Holding

The Tax Court took one look at Suleiman Sami’s expense list—celebrity selfies, award shows, charity galas, streaming subscriptions, the works—and said, nice try. Posting about your run-in with Benedict Cumberbatch doesn’t magically turn it into a business deduction. The court did let him keep some transportation costs, credit card fees, a slice of his phone bill, and the QBI deduction. But the accuracy penalty? That stuck too.

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Why It Matters

• The court didn’t buy the influencer special pleading. Regular business expense rules still apply, even if your ‘business’ is posting about your VIP lifestyle. Just because you can monetize your personal life doesn’t mean the tax code suddenly gets more generous.

• The key question: Why did you spend the money in the first place? If it was mostly for yourself, the fact that you later got more followers or engagement doesn’t turn brunch with Matt Damon into a business write-off.

• This is a recurring headache for influencers: when your ‘business’ is basically living large, it’s hard to convince the IRS that your spending isn’t just personal consumption with a filter slapped on. Just because something is vaguely business-adjacent doesn’t make it deductible.

• The court also floated the idea that if you’re spending before your influencer gig actually makes money, maybe those are startup costs, not regular business expenses. But Sami didn’t have the paperwork to even argue that point, so the court left it hanging.

• This case is also a recordkeeping clinic. When Sami actually kept trip logs for his driving business, he got the deduction. When he just waved around credit card statements with no details, the court shrugged. If you can’t show what you bought or why it mattered for your business, good luck.

Key Facts

Suleiman Sami worked full-time in JetBlue’s IT department from 2019 through 2021. He also operated S Sami Services LLC, a single-member LLC treated as a disregarded entity for federal income tax purposes.

Sami described the business as having three components:

• transportation services;

• resale of event tickets; and

• social media influencing.

He reported the combined activities on Schedule C.

S Sami Services reported gross receipts of $169,532 for 2019, $93,229 for 2020, and $133,252 for 2021. Most, if not all, of those receipts came from transportation services. Some may have come from ticket sales. None came from social media influencing during the years before the Court.

By October 2025, Sami had approximately 520,000 TikTok followers, 140,000 Instagram followers, and 4,200 followers on X. He testified that he later earned about $25,000 annually from social media advertising revenue sharing. The record did not establish how many followers he had from 2019 through 2021.

Sami spent significant amounts on celebrity encounters and exclusive events. Among other expenditures, he paid:

• $10,000 for two Grammy tickets;

• $2,700 for two Emmy tickets;

• $8,912 for an interaction with Benedict Cumberbatch;

• $4,151 for an interaction with Matt Damon;

• $2,600 for an interaction with Mark Ruffalo;

• $2,025 for a personalized Chris Evans video;

• $6,500 to attend Tiger Jam 2019;

• $831 to catch a pass from Drew Brees;

• $779 to return a John McEnroe serve;

• $425 for training and lunch with Chuck Liddell; and

• $6,317 for signed Kobe Bryant game-issue shoes.

He also paid for other celebrity and sporting experiences, including an opportunity to catch a pass from Tom Brady.

Sami generally purchased these experiences through charities. He originally claimed many of the payments as charitable contribution deductions. After the IRS disallowed them, he changed his position and argued that they constituted marketing expenses for his business.

He photographed or recorded many of the experiences and posted the content on social media. He testified that some posts increased attention to his accounts and generated inquiries from users interested in similar celebrity experiences.

The IRS determined deficiencies of $63,219 for 2019, $27,421 for 2020, and $39,910 for 2021. It also determined 20% §6662(a) penalties of $12,644, $5,484, and $7,982, respectively.

Statutory and Regulatory Framework

Section 162(a) allows a taxpayer to deduct ordinary and necessary expenses paid or incurred in carrying on a trade or business. Section 262(a) generally prohibits deductions for personal, living, and family expenses.

An expense with both business and personal characteristics must be primarily undertaken for business purposes to qualify under §162.

Section 274(d) imposes heightened substantiation requirements for specified categories of expenses, including certain listed property. When §274(d) does not apply, the rule from Cohan v. Commissioner permits a Court to estimate a deductible expense if the taxpayer proves that a deductible expense occurred and supplies a reasonable evidentiary basis for estimating the amount.

Section 195 generally requires capitalization of startup expenditures incurred before an active trade or business begins, subject to the deductions permitted under that section.

Section 199A allows eligible taxpayers a deduction based in part on qualified business income from a qualified trade or business.

Arguments

Taxpayer argued:

• The celebrity encounters, entertainment events, and charitable event purchases were treated as marketing expenses because he used them to create social media content.

• Celebrity content increased views, followers, and user engagement, and could eventually increase advertising revenue.

• Comparable social media influencers routinely pay to attend events, premieres, and similar experiences to create content.

• His transportation records supported substantial vehicle expenses even though he had not recorded exact mileage.

• His phone, streaming subscriptions, and other expenses supported his transportation, ticket resale, and social media activities.

• His Schedule C income qualified for the §199A deduction.

• The IRS failed to establish proper supervisory approval for the 2019 and 2020 penalties.

• He had reasonable cause and acted in good faith regarding the disputed tax positions.

Government argued:

• Sami failed to establish that many claimed expenses had a business purpose.

• Bank and credit card statements established that payments occurred but generally did not establish what Sami purchased or how the expenditure related to his business.

• The celebrity experiences and entertainment expenditures were personal rather than ordinary and necessary business expenses.

• Sami failed to satisfy the applicable substantiation requirements for numerous deductions.

• The §6662(a) penalties were properly approved and applied.

Court’s Reasoning

• The celebrity experiences were primarily personal. The Court focused on Sami’s purpose in purchasing the experiences rather than on their potential later effect on his social media accounts. Grammy tickets, celebrity encounters, sporting experiences, and similar purchases offered obvious personal enjoyment, prestige, or status. The Court found that those personal motives predominated.

