  • Conspiracy to commit wire fraud statute.

Holding

The U.S. District Court for the District of Utah rejected the IRS’s request for a more detailed complaint under Rule 12(e). The court found that the taxpayers’ complaint gave the IRS enough information to understand and answer the refund claim.

Why It Matters

• This is a procedural ruling, not a merits victory for the taxpayers. The Court did not decide whether the Coxes are entitled to a refund.

• The decision reinforces how low the pleading threshold remains in federal tax refund litigation under Rule 8 notice pleading standards.

• The ruling signals that courts may resist the IRS's attempts to require pro se taxpayers to provide detailed factual development before discovery or substantive briefing.

• The case highlights a recurring operational issue: amended returns and audit reconsideration requests that allegedly remain unresolved for years inside IRS processing channels.

Key Facts

Charles and Denan Cox filed their 2015 federal income tax return in April 2016 and paid approximately $6,461 with the return.

The IRS later audited the return and disallowed certain business expenses because the agency concluded that the taxpayers failed to substantiate that the expenses were ordinary and necessary and incurred during the tax year. The IRS increased the liability first to about $25,114 and later to about $28,758 after the taxpayers allegedly failed to respond to requests for additional information.

The taxpayers later pursued appeals and requests for audit reconsideration. In February 2020, they submitted another reconsideration request together with an amended 2015 return. According to the complaint, the amended return corrected an issue in the original filing in which two businesses had been combined on a single Schedule C.

The taxpayers paid the assessed liability in full in October 2020.

The complaint alleges the IRS later closed the reconsideration request without processing the amended return. The taxpayers claimed they ultimately paid approximately $24,370 for 2015, even though the amended return allegedly showed a correct liability of only $9,641, resulting in an asserted overpayment of $14,729.

The taxpayers filed a refund suit under §7422 in April 2025. The IRS responded with a Rule 12(e) motion seeking a more definite statement, arguing the complaint lacked enough detail to frame a response.

Statutory or Regulatory Framework

• §7422 governs federal tax refund suits against the United States.

• Before filing suit, taxpayers generally must:

  • file an administrative refund claim with the IRS,

  • satisfy statutory timing requirements under §6511 and §6532,

  • and fully pay the assessed tax liability under the full-payment rule from Flora v. United States.

• Federal Rule of Civil Procedure 8 requires only a “short and plain statement” of the claim.

• Rule 12(e) permits a motion for a more definite statement only when a pleading is so vague or ambiguous that a party cannot reasonably prepare a response.

The Court emphasized that Rule 12(e) motions are disfavored and are intended to address unintelligible pleadings, not ordinary requests for additional factual detail.

Arguments

Taxpayer argued:

• The amended return corrected errors in the original 2015 filing.

• The IRS failed to process the amended return.

• The taxpayers overpaid their 2015 taxes by approximately $14,729.

• The refund claim was timely and properly submitted through audit reconsideration and amended return procedures.

Government argued:

• The complaint lacked enough detail to determine the basis for the refund claim.

• The taxpayers failed to explain adequately:

  • the nature of the overpayment,

  • the changes reflected on the amended return,

  • why the original assessment was incorrect,

  • and the exact basis for entitlement to the claimed refund.

• Without additional specificity, the IRS argued it could not reasonably prepare a response.

Court’s Reasoning

• The Court noted that Rule 12(e) motions are generally disfavored in federal practice.

• A complaint only needs enough specificity to permit the opposing party to admit or deny the allegations.

• The taxpayers identified the relevant tax year, the audit adjustments, the amended return, the amount allegedly paid, and the corrected liability they claimed should apply.

• The complaint also explained the core factual theory: the original return improperly combined two businesses on a single Schedule C, and the amended return corrected that treatment.

• The Court concluded the IRS could understand the substance of the refund claim and frame a response.

• The Court rejected the IRS’s argument that additional detail was necessary merely because the complaint did not fully explain every adjustment reflected on the amended return.

• The Court characterized the alleged basis for the refund claim as sufficiently understandable: the amended return allegedly corrected the business expense issues underlying the audit adjustments, but the IRS never processed the correction.

Result

The court denied the IRS’s Rule 12(e) motion and told the agency to answer or respond to the complaint by May 28, 2026.

The Takeaway

This ruling is a small step in procedure but matters in practice. Courts usually do not make taxpayers argue the whole refund claim in the complaint, especially when the IRS already knows the tax year, payment history, and the main reason for the claim.