• Generating useful content did not make a personal expense deductible. Sami showed that some celebrity posts produced attention and engagement. The Court found that insufficient. A personal expenditure can generate useful business material without being treated as a business expense. The relevant question remained why the taxpayer primarily incurred the expense.

• Influencers remain subject to ordinary §162 rules. The Court stated that a social media influencer business is no different from another for-profit enterprise for purposes of applying the general business-expense rules. An expense commonly incurred by influencers still must satisfy §162.

• The timing of the influencer activity created an additional problem. Sami earned no social media advertising revenue from 2019 to 2021. The Court observed that if the disputed expenditures represented costs of developing a future revenue-producing social media business, they could constitute startup expenditures governed by §195 rather than currently deductible §162 expenses. The Court did not resolve that issue.

• Sami did not adequately substantiate most claimed marketing expenses. His bank and credit card statements often contained only merchant names, payment processors, usernames, or transaction numbers. They generally did not identify what he purchased, establish a business purpose, or connect a specific purchase to particular social media content.

• General marketing expenses failed for the same evidentiary reason. Charges involving PayPal transfers, events, ticket vendors, Cameo, music purchases, and services that appeared to increase social media follower counts lacked enough documentation for the Court to determine which expenses were business-related.

• Television and streaming expenses remained personal. Sami claimed that subscriptions including DirecTV, cable service, Netflix, Hulu, WWE, and Apple helped him monitor entertainment trends and identify events. The Court found no sufficiently direct relationship between those subscriptions and his business.

Transportation Expenses

The transportation deductions produced a materially different result because Sami maintained substantial contemporaneous records.

He recorded individual trips on paper vouchers showing dates, customer information, starting and ending locations, fares, tolls, taxes, and total charges. The vouchers did not contain the exact mileage.

Sami later used the recorded locations and Google Maps to estimate mileage. He claimed 62,533 business miles for 2019, 20,574 for 2020, and 38,869 for 2021.

The IRS argued that the strict substantiation requirements of §274(d) applied.

The Court disagreed. Section 280F excludes from the definition of a passenger automobile a vehicle used directly in the business of transporting people or property for compensation or hire. Sami used his vehicles to transport paying customers directly. The heightened §274(d) substantiation rule therefore did not control those vehicle expenses.

The Court applied Cohan instead.

Because Sami had contemporaneous evidence of the trips but had failed to record exact pickup and drop-off addresses, the Court reduced his estimates by 20%.

It allowed vehicle deductions of:

• $29,015 for 2019;

• $9,464 for 2020; and

• $17,414 for 2021.

The Court applied the same 80% allowance to substantiated toll and parking expenses, allowing $11,101 for 2019, $5,042 for 2020, and $35 for 2021.

This part of the opinion reinforces the distinction between imperfect records and records that are not usable. Sami’s transportation documentation gave the Court a factual basis for estimating expenses. His marketing records generally did not.

Other Expense Rulings

The Court denied $730 of the claimed 2021 cost of goods sold for event tickets. Sami showed purchases from SeatGeek and Ticketmaster but did not establish that he resold the particular tickets.

The Court denied the claimed contract labor deductions of $600, $600, and $900 for 2019 through 2021. It accepted that Sami sometimes paid relatives to drive, but lacked evidence to determine or estimate the amounts.

The Court declined additional office-expense deductions because the claimed expenditures represented supplies, and Sami had already received unchallenged deductions for supplies on the returns.

The Court allowed credit card processing fees of $10,904 for 2019, $6,749 for 2020, and $9,186 for 2021. Sami established that the charges related to customers paying for transportation and ticket purchases.

For cell phone service, the Court accepted that Sami needed at least one phone for his transportation business but found four phones and multiple service providers excessive without evidence establishing their business use. Applying Cohan, 25% of the claimed cell service expenses were allowed.

The Court denied deductions for phone equipment because Sami failed to establish that the equipment was for business rather than personal use.

Qualified Business Income

The Court held that Sami’s Schedule C income from transportation and event ticket sales constituted qualified business income under §199A.

Those activities were neither specified service trades or businesses nor services performed as an employee. The income, therefore, came from qualified trades or businesses for purposes of §199A.

The Court’s ruling on the QBI deduction was separate from its rejection of the claimed influencer expenses.

Accuracy-Related Penalties

The IRS imposed §6662(a) penalties based on substantial understatements of income tax.

Sami challenged supervisory approval of the 2019 and 2020 penalties because the manager’s signature on a penalty approval form did not contain a date.

The Court rejected that argument. The same manager had signed the 30-day letter asserting the penalties before the IRS issued the notice of deficiency. That written approval satisfied §6751(b)(1) under controlling Second Circuit precedent.

The parties agreed that approval of the 2021 penalty was proper.

Sami also asserted reasonable cause and good faith under §6664(c).

The Court rejected the defense. Sami had bachelor’s and master’s degrees in accounting and had previously worked at PricewaterhouseCoopers. Despite that background, he kept no business books, used accounts that mixed personal and business expenditures, lacked receipts for many purchases, and could not establish the business purpose of many of the claimed expenses.

The Court concluded that he did not exercise ordinary business care and prudence.

Result

The Tax Court allowed portions of Sami’s transportation, toll, credit card processing, cell phone, and §199A deductions, denied the disputed influencer and other inadequately substantiated expenses, sustained the §6662(a) penalties, and directed the parties to compute the final deficiencies under Rule 155.

The Takeaway

You can’t just snap a selfie, post it, and call your life a business expense. If you’re advising influencers, focus on the basics: what was the real reason for the spending, when did the business actually start, and do you have records that tie the expense to actual revenue? Otherwise, expect the IRS to call your bluff.