The decision also shows the ongoing tension between IRS processing and refund lawsuits. More taxpayers end up in court after years of waiting for the IRS to handle amended returns or reconsideration requests. Judges seem unwilling to let these cases get stuck just because of technicalities in the complaint. Our tax system sometimes lets paperwork disappear for years, so it is not surprising when people turn to the courts.

List of Citations

• §7422

  • Governs federal tax refund litigation procedures.

• §6511

  • Establishes timing rules for filing refund claims.

• §6532

  • Governs timing for filing refund suits after IRS action or delay.

• Flora v. United States, 362 U.S. 145 (1960)

  • Established the full-payment rule for tax refund suits.

• Green v. United States, 880 F.3d 519 (10th Cir. 2018)

  • Discussed requirements for adequately presenting refund claims to the IRS.

• Federal Rule of Civil Procedure 12(e)

  • Allows motions for more definite statements only when pleadings are too vague to answer.

• Federal Rule of Civil Procedure 8

  • Establishes federal notice pleading standards.

Holding

The Second Circuit upheld the denial of Michael Little’s petition for a writ of error coram nobis and turned down his request for an evidentiary hearing. The court also rejected his challenges to the $4.2 million restitution order and his claims of judicial bias.

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Why It Matters

• The decision reinforces the narrow scope of federal courts' application of coram nobis relief after a criminal tax conviction becomes final.

• Prior appellate rulings remain binding under the mandate rule. Taxpayers cannot recycle the same arguments through collateral attacks framed as “new evidence.”

• The opinion shows continued judicial reluctance to revisit restitution calculations in criminal tax cases absent a clear statutory or constitutional error.

• The Court treated speculative “double taxation” claims as insufficient to reduce criminal restitution tied to tax evasion conspiracies.

Key Facts

Michael Little, a disbarred attorney proceeding without counsel, was convicted in 2018 for participating in a conspiracy involving the heirs of businessman Harry Seggerman.

The scheme involved efforts to evade estate taxes and reporting obligations tied to Seggerman’s estate. Little was also convicted for failing to file U.S. tax returns.

He received:

• A 20-month prison sentence.

• A restitution order exceeding $4.2 million.

After his conviction became final, Little filed a petition for a writ of error coram nobis. Coram nobis is an extraordinary post-conviction remedy available in limited situations after a defendant is no longer in custody.

Little argued:

• An agreement between the IRS and U.K. tax authorities eliminated his obligation to file U.S. tax returns for 2008 through 2010.

• The restitution order improperly created a “double taxation” windfall.

• The district judge was biased and should have recused himself.

The District Court denied relief. Little appealed.

Statutory Framework

• A writ of error coram nobis is an extraordinary judicial remedy used to correct fundamental errors in criminal proceedings after custody ends.

• The petitioner must show:

  • compelling circumstances,

  • valid reasons for not seeking earlier relief, and

  • continuing legal consequences from the conviction.

• The mandate rule bars relitigation of issues already decided by an appellate Court.

• Criminal restitution in tax cases may include losses tied to the full scope of a conspiracy.

• Under §102(a), inheritances generally are excluded from gross income for income tax purposes.

Arguments

Taxpayer argued:

• An IRS agreement with U.K. tax authorities established that he had no U.S. filing obligation for certain years.

• The agreement constituted newly discovered evidence.

• The restitution order improperly included taxes connected to an heir’s inheritance and therefore created a double-taxation windfall.

• The trial judge demonstrated bias through adverse rulings.

Government argued:

• The alleged “new evidence” was known to Little years earlier.

• The Second Circuit had already rejected substantially identical arguments in prior proceedings.

• Coram nobis cannot be used as a substitute for appeal.

• The restitution calculation properly reflected losses caused by the conspiracy.

• Judicial rulings alone do not establish bias.

Court’s Reasoning

• The Court emphasized that coram nobis relief is available only in “extreme cases” involving fundamental errors.

• Little failed to establish that the IRS-U.K. agreement was newly discovered evidence because he knew about it in 2020 and 2021.

• A prior Second Circuit panel had already rejected arguments based on the same agreement during an earlier Rule 33 appeal.

• The mandate rule barred relitigation of issues already resolved by the appellate Court.

• Coram nobis cannot function as a substitute for direct appeal or repeated collateral attacks.

• The Court found no plain error in the restitution calculation.

• The alleged double-taxation issue was speculative because inheritances generally are excluded from income under §102(a).

• The estate assets tied to Patricia Seggerman’s inheritance were still part of the concealed estate involved in the conspiracy.

• The Court rejected the judicial bias claim because adverse rulings alone rarely establish judicial partiality.

Result

The Second Circuit affirmed the denial of post-conviction relief and left the criminal convictions and $4.2 million restitution order intact.

The Takeaway

This case was not a big change in tax law. Instead, it serves as a reminder that federal courts strictly limit post-conviction challenges in criminal tax cases. If an appellate court has already rejected an argument, it is very hard to bring it up again as “new evidence.”

The decision also shows that courts rarely change restitution awards in broad tax conspiracy cases unless there is a clear legal problem. People often hope to find a loophole that will erase criminal tax liability years later, but federal appellate courts are determined to prevent that.

List of Citations

• United States v. Rutigliano, 887 F.3d 98 (2d Cir. 2018)
  Defined the narrow scope of coram nobis relief.

• United States v. Denedo, 556 U.S. 904 (2009)
  Described coram nobis as an extraordinary remedy.

• United States v. Mandanici, 205 F.3d 519 (2d Cir. 2000)
  Confirmed that coram nobis is not a substitute for an appeal.

• Foont v. United States, 93 F.3d 76 (2d Cir. 1996)
  Limited collateral attacks through coram nobis.

• Yick Man Mui v. United States, 614 F.3d 50 (2d Cir. 2010)
  Explained the mandate rule barring relitigation.

• United States v. Marcus, 560 U.S. 258 (2010)
  Defined the plain-error review standard.

• Liteky v. United States, 510 U.S. 540 (1994)
  Held that judicial rulings alone rarely establish bias.

• §102(a)
  Excludes inheritances from gross income for income tax purposes.

What Happened

Dr. Gary Karakashian filed a petition in Tax Court to challenge an IRS Notice of Deficiency for 2021. The IRS claimed:

• $5,774,740 in additional income tax

• $4,293,843.75 in civil fraud penalties under §6663

The dispute centers on the main issue: whether Karakashian was a bona fide resident of Puerto Rico under §937(a). If so, he could exclude a large amount of Puerto Rico income from U.S. federal tax under §933.ed he failed:

• physical presence test

• tax home test

• closer connection test

The IRS also questioned a group of Puerto Rico entities, captive insurance deals, management companies, and investment structures connected to the taxpayer’s medical practice and investments.

Human civilization has now produced a world where dermatologists apparently maintain captive insurers, transfer pricing studies, Puerto Rico management entities, telehealth operations, reinsurance pools, and six-million-dollar intercompany loan chains. Accountants everywhere just nodded grimly and opened another spreadsheet.

Why It Matters

• Puerto Rico residency disputes remain a major IRS enforcement priority, especially where taxpayers exclude large amounts of capital gain or business income under §933.

• The case combines several areas currently receiving heightened scrutiny:

  • Puerto Rico Act 60 residency claims

  • captive insurance structures

  • Subpart F and GILTI issues

  • management company arrangements

  • economic substance penalties

• The IRS appears willing to assert both civil fraud penalties and alternative economic substance penalties in the same case when large Puerto Rico exclusion claims are involved.

• The petition highlights how residency determinations can affect downstream international tax treatment. If the taxpayer loses Puerto Rico residency status, multiple Puerto Rico entities could become controlled foreign corporations subject to Subpart F and GILTI inclusion rules.

Key Facts

Karakashian alleges that he became a permanent resident of Puerto Rico in 2018 and remained a bona fide resident through 2021.

He claims:

• 209 days of Puerto Rico presence during 2021

• a Puerto Rico tax home

• minimal U.S. personal connections

The taxpayer operated or owned several entities, including:

• Tripod Management Services, LLC

• Aqua Investments, LLC

• Zeus Protected Cell

• Gary V. Karakashian International Business Group, Inc.

• Gary V. Karakashian, M.D., P.A.

The petition states that Tripod provided physician, administrative, telehealth, pathology, billing, compliance, and management services from Puerto Rico to a New Jersey dermatology practice.

The IRS also challenged:

• more than $4 million of allegedly excluded capital gains

• deductions tied to captive insurance premiums

• depreciation and business expense deductions

• investment interest expense

• additional “other income” reconstructed using bank deposit methods

Statutory Framework

Section 937(a) defines a bona fide Puerto Rico resident using three principal tests:

• Physical presence test

• Tax home test

• Closer connection test

Section 933 generally excludes Puerto Rico source income from U.S. federal income tax for bona fide Puerto Rico residents.

Sections 951 and 951A govern Subpart F and GILTI inclusions for U.S. shareholders of controlled foreign corporations.

Section 6663 imposes a 75% civil fraud penalty on underpayments attributable to fraud.