List of Citations

Holding

The Tax Court sided with the IRS. No, they didn’t abuse their discretion by refusing to wipe out $1,649 of interest on Andrew Tabaka’s 2016 tax bill. The IRS moved the case along at a normal pace, and the stuff Tabaka complained about was all about figuring out his actual tax—not some clerical slip-up.

Why It Matters

• The decision applies a narrow statutory standard. Section 6404(e) does not authorize interest abatement whenever an IRS examination, Appeals proceeding, or Tax Court case takes longer than the taxpayer believes necessary. The taxpayer must connect the interest to an unreasonable IRS error or delay involving a qualifying ministerial or managerial act.

• Normal litigation time generally does not qualify. The Court treated the approximately 16 months between the IRS’s first written contact and entry of the stipulated Tax Court decision as routine, particularly because the case moved through examination, Appeals, IRS counsel, and settlement.

• Disputes over substantive tax liability fall outside §6404(e). Determining whether reported Forms 1099-R correctly reflected taxable retirement distributions required legal and factual judgment. Those decisions were not ministerial or managerial acts.

• The decision also illustrates an important jurisdictional rule. When the IRS does not issue a formal final determination on an interest-abatement claim, §6404(h)(1)(A)(ii) allows an eligible taxpayer to petition the Tax Court after 180 days have passed from filing the claim. The absence of a formal denial, therefore, does not leave the taxpayer without judicial review.

Key Facts

Andrew Tabaka and his wife filed their 2016 federal income tax return in March 2017.

The IRS identified $93,200 of retirement income reported by third parties on two Forms 1099-R but not reported on the return. On April 16, 2018, the IRS issued a CP2000 proposing:

• A $23,960 income tax deficiency.

• A $4,792 accuracy-related penalty.

The IRS did not receive an adequate response and issued a notice of deficiency on July 9, 2018.

Tabaka petitioned the Tax Court on October 10, 2018. He also paid $10,590 toward the disputed 2016 liability that day.

The case went to the IRS Independent Office of Appeals in December 2018. Appeals scheduled a conference for January 2019 and warned Tabaka that interest would continue accruing until the liability was paid.

Appeals could not resolve the dispute and returned the docketed case to IRS counsel in April 2019 for trial preparation.

The Tax Court scheduled a trial on June 5, 2019. Tabaka made an additional payment of $7,848 on July 3, bringing his total payments to $18,438.

The parties then settled. They stipulated that:

• Tabaka owed an $18,438 deficiency for 2016.

• No accuracy-related penalty applied.

• Interest would be assessed as provided by law.

The Tax Court entered the stipulated decision on August 6, 2019.

The IRS initially calculated interest of $2,246 without properly accounting for Tabaka’s earlier payments. After recognizing the payments, the IRS abated $614 of interest and made minor account adjustments. The remaining interest liability was $1,649, which Tabaka paid in December 2019.

Fast forward to June 2020. Tabaka files Form 843, asking for his $1,649 back. His pitch? The IRS dragged its feet and turned a simple tax issue into a marathon.

The IRS never bothered to send a formal denial. So Tabaka took his shot in Tax Court in October 2024.

Statutory and Regulatory Framework

Interest on an income tax deficiency generally begins accruing on the original due date of the return and continues until the liability is paid. Interest compounds daily. §§6151(a), 6601(a), and 6622(a).

Section 6404(e)(1) permits the IRS to abate interest attributable to an unreasonable error or delay by an IRS officer or employee in performing a ministerial or managerial act.

A ministerial act is a procedural or mechanical task that requires no judgment or discretion after all prerequisites have been completed. Treas. Reg. §301.6404-2(b)(2).

A managerial act involves administrative matters such as personnel management or the temporary or permanent loss of records. Treas. Reg. §301.6404-2(b)(1).

A decision involving the proper application of federal tax law is neither ministerial nor managerial.

An error or delay counts under §6404(e) only when:

• No significant part of the error or delay is attributable to the taxpayer.

• The error or delay occurs after the IRS first contacts the taxpayer in writing regarding the deficiency.

Under §6404(h)(1), the Tax Court reviews the IRS’s refusal to abate interest for abuse of discretion. The Court may order an abatement if the IRS relied on an erroneous interpretation of law or a clearly erroneous assessment of the evidence.

Arguments

Taxpayer argued:

• The IRS dragged things out way too long for what Tabaka saw as a simple 2016 tax issue.

• The period between the 2017 return due date and the November 2019 interest notice was marked by multiple IRS errors and delays.

• The IRS unnecessarily prolonged the case by moving it through Appeals and later referring it to IRS counsel for trial preparation.

• The resulting $1,649 of interest should therefore be refunded under §6404(e).

Government argued:

• Interest accrued automatically because Tabaka had not paid the full 2016 tax liability by the return due date.

• The IRS handled the examination and subsequent Tax Court proceeding within a reasonable period.

• Referral of the docketed case to Appeals and then back to IRS counsel followed normal procedures.

• Any time spent resolving the correct tax treatment of the Forms 1099-R involved substantive tax determinations rather than ministerial or managerial acts.

• The IRS therefore had no statutory basis to abate the remaining interest.

Court’s Reasoning

• The relevant period began with the IRS’s first written contact. Section 6404(e) does not treat delays occurring before the IRS contacts the taxpayer in writing about the deficiency as grounds for abatement. The relevant starting date was therefore April 16, 2018, when the IRS issued the CP2000.

• The IRS moved the case forward without unreasonable inactivity. The IRS issued the notice of deficiency less than three months after the CP2000. Tabaka petitioned the Tax Court 93 days later. Appeals then received the docketed case, scheduled a conference, and attempted settlement.

• Returning the case to IRS counsel was not an improper delay. Appeals could not reach an agreement with Tabaka. Because the case was already pending in Tax Court, Appeals had to return it to IRS counsel for trial preparation. The Court rejected Tabaka’s characterization of that referral as unnecessary.

• The underlying dispute was resolved relatively quickly. The Tax Court scheduled a trial in June 2019, and the parties reached a settlement shortly afterward. The stipulated decision was entered on August 6, 2019. Less than 16 months elapsed between the first written contact from the IRS and the resolution of the deficiency proceeding.

• Elapsed time alone did not establish statutory delay. Citing Lee v. Commissioner, the Court emphasized that the ordinary passage of time during tax litigation does not by itself constitute an error or delay under §6404(e). The Court characterized Tabaka’s case as having been resolved comparatively quickly.

• The challenged activity involved substantive tax determinations. The IRS had to determine the proper treatment of two Forms 1099-R reporting fully taxable retirement distributions. Resolving that issue required evaluating documentation and determining the taxpayer’s correct liability. Those functions required judgment and therefore were not ministerial or managerial acts.

• The IRS corrected the actual interest-computation error. The IRS initially failed to account for Tabaka’s prior payments when calculating interest. Once it identified that problem, it abated $614. Tabaka did not dispute the mathematical correctness of the remaining $1,649.

Jurisdiction

The IRS never sent Tabaka a formal final determination denying his Form 843 claim.

That didn’t block the Tax Court from hearing the case.

Section 6404(h)(1)(A) provides two routes to Tax Court review. If the IRS issues a final determination, the taxpayer generally must petition within 180 days after the IRS mails it. If the IRS fails to issue a determination within 180 days after the taxpayer files an abatement claim, §6404(h)(1)(A)(ii) permits the taxpayer to petition after that waiting period.

Tabaka filed his Form 843 on June 5, 2020, and did not petition until October 19, 2024. Because the IRS had never issued a formal final determination, he had satisfied the statutory waiting period.

The Court also noted that jurisdiction would exist even if the IRS’s July 9, 2024, letter were treated as a final determination because Tabaka filed his petition within 180 days of that letter.

This technicality didn’t change the outcome, but it’s a handy tip for anyone else stuck waiting on an IRS answer.

Result

Bottom line: the Tax Court sided with the IRS. Tabaka’s $1,649 interest bill stands.

The Takeaway

This case reinforces that §6404(e) addresses specific administrative failures, not just slow cases. If you want interest abated, you need to point to a specific clerical or management screw-up that actually cost you money. Routine audits, Appeals, and Court fights won’t cut it.

List of Citations

Holding

The Tax Court sided with the IRS on every front. Dieffenbach, a Connecticut attorney, got hit with tax bills, late-filing penalties, and accuracy penalties for five years straight. The IRS had the paperwork—W-2s, 1099s, Social Security statements. Dieffenbach had... nothing. No evidence, no counter-numbers, just arguments. The court wasn’t impressed.

Why It Matters

• This is basic burden-of-proof territory. The IRS showed Dieffenbach got paid. After that, it was his job to prove the numbers were wrong. He didn’t.

• Procedural nitpicking is not a defense to owing tax. Dieffenbach spent his time arguing about the notice and whether the IRS ran two audits instead of one. None of that changed the fact that he never challenged the actual income numbers.

• As for the business expenses, Dieffenbach claimed a lot but proved nothing. He filed unsigned or amended returns with big Schedule C deductions, but didn’t back them up in court. The Tax Court gave him nothing.

• This case is a reminder: the Tax Court cares about evidence, not how the IRS ran the audit. If you want to win, bring receipts. Complaints about process won’t get you far.

Key Facts

Jeffery Dieffenbach is a licensed attorney in Connecticut who also performed bookkeeping work.

The IRS examined his federal income tax liabilities for 2015 through 2019.

From 2015 through 2017, the IRS treated Dieffenbach as a nonfiler and prepared substitute returns under §6020(b). Those returns relied on information reported by third parties.

Dieffenbach later submitted unsigned returns for 2015 through 2017 containing Schedule C deductions. The IRS did not accept those returns.

He filed a return for 2018 after the IRS examination began and timely filed his 2019 return. He later submitted amended returns for 2018 and 2019, but the IRS did not process them.

The IRS issued a notice of deficiency on October 24, 2023.

The notice determined the following deficiencies:

• 2015: $7,620

• 2016: $19,499

• 2017: $12,212

• 2018: $16,124

• 2019: $16,948

The notice also determined failure-to-file and failure-to-pay additions, an estimated tax addition for 2016, and accuracy-related penalties of $3,225 for 2018 and $3,390 for 2019.

Third-party information returns showed that Dieffenbach received income from several sources.

For 2015, he received:

• $3,927 of unemployment compensation from Rhode Island

• $9,093 of wages from Network and Simulation Technologies

• Social Security benefits

• $14,610 of independent contractor income from Greenleaf Compassionate Care Center

• $6,562 of independent contractor income from Malcom Company

In later years, he received additional wages, Social Security benefits, and compensation as an independent contractor.

Greenleaf reported payments of $14,610, $24,855, $37,870, and $50,575 for 2015 through 2018, respectively.

Dieffenbach also claimed substantial Schedule C expenses. He reported approximately:

• $22,101 for 2015

• $32,558 for 2016

• $38,011 for 2017

• $62,844 for 2018

Those claimed expenses included advertising, vehicles and equipment, taxes and licenses, interest, office expenses, utilities, and self-employed health insurance.

He also claimed a $75,000 net operating loss carryforward deduction on his 2019 return.

Statutory and Regulatory Framework

Section 61 generally includes all income from whatever source derived in gross income.