Section 6662 includes accuracy-related penalties for:

• negligence

• substantial understatement

• non-economic substance transactions

• undisclosed foreign financial asset understatements

Taxpayer Argued

• He satisfied all Puerto Rico residency tests under §937(a).

• Puerto Rico source income was properly excluded under §933.

• Puerto Rico entities were not controlled foreign corporations because they were bona fide residents of Puerto Rico.

• Captive insurance arrangements constituted valid insurance transactions with economic substance.

• Premiums were actuarially determined and supported by risk distribution arrangements through a Puerto Rico reinsurance pool.

• Business deductions and depreciation were properly substantiated.

• He relied on qualified professional advisors and did not commit fraud.

Government Argued

According to the petition, the IRS concluded:

• the taxpayer failed Puerto Rico residency requirements

• Puerto Rico income exclusions were improper

• Puerto Rico entities constituted controlled foreign corporations

• certain income was subject to Subpart F and GILTI inclusion

• captive insurance arrangements failed federal tax requirements

• various deductions lacked substantiation or represented personal expenses

• fraud or alternative accuracy-related penalties applied

Court Process and Issues to Watch

The petition raises several issues that frequently appear in modern Puerto Rico enforcement cases.

Residency documentation

The taxpayer claims 209 qualifying Puerto Rico days, including days attributable to medical treatment exceptions. The IRS often scrutinizes:

• travel logs

• phone records

• flight data

• utility usage

• social connections

• business activity location

Captive insurance scrutiny

The petition describes a sophisticated captive insurance structure involving:

• protected cell arrangements

• actuarial studies

• reinsurance participation

• Puerto Rico insurance regulation

• risk distribution mechanisms

The IRS has aggressively challenged micro-captive and related insurance structures for years, especially where tax benefits substantially outweigh demonstrated insurance purpose.

Puerto Rico management company structures

The petition claims the taxpayer personally performed management and telehealth services from Puerto Rico through Tripod.

That issue matters because service income sourcing and operational substance remain central in Puerto Rico residency examinations.

Economic substance penalties

The IRS asserted fraud penalties and, alternatively, non-economic substance penalties.

That approach gives the government multiple fallback positions if fraud is difficult to prove. Tax litigation increasingly resembles a prosecutor carrying backup batteries because modern tax structures tend to fail in layers rather than all at once.

The Takeaway

This petition shows that Puerto Rico residency disputes often grow to include international tax, captive insurance, transfer pricing, and economic substance issues once the IRS questions residency.

For practitioners, the key point is both procedural and substantive: losing a Puerto Rico residency claim can cause a chain reaction across entity classification, Subpart F exposure, reporting, sourcing rules, and penalties. One residency decision can reopen an entire structure.

List of Citations

• §933: Exclusion of Puerto Rico source income for bona fide Puerto Rico residents.

• §937(a): Defines bona fide Puerto Rico residency tests.

• §951 and §951A: Subpart F and GILTI inclusion rules for controlled foreign corporations.

• §957(a) and §957(c)(1): Controlled foreign corporation definitions and Puerto Rico exceptions.

• §6663: Civil fraud penalty provisions.

• §6662(b)(6), §6662(i), §6662(j): Economic substance and foreign asset understatement penalties.

• Karakashian v. Commissioner: Tax Court petition challenging Puerto Rico residency determination and related penalties.

Artificial intelligence is beginning to disrupt this model. Entry-level tasks are now becoming automated.

KPMG’s recent actions highlight this shift. The firm reportedly cut about 10% of its U.S. audit partners while also speeding up its use of AI in audits. These decisions are linked, showing the profession is moving from labor-heavy growth to a model focused on specialized expertise.

The Event

Routine testing has long been the foundation of early accounting careers. Associates learned by reviewing transactions, checking documents, tracing balances, and handling many small inconsistencies. The repetitive work helped build their judgment.

KPMG’s stance shows the firm no longer sees this work as an efficient use of people’s time.

At the same time, the partner cuts reveal another side of the transition. The reductions were not described as broad-based retrenchment; instead, they frame the pressure as falling on partners whose economics depended heavily on leverage rather than client origination or differentiated expertise.

This difference matters. AI doesn’t affect all parts of a firm equally. It changes which skills and roles are most valuable.

The Real Driver

The main reason is efficiency. Firms automate repetitive tasks because software does them faster and cheaper. But that’s only part of the story.

A bigger issue is that AI undermines the traditional economic model of accounting firms.

For years, firms made profits by having layers of staff. Junior employees did routine tasks, managers checked their work, and partners earned the difference between labor costs and billing rates. This system relied on lots of people at the bottom.