The IRS is ordinarily presumed to have the amounts in a notice of deficiency correct. The taxpayer bears the burden of proving otherwise under Tax Court Rule 142(a).

For unreported income, however, the IRS must first establish an evidentiary connection between the taxpayer and the income. Third-party Forms W-2 and 1099 can satisfy that threshold requirement.

Section 6020(b) allows the IRS to prepare a substitute for return when a taxpayer fails to file.

Section 6651(a)(1) imposes an addition to tax for failing to file a required return on time unless the taxpayer establishes reasonable cause.

Section 6651(a)(2) imposes an addition for failing to pay tax shown on a return. A substitute for return prepared under §6020(b) can constitute a return for purposes of that provision.

Section 6654 generally imposes an addition to tax when an individual fails to make required estimated tax payments.

Section 6662 imposes a 20% accuracy-related penalty on certain underpayments, including those attributable to negligence or a substantial understatement of income tax. A substantial understatement generally exists when the understatement exceeds the greater of 10% of the tax required to be shown or $5,000.

Arguments

Taxpayer argued:

• The notice of deficiency was invalid.

• He had filed returns on time for 2015 through 2017.

• The IRS improperly subjected him to multiple examinations.

• The IRS’s actions were unconstitutional.

• Res judicata barred the IRS from proceeding because it had previously filed a Tax Court case covering the same years.

Government argued:

• Third-party information establishes Dieffenbach’s receipt of taxable income.

• IRS records showed that he did not file valid returns for 2015 through 2017.

• The examination remained a single examination even though a second revenue agent took over after the first agent retired.

• The statutory period for assessing 2017 remained open because Dieffenbach executed Form 872, extending the period.

• The earlier Tax Court proceeding did not create res judicata because the case was dismissed for lack of jurisdiction and no judgment on the merits was rendered.

• Dieffenbach remained liable for the additions to tax and accuracy-related penalties because he failed to establish reasonable cause or otherwise rebut the IRS’s determinations.

Court’s Reasoning

• The IRS established the required evidentiary connection to the unreported income through Forms W-2, Forms 1099, Forms SSA-1099, and Form 1099-G.

• Once the IRS met that threshold burden, Dieffenbach had to show that the deficiency determinations were arbitrary or incorrect.

• Dieffenbach did not offer testimony or other evidence disputing the income amounts. When the Court asked whether he had evidence addressing the deficiency determinations, he continued to argue only that the notice was invalid.

• IRS records showed no valid returns for 2015 through 2017. Dieffenbach produced no persuasive evidence to overcome those records.

• The limitation period for 2017 had not expired. Dieffenbach signed Form 872 extending the assessment deadline to December 31, 2023, and the IRS issued the notice on October 24, 2023.

• The assignment of a second revenue agent after the first agent retired did not establish that the IRS conducted a prohibited second examination. Dieffenbach failed to prove that more than one examination occurred.

• The prior Tax Court proceeding did not bar the case under res judicata because it was dismissed for lack of jurisdiction. The earlier case therefore produced no final judgment on the merits.

• The Court found no substantial evidence of unconstitutional conduct by the IRS that would justify looking behind the notice of deficiency.

• IRS account transcripts established that Dieffenbach failed to file timely returns for 2015 through 2018. He did not show reasonable cause, so the Court sustained the §6651(a)(1) additions.

• Certified substitutes for returns established the basis for the §6651(a)(2) failure-to-pay additions for 2015 through 2017.

• Dieffenbach filed no 2015 or 2016 return and made no required estimated payments for 2016, supporting the §6654 addition.

• The 2018 and 2019 understatements exceeded $5,000 and qualified as substantial understatements. Dieffenbach did not establish reasonable cause and good faith, so the Court sustained the §6662 penalties.

Result

The Tax Court sustained the IRS’s deficiency, addition-to-tax, and penalty determinations, with the final amounts to be calculated under Tax Court Rule 155.

The Takeaway

Here’s the real takeaway: you can complain about IRS procedures all day, but if you don’t actually dispute the numbers, you’re out of luck. The Tax Court wants evidence, not just arguments.

List of Citations

• IRC §61(a): Defines gross income broadly as income from whatever source derived.

• IRC §6020(b): Authorizes the IRS to prepare substitutes for returns for nonfilers.

• IRC §6651(a)(1): Imposes the failure-to-file addition to tax.

• IRC §6651(a)(2): Imposes the failure-to-pay addition to tax.

• IRC §6651(g): Treats certain §6020(b) substitutes for returns as returns for failure-to-pay purposes.

• IRC §6654: Governs additions to tax for underpayment of estimated tax.

• IRC §6662: Imposes the 20% accuracy-related penalty.

• IRC §6664(c)(1): Provides the reasonable-cause and good-faith exception to the accuracy-related penalty.

• IRC §6751(b)(1): Requires written supervisory approval for the initial determination of certain penalties.

• IRC §7491(c): Places the burden of production on the IRS for individual penalties and additions to tax.

• IRC §7605(b): Limits unnecessary examinations and multiple inspections of a taxpayer’s books.

• Welch v. Helvering, 290 U.S. 111 (1933): Establishes the general presumption of correctness for deficiency determinations.

• INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992): Confirms that taxpayers must establish entitlement to deductions.

• New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934): Treats deductions as matters of legislative grace.

• Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979): Requires an evidentiary foundation connecting a taxpayer to alleged unreported income.

• Petzoldt v. Commissioner, 92 T.C. 661 (1989): Applies the evidentiary foundation requirement in unreported-income cases.

• Silver v. Commissioner, T.C. Memo. 2021-98: Recognizes third-party information returns as sufficient evidence of income.

• Walquist v. Commissioner, 152 T.C. 61 (2019): Explains the taxpayer’s burden after the IRS establishes receipt of unreported income.

• Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324 (1974): Limits Tax Court review of the IRS’s administrative examination process.

• United States v. Powell, 379 U.S. 48 (1964): Interprets §7605(b) as imposing no severe restriction on IRS investigative authority.

• Hough v. Commissioner, 882 F.2d 1271 (7th Cir. 1989): Addresses claims involving prohibited second examinations.

• Estate of Sower v. Commissioner, 149 T.C. 279 (2017): Addresses the taxpayer’s burden to establish an improper second examination.

• Federated Department Stores, Inc. v. Moitie, 452 U.S. 394 (1981): States principles governing res judicata.

• Monge v. Commissioner, 93 T.C. 22 (1989): Addresses jurisdiction and the effect of a prior Tax Court dismissal.

• Higbee v. Commissioner, 116 T.C. 438 (2001): Explains the IRS’s burden of production for penalties.

• Wheeler v. Commissioner, 127 T.C. 200 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008): Addresses the IRS’s evidentiary burden for failure-to-pay and estimated-tax additions.

• Dieffenbach v. Commissioner, No. 3921-22 (T.C. May 4, 2023): Earlier proceeding dismissed for lack of jurisdiction and therefore not a judgment on the merits.

Tell Me More

FinCEN is making its March 26, 2025 interim final rule permanent and adding more relief for U.S. persons. Domestic entities are no longer considered reporting companies. Foreign reporting companies do not need to report beneficial ownership information for U.S. person beneficial owners or company applicants. U.S. persons also do not have to update or correct information linked to their FinCEN identifiers.

The rule takes effect once it is published in the Federal Register. FinCEN has submitted the rule for publication and notes that the Federal Register version will be the official one.

Why It Matters

• The CTA reporting regime is now overwhelmingly a foreign-entity reporting regime. Corporations, LLCs, and similar entities created under U.S. state or tribal law remain exempt from BOI reporting even if they previously would have qualified as domestic reporting companies.

• U.S. persons now get more relief than they did under the March 2025 interim rule. Foreign reporting companies already did not have to report U.S. person beneficial owners, and now the exemption also covers U.S. person company applicants.

• Current U.S. FinCEN ID holders no longer need to keep updating their information. FinCEN estimates that about 760,000 U.S. persons have FinCEN IDs and will no longer have to update or correct their details.

• Foreign reporting companies still have compliance requirements. A foreign entity formed under foreign law and registered to do business in a U.S. state or tribal area generally must still report BOI unless another exemption applies.

• The final rule does not remove customer due diligence requirements for financial institutions. FinCEN makes it clear that the CTA Reporting Rule is separate from the Customer Due Diligence Rule, and financial institutions must still follow the latter while FinCEN reviews possible changes.

• FinCEN plans to delete much of the U.S. person information already in its BOI database. The agency expects to do a one-time removal of information that would not have been required under the final rule.

Key Facts

Congress enacted the Corporate Transparency Act in 2021 as part of the Anti-Money Laundering Act of 2020. The CTA added §5336 to the Bank Secrecy Act and directed Treasury to create a federal beneficial ownership reporting system.

FinCEN’s original 2022 Reporting Rule generally required both domestic and foreign reporting companies to provide identifying information about themselves and their beneficial owners. Companies created or registered after January 1, 2024 also had to report certain company applicants.

Litigation disrupted implementation during late 2024 and early 2025. Treasury then announced on March 2, 2025, that it would stop enforcing CTA reporting requirements on U.S. citizens and domestic reporting companies and would narrow the rule to apply only to foreign companies.

FinCEN implemented that policy through an interim final rule effective March 26, 2025. The interim rule:

• removed domestic entities from the definition of reporting company;

• exempted U.S. person beneficial owners from BOI reporting;

• retained reporting for foreign entities registered to do business in the United States;

• required those foreign reporting companies to report only non-U.S. beneficial owners; and

• retained a 30-day filing framework for covered foreign companies.

FinCEN received 118 comment letters on the interim rule. Forty clearly supported the narrowed reporting regime, 28 strongly opposed it, and 50 did not clearly support or oppose it.

The final rule retains the basic framework but provides two additional forms of relief for U.S. persons.

First, foreign reporting companies no longer have to identify applicants as U.S. persons. The interim rule had exempted U.S. beneficial owners but not necessarily U.S. company applicants.

Second, U.S. persons who obtained FinCEN identifiers no longer have to update or correct the identifying information associated with those identifiers.

Statutory Framework

The CTA generally requires reporting companies to provide BOI to FinCEN but gives Treasury substantial exemption authority.

Under 31 U.S.C. §5336(a)(11)(B)(xxiv), Treasury may exempt an entity or class of entities when the Secretary, with written concurrence from the Attorney General and Secretary of Homeland Security, determines that requiring BOI would not serve the public interest and would not be highly useful for national security, intelligence, or law enforcement purposes.

Treasury also relies on 31 U.S.C. §5318(a)(7), which authorizes appropriate exemptions from Bank Secrecy Act requirements.

The final rule modifies 31 CFR §1010.380, FinCEN’s CTA reporting regulation.

What the Final Rule Changes

Domestic entities remain exempt

The most consequential provision remains unchanged from the interim rule.

Entities created under U.S. state or tribal law are excluded from the operative definition of reporting company. FinCEN therefore does not require the millions of corporations, LLCs, and similar domestic entities that originally fell within the CTA Reporting Rule to submit BOI reports.

FinCEN rejected requests to replace the broad exemption with narrower exemptions based on factors such as company size, ownership, nonprofit status, foreign ownership, or shell-company characteristics.

Treasury concluded that the blanket domestic exemption better satisfied what it views as the CTA’s required balancing of useful information against private compliance costs.