AI is aimed directly at that layer.

When software takes over routine testing, document review, and other structured tasks, firms need fewer people for those jobs. This changes how firms hire, promote, and even structure partnerships.

As the lower-level work becomes easier to automate, the value of top-level roles increases.

Clients still want experienced professionals to make tough decisions. Boards still value judgment when facts are unclear or sensitive. Reputation is still important when problems arise. AI can speed up analysis, but people are still responsible for the outcomes.

The term “K-shaped” describes a situation in which one part of the profession is climbing rapidly while the other is declining, illustrating how different groups may experience very different economic outcomes.

The top tier benefits because technology lets successful professionals do more. A trusted partner can oversee more work, respond faster, and provide advice more efficiently with AI tools to support them. The lower tier faces a different result. Standardized compliance work becomes cheaper and easier to commoditize. The same tools that help the top reduce the need for workers at the bottom. Managers are no longer supervising large groups performing manual procedures—their role shifts toward coordinating, overseeing, and interpreting outputs generated by automated systems.

This is a redesign of how firms create and distribute economic value.

The Pattern

Firms that have fully adopted AI are pulling ahead of those still treating it as a trial. This divide is about incentives as much as it is about technical skills. Well-funded organizations, or those backed by private equity, can move faster because their leaders have more incentive to restructure early. These firms are already redesigning workflows, building their own tools, and changing pay structures to attract the partners they think will be important in the future.

In contrast, older partnerships face pushback from within. Senior partners close to retirement often have little reason to change a system that still works for them. This slows down investment and delays change inside professions. The article also notes another common pattern in professional services: a gap between what firms say publicly and what they actually do internally. Internally, actual usage can look far less consistent. The gap becomes especially important when leadership itself uses the tools less frequently than the staff does. In that situation, governance problems emerge quickly because executives are making strategic decisions about systems they do not fully understand operationally.

This pattern shows up often during times of technological change. Institutions usually don’t struggle because technology fails, but because their incentives, authority, and habits change more slowly than the technology does.

Implications

The immediate consequence is that the traditional career ladder inside accounting firms becomes narrower and eventually nonexistent.

Entry-level work used to serve two roles: it produced billable work and trained future professionals. If AI reduces the need for this work, firms may also lose the process that builds experienced judgment over time.

This leads to a long-term succession problem.

Audit judgment is developed through repeated exposure to low-risk decisions before professionals handle bigger ones. If firms remove much of this repetitive work, they may end up with too few people who have deep practical experience.

The industry’s pricing structure is also changing.

Routine work is now faster, cheaper, and harder to tell apart. Clients who buy standard compliance services will likely push harder on fees because technology makes labor less visible.

At the top end, pricing power may strengthen instead of weaken. Professionals with strong industry credibility, specialized expertise, and durable client trust become harder to replace because those qualities do not scale as easily as automation can.

In the new model, the main products are: deep industry experience, judgment, trust, and personal reputation.

Forward View

The accounting firms will not disappear. There is still a need for assurance, oversight, and professional judgment. What’s changing is how firms organize their people around these roles. It is a thinner professional structure supported by heavier automation underneath it. More output will come from fewer people, but the remaining people at the top will carry greater economic importance.

This also explains why private equity investors now judge firms by how seriously management has taken AI adoption and operational redesign. The question isn’t whether automation affects professional services, but whether leaders acted soon enough to reshape the firm before the economics changed.

Accounting firms that adapt may still look the same from the outside, but inside, they will run on very different ideas about labor, expertise, and value.

Holding Sought on Appeal

Karen Dorondo asks the Ninth Circuit to reverse the Tax Court’s dismissal of her late-filed deficiency petition and remand the case so the Tax Court can consider equitable tolling.

Why It Matters

• This appeal directly challenges whether §6213(a)’s 90-day deficiency petition deadline is jurisdictional in the Ninth Circuit. That issue affects thousands of Tax Court cases annually.

• The taxpayer relies heavily on the Supreme Court’s recent jurisdictional jurisprudence, especially Boechler, P.C. v. Commissioner, which held that another Tax Court filing deadline was not jurisdictional and could be equitably tolled.

• The appeal highlights a growing circuit split in practice, even if not formally acknowledged. The Second, Third, and Sixth Circuits have already concluded that §6213(a) is nonjurisdictional after Boechler. Humans continue discovering that “final deadlines” are apparently less final than advertised. Bureaucracy remains committed to suspense.

• If the Ninth Circuit reverses its earlier precedent in Organic Cannabis Foundation, LLC v. Commissioner, taxpayers in western states could gain broader access to equitable tolling arguments involving illness, disability, natural disasters, or other extraordinary circumstances.

• The taxpayer also frames the Tax Court as a pro-taxpayer forum intended to be accessible and to encourage frequent pro se participation. That framing could influence future procedural disputes involving filing deadlines and access to review.

Key Facts

• Karen Dorondo received a notice of deficiency on March 3, 2025, asserting roughly $1,444 in taxes, penalties, and interest for 2021.

• Dorondo filed a Tax Court petition on June 23, 2025. The filing came 21 days after the standard 90-day deadline under §6213(a).

• She argued the delay resulted from a debilitating stroke suffered in 2020 that materially impaired her ability to manage financial and tax matters.

• Dorondo also asserted that her 2021 return, filed in 2021, showed an overpayment and a refund due, not an unpaid liability.

• The Tax Court dismissed the petition for lack of jurisdiction based on Ninth Circuit precedent treating §6213(a)’s filing deadline as jurisdictional and not subject to extension.

Statutory Framework

• §6213(a) generally gives taxpayers 90 days after a notice of deficiency is mailed to petition the Tax Court.

• If a timely petition is filed, the IRS generally cannot assess or collect the disputed deficiency until the Tax Court proceeding concludes.

• Jurisdictional deadlines cannot be waived or equitably tolled.

• Nonjurisdictional claim-processing rules may allow equitable tolling in extraordinary circumstances.

• Recent Supreme Court decisions have narrowed the category of procedural rules treated as jurisdictional absent a clear congressional statement.

Taxpayer argued

• §6213(a)’s filing deadline is not jurisdictional because the statute lacks a clear statement tying the deadline to the Tax Court’s adjudicatory authority.

• Supreme Court precedent after Organic Cannabis fundamentally changed the jurisdictional analysis.

• The Tax Court should consider equitable tolling because Dorondo’s stroke impaired her ability to comply with the filing deadline.

• Congress designed the Tax Court as an accessible prepayment forum for ordinary taxpayers, many of whom proceed without counsel.

• Dismissing the petition would allow the IRS to retain funds despite the taxpayer allegedly being entitled to a refund.

Government argued

• Existing Ninth Circuit precedent in Organic Cannabis treats §6213(a)’s deadline as jurisdictional.

• The Tax Court lacks authority to extend the filing period.

• Untimely petitions must therefore be dismissed regardless of equitable considerations.

Court Proceedings and Legal Context

The appeal spends substantial time attacking Organic Cannabis. The taxpayer argues that the case cannot survive after Boechler and subsequent Supreme Court decisions emphasizing that filing deadlines are presumptively nonjurisdictional absent explicit congressional language.

The brief also cites post-Boechler appellate decisions from the Second, Third, and Sixth Circuits that conclude that §6213(a) is not jurisdictional and can be equitably tolled.

The taxpayer repeatedly emphasizes that Congress explicitly used jurisdictional language elsewhere in the Internal Revenue Code, but not in the sentence establishing the 90-day filing deadline itself.

A central practical argument involves access to justice. The brief notes that most Tax Court litigants are pro se and many disputes involve relatively small dollar amounts. Requiring full payment before judicial review can effectively deny lower-income taxpayers access to review.

The taxpayer also distinguishes older Supreme Court cases where filing deadlines were treated as jurisdictional because of long historical treatment by the Supreme Court itself. The brief argues that no comparable Supreme Court authority exists for §6213(a).

Court’s Reasoning Requested by Taxpayer

• Filing deadlines are generally treated as claim-processing rules rather than jurisdictional bars.

• A procedural requirement becomes jurisdictional only if Congress clearly states that result.

• §6213(a)’s text discusses what taxpayers “may” do within 90 days, but does not expressly condition Tax Court jurisdiction on timely filing.

• Other Internal Revenue Code provisions expressly address Tax Court jurisdiction, suggesting Congress knew how to impose jurisdictional limits when it intended to do so.

• The Supreme Court’s Boechler analysis regarding another Tax Court filing deadline applies equally to §6213(a).

• Equitable tolling is presumptively available unless Congress clearly forecloses it.

• Severe medical impairment could justify tolling if the Tax Court is permitted to consider the issue on remand.

Result

The taxpayer asks the Ninth Circuit to reverse the Tax Court’s dismissal and remand for consideration of equitable tolling.

The Takeaway

This appeal matters far beyond a $1,400 deficiency dispute. It targets one of the foundational procedural rules governing access to the Tax Court.