Foreign reporting companies remain covered

A reporting company now effectively means an entity that:

• is formed under the law of a foreign country; and

• registers to do business in a U.S. state or tribal jurisdiction by filing a document with a secretary of state or similar office.

Existing statutory and regulatory exemptions continue to apply.

FinCEN estimates approximately 28,000 foreign entities may ultimately qualify as nonexempt reporting companies. About 13,000 had already filed reports by the end of 2025, leaving an estimated 15,000 existing foreign companies still expected to report. FinCEN expects roughly 1,800 additional foreign reporting companies each year.

U.S. beneficial owners remain exempt

Foreign reporting companies do not have to report BOI for beneficial owners who are U.S. persons.

A foreign reporting company owned entirely by U.S. persons can therefore still have a filing obligation even though its report contains no beneficial owner information.

The final rule relocates this exemption within §1010.380 but does not materially reverse the exemption adopted in 2025.

U.S. company applicants are now exempt

This is one of the principal changes to the final rule from the interim rule.

A company applicant generally includes the person who files the document registering the entity and, when applicable, the person primarily responsible for directing that filing.

Under the interim rule, a foreign company registered in the United States on or after January 1, 2024 could still have been required to report a U.S. person company applicant.

The final rule eliminates that requirement.

Reporting companies are exempt from reporting BOI for any U.S. person who is either:

• a beneficial owner; or

• a company applicant.

U.S. persons are correspondingly exempt from having to provide that information to the reporting company.

U.S. FinCEN ID holders no longer have to update information

The original rules required a person who obtained a FinCEN identifier to update or correct the underlying personal information when it changed.

That produced an odd result after the 2025 exemptions. A U.S. person could have no remaining BOI reporting obligation but still face a continuing obligation to maintain information associated with an old FinCEN ID.

The final rule eliminates that requirement for U.S. persons.

Only individuals who are not U.S. persons remain subject to the FinCEN ID update and correction requirement in revised 31 CFR §1010.380(b)(4)(iii)(A).

For non-U.S. persons, changes generally must be reported within 30 calendar days.

Filing Deadlines

FinCEN did not change the 30-day filing framework established under the interim rule.

A newly covered foreign reporting company generally must file its initial BOI report within 30 days after the earlier of:

• receiving actual notice that it has been registered to do business in the United States; or

• the relevant state or tribal office first providing public notice of the registration.

Covered reporting companies generally must also update or correct required information within 30 days after the relevant change or discovery of an error.

FinCEN rejected requests to extend the general filing period to 90 days.

Previously Reported U.S. BOI

The final rule addresses a major practical issue left unresolved by the interim rule: what FinCEN intends to do with information already submitted by U.S. companies and U.S. individuals.

Millions of domestic entities filed BOI reports before Treasury changed course.

FinCEN now states that privacy, information security, and public trust support removing, as practicable, information that would not have been required if the final rule had been in effect as of January 1, 2024.

FinCEN anticipates working with the National Archives and Records Administration to conduct a one-time deletion project.

The agency expects to identify domestic companies and U.S. persons using information already contained in BOI filings, including identification documents such as U.S. passports and U.S. driver’s licenses.

FinCEN does not expect U.S. companies or individuals to submit deletion requests.

It also does not plan to issue individual confirmations when records are deleted. FinCEN instead intends to announce publicly on its website once the deletion process is complete.

The contemplated deletion process has an important limitation. FinCEN says that if U.S. person information is submitted after a date 180 days following publication of the final rule, whether intentionally or inadvertently, the agency does not anticipate conducting additional periodic sweeps to delete it.

Customer Due Diligence Remains Separate

The final rule does not eliminate the collection of beneficial ownership information by banks and other covered financial institutions.

FinCEN emphasizes that the CTA Reporting Rule and its Customer Due Diligence Rule serve different purposes and derive from different legal authorities.

Covered financial institutions may therefore still be required to collect beneficial ownership information from legal-entity customers, even if the same domestic business has no obligation to file a CTA BOI report with FinCEN.

FinCEN acknowledges that this creates questions about how the two regimes interact.

The agency says it remains legally required to revise the CDD Rule and intends to return its attention to that rule now that the BOI Reporting Rule revisions have been completed.

Enforcement

The final rule does not amend the CTA’s existing reporting violation provisions.

Civil and criminal liability may be available for willful violations by persons and entities subject to reporting requirements.

FinCEN states that inadvertent mistakes and simple lack of awareness should not form the basis for enforcement because the statute requires willfulness.

That distinction matters primarily for foreign reporting companies and non-U.S. persons, as domestic companies and U.S. persons have largely been removed from the reporting regime.

Regulatory Impact

FinCEN treats the rule as a major deregulatory action.

The agency estimates that approximately 27.5 million domestic reporting companies were relieved of filing obligations through the 2025 interim rule.

Using the assumptions from its original Reporting Rule, FinCEN estimates that the rollback has eliminated approximately:

• 53 million reporting burden hours per year, on average; and

• $9 billion in reporting costs per year, on average.

FinCEN estimates roughly $18 billion in aggregate reporting cost savings for entities relieved from reporting since the interim rule took effect.

The additional changes made by this final rule produce much smaller incremental savings because the major deregulation already occurred in March 2025.

FinCEN estimates that eliminating U.S. FinCEN ID updates and U.S. company applicant reporting will save approximately:

• $233,439 during the first year; and

• $209,105 annually thereafter.

The table on page 50 summarizes the regulatory changes. It identifies three affected groups: reporting companies, U.S. persons generally, and U.S. persons holding FinCEN IDs. The rule eliminates reporting of U.S. beneficial owners and company applicants and removes ongoing FinCEN ID updates for U.S. persons.