If the Ninth Circuit abandons Organic Cannabis, taxpayers within the circuit could gain a meaningful path to preserve late deficiency petitions in extraordinary circumstances. Tax procedure lawyers have spent decades treating the 90-day deadline like a sacred relic carved into granite tablets. The Supreme Court’s recent cases keep showing that many of those assumptions were built more on habit than on statutory text. Human legal systems adore certainty right up until appellate courts reread the statute.

List of Citations

• Boechler, P.C. v. Commissioner
  Supreme Court decision holding that another Tax Court filing deadline was nonjurisdictional and subject to equitable tolling.

• Organic Cannabis Foundation, LLC v. Commissioner
  Existing Ninth Circuit precedent treating §6213(a)’s deadline as jurisdictional.

• Buller v. Commissioner
  Second Circuit decision concluding §6213(a) is nonjurisdictional after Boechler.

• Culp v. Commissioner
  Third Circuit decision concluding equitable tolling applies to §6213(a).

• Oquendo v. Commissioner
  Sixth Circuit decision rejecting jurisdictional treatment of §6213(a).

• §6213(a)
  Statutory provision establishing the 90-day Tax Court deficiency petition deadline.

• §6214(a)
  Provision granting the Tax Court jurisdiction to redetermine deficiencies.

• §6512(b)
  Provision granting Tax Court jurisdiction over overpayment determinations and refunds.

Holding

The Tax Court upheld economic substance penalties under §6662(b)(6) and applied the higher 40% rate under §6662(i) for 2012 to 2015, after deciding the microcaptive arrangement failed both parts of the economic substance test in §7701(o).

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Why It Matters

• This case is a clear example, after Patel, of how the economic substance doctrine applies to a microcaptive structure. The court used Patel as the main authority for applying the higher penalty under §6662(i).

• The decision shows that not disclosing enough can raise a 20% penalty to 40%. Just deducting premiums on a tax return does not count as proper disclosure.

• The Court continued its broader skepticism toward captive arrangements built around circular cash flows, inflated premiums, and owner-controlled claims administration.

• The opinion reinforces that courts will examine whether purported insurance activity changes the taxpayer’s economic position in a real way, not merely whether formal policies exist on paper. Humans continue to discover that moving money between entities they control, while calling it “risk management,” tends to attract judicial scrutiny. Remarkable pattern recognition exercise by the species.

Key Facts

Curtis Kadau owned Surface Engineering & Alloy Co., Inc., an S corporation that participated in a microcaptive insurance arrangement.

Surface Engineering deducted payments made to captive-related entities as insurance expenses under §162. The captive arrangement involved:

• Risk & Asset Protection Services, Ltd.

• RMC Property & Casualty, Ltd.

• Reinsurance agreements between related entities

• Policies covering risks that taxpayers claimed were expensive or commercially unavailable.

Earlier, in Kadau I, the court decided that the payments were not deductible as insurance premiums because the arrangement did not qualify as insurance for federal tax purposes.

The only issue left was about penalties.

The IRS sought higher 40% penalties for 2012 to 2015 because the transactions lacked economic substance and were not disclosed. The deficiencies and penalties were:

• 2012: $135,858 deficiency and $54,343 penalty

• 2013: $31,371 deficiency and $12,236 penalty

• 2014: $89,100 deficiency and $35,640 penalty

• 2015: $180,633 deficiency and $72,253 penalty

The court waited to rule on the higher penalties until after it decided Patel v. Commissioner, a case about the economic substance doctrine under §7701(o).

Statutory or Regulatory Framework

Section §7701(o) codifies the economic substance doctrine.

A transaction has economic substance only if:

• It meaningfully changes the taxpayer’s economic position apart from tax effects.

• The taxpayer has a substantial non-tax business purpose for entering into the transaction.

Both requirements must be satisfied.

Section §6662(b)(6) imposes a 20% accuracy-related penalty for underpayments attributable to transactions lacking economic substance.

Section §6662(i) increases that penalty to 40% if the transaction is nondisclosed.

Arguments

Taxpayer argued:

• The captive arrangement addressed legitimate operational and insurance needs.

• Commercial insurance was expensive.

• Additional risks were difficult or costly to insure commercially.

• An actuarial feasibility study supported the premiums and coverages.

• The arrangement gradually replaced commercial insurance coverage.

• The structure, therefore, had economic substance and a substantial non-tax purpose.

Government argued:

• The arrangement lacked meaningful economic consequences apart from tax deductions.

• Premiums were unreasonable and not actuarially determined.

• Funds moved in near-circular flows among related entities.

• Claims administration lacked independence.

• The arrangement functioned primarily as a tax and estate-planning vehicle.

• The taxpayers failed to disclose the arrangement on their returns adequately.

Court’s Reasoning

• The Court found no meaningful change in economic position because the arrangement largely recycled funds among related entities.

• Risk & Asset received no claims during the first several years of the policy.

• When claims were eventually filed, Mr. Kadau personally determined the validity of claims, approved payments, and bypassed independent adjusters.

• The Court concluded the taxpayers would have been economically identical if they had placed the premium amounts into a bank account for future losses.

• The Court rejected reliance on the actuarial study because it was prepared quickly, after minimal inquiry, and without meaningful company documentation.

• Premiums were significantly higher than comparable commercial coverage, which the Court viewed as evidence that deductions, rather than risk management, drove the structure.

• The captive’s investments included a $6 million life insurance policy designed to protect Mr. Kadau’s family and mortgages, which the Court viewed as evidence of estate-planning motives rather than insurance risk management.

• The taxpayers failed to adequately disclose the arrangement because the returns did not identify relationships among the entities and did not include disclosure statements such as Form 8275.

Result

The Tax Court imposed 40% penalties under §6662(i) for 2012 through 2015 and sustained separate 20% accuracy-related penalties for 2016 and 2017.

The Takeaway

This opinion pushes the Tax Court further into an aggressive anti-microcaptive posture after Patel. The Court treated weak actuarial work, owner-controlled claims handling, circular fund flows, and estate-planning features as strong indicators that the arrangement existed primarily for tax benefits.

For practitioners, the issue of disclosure is nearly as important as the economic substance decision. The court made it clear that not specifically disclosing the structure can double the penalty from 20% to 40%. This highlights how costly paperwork mistakes can be.

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Findings

TIGTA found that IRS procedures did not do enough to stop or catch backdated penalty approvals under §6751(b), which requires written supervisory approval before some penalties can be assessed. The IRS accepted all five of TIGTA’s recommendations.

Why It Matters

• This is not a routine paperwork issue. Backdating penalty approvals can make IRS penalty assertions legally defective.

• The immediate financial impact was real. The IRS conceded more than $68 million in penalties in seven docketed cases.

• The issue is concentrated in syndicated conservation easement cases, but the control weakness applies more broadly to penalty documentation.

• TIGTA’s strongest practical point is simple: apparently, this needed to be said by an inspector general: penalty approval documents must be dated when signed, not after the fact.

Key Facts

TIGTA checked how the IRS followed §6751(b) after the LakePoint Land II, LLC v. Commissioner case. In that case, the Tax Court found that an IRS supervisor backdated penalty approval documents and that IRS Counsel gave the Court the wrong information about when they were signed.

The IRS and Chief Counsel reviewed 1,268 syndicated conservation easement cases. The review covered:

• 829 docketed Tax Court cases.

• 439 nondocketed administrative cases.

• 13 docketed cases with invalid supervisory approval.

• 7 cases involving backdated approvals.

• More than $68 million in penalties conceded by the IRS.

TIGTA also found six cases without court dockets where missing records made it impossible to confirm that supervisory approval happened before letters were sent to taxpayers.

Statutory Framework

§6751(b) usually does not allow certain penalties to be assessed unless the initial decision gets written approval from the employee’s direct supervisor. This rule was created to stop penalties from being used as pressure during audits.

TIGTA’s Findings

TIGTA identified several control failures:

• IRS employees used penalty lead sheets that were later altered.

• Some documents had identical digital signatures across multiple versions.

• Some penalty correspondence listed penalties that were not reflected on the approved lead sheets.

• Some summary reports showed penalties without clear supervisory approval.

• IRS Counsel had informal guidance for electronic document review, but had not formalized it in the Chief Counsel Directives Manual.

TIGTA also found five possible §6103 disclosure violations involving taxpayer information. While this is a separate privacy issue, it shows again that documentation controls were not as careful as they should have been.

IRS Response

The IRS agreed to:

• Promote digital approvals on penalty approval documents.

• Revise penalty procedures for SB/SE and LB&I cases.

• Require Chief Counsel attorneys to verify §6751(b) compliance in docketed cases.

• Tell employees that approving backdated penalties is not appropriate.

• Require Chief Counsel review after Court sanctions against Counsel.

Conlcusion

TIGTA made five recommendations, and IRS management agreed to implement all of them.

The Takeaway

Tax professionals should see §6751(b) approval records as an ongoing legal issue, especially in cases with many penalties. The IRS might improve the process later, but current penalty files with weak approval records are still at risk.