FinCEN permanently adopts the 2025 narrowing of the Corporate Transparency Act reporting regime and expands it by eliminating BOI reporting for U.S. company applicants and ongoing FinCEN ID update requirements for U.S. persons.

The Takeaway

For most U.S.-formed businesses, CTA beneficial ownership reporting is now essentially finished under FinCEN’s current rule. Practitioners should focus BOI compliance efforts on foreign-organized entities registered to do business in the United States, and remember that financial institution customer due diligence requirements remain separate.

List of Citations

• 31 U.S.C. §5336: Corporate Transparency Act beneficial ownership reporting requirements and Treasury exemption authority.

• 31 U.S.C. §5336(a)(11)(B)(xxiv): Authorizes Treasury to exempt additional entities or classes of entities from the definition of reporting company.

• 31 U.S.C. §5336(b)(4)(A): Authorizes Treasury to establish procedures and standards governing FinCEN identifiers.

• 31 U.S.C. §5336(h): Establishes civil and criminal consequences for willful BOI reporting violations.

• 31 U.S.C. §5318(a)(7): Provides Treasury authority to grant appropriate exemptions from Bank Secrecy Act requirements.

• 31 CFR §1010.380: FinCEN regulation implementing CTA beneficial ownership reporting requirements.

• 90 FR 13688 (March 26, 2025): Interim final rule that initially narrowed CTA reporting primarily to foreign reporting companies.

• Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024): Cited by commenters challenging whether Treasury’s broad domestic-company exemption is consistent with the CTA.

• McHenry v. Texas Top Cop Shop, Inc., 145 S. Ct. 1 (2025): Supreme Court order staying a nationwide preliminary injunction involving CTA enforcement.

• Texas Top Cop Shop, Inc. v. Garland, 758 F. Supp. 3d 607 (E.D. Tex. 2024): CTA litigation that disrupted implementation of FinCEN’s original reporting deadlines.

• Smith v. U.S. Department of the Treasury, 761 F. Supp. 3d 952 (E.D. Tex. 2025): Additional litigation affecting implementation of the CTA Reporting Rule.

• National Small Business United v. U.S. Department of the Treasury, 161 F.4th 1323 (11th Cir. 2025): Appellate CTA litigation referenced in FinCEN’s procedural history.

• Flowers Title Co. v. Bessent, No. 6:25-CV-127-JDK, 2026 WL 782283 (E.D. Tex. Mar. 19, 2026): Decision cited by FinCEN concerning the separate Real Estate Reporting Rule.

Holding

The Tax Court rejected the Schedule C deductions related to the taxpayers’ corporation and denied the $49,986 charitable contribution deduction. The couple did not provide the necessary written proof or show that the recipient met §170(c) requirements.

Why It Matters

• This decision follows established law. A corporation and its shareholders are separate taxpayers, so shareholders usually cannot deduct corporate expenses on their own tax returns.

• The charitable contribution issue turned on substantiation, not merely on where the deduction appeared on the return. Moving an expense from Schedule C to Schedule A does not fix the problem if the §170 documentation requirements are not met.

• This opinion is a small tax case under §7463 and cannot be used as precedent.

Key Facts

Ehimwenma E. Aimiuwu and Kehinde F. Aimiuwu filed a joint 2021 federal income tax return.

Ehimwenma Aimiuwu owned Edofolks, Inc., a Georgia corporation that sold books. The corporation reported no income for the year.

The couple claimed a $79,136 Schedule C loss on their individual return—most of the expenses related to Edofolks rather than to a separate business conducted personally by the taxpayers.

The Schedule C also included a $49,986 expense labeled “Donation.” The couple said the payment went to an organization identified as Aimiuwu.com. Inc.

The taxpayers attributed the reporting errors to their paid return preparer, who allegedly advised them to deduct the corporation’s expenses personally because the corporation had no income.

By trial, the taxpayers conceded that the corporate expenses did not belong on their individual return. They continued to claim that the $49,986 payment should instead qualify as an itemized charitable contribution deduction on Schedule A.

They produced no canceled check, contribution receipt, acknowledgment from the recipient, or other written record supporting the payment. They also produced no evidence showing that Aimiuwu.com Inc. qualified as an eligible charitable organization.

Statutory and Regulatory Framework

A corporation ordinarily constitutes a taxpayer separate from its shareholders. One taxpayer generally cannot deduct expenses paid or incurred by another taxpayer.

Section 170 allows a deduction for qualifying charitable contributions. For cash contributions, §170(f)(17) requires a bank record, written communication from the charitable organization, or another qualifying written record showing the recipient, date, and amount of the contribution.

The taxpayer must also establish that the recipient qualifies under §170(c), which defines the organizations and entities eligible to receive deductible charitable contributions.

Arguments

Taxpayer argued:

• The return preparer incorrectly placed corporate expenses on the couple’s Schedule C.

• The $49,986 donation should have appeared on Schedule A rather than Schedule C.

• The payment therefore remained deductible despite the original reporting error.

Government argued:

• The expenses associated with Edofolks were the corporation's and could not be deducted by its shareholders.

• The taxpayers failed to provide the documentation required to substantiate the alleged charitable contribution.

• The taxpayers also failed to establish that the recipient qualified under §170(c).

Court’s Reasoning

• Edofolks, Inc. existed as a separate corporate taxpayer from the Aimiuwus.

• The taxpayers conceded that nearly all expenses claimed on Schedule C belonged to Edofolks.

• Longstanding federal tax principles prevent shareholders from deducting expenses attributable to their corporation.

• Moving the $49,986 donation from Schedule C to Schedule A would not establish entitlement to the deduction.

• Section 170 requires written substantiation for cash contributions.

• The taxpayers offered only testimony regarding the alleged payment and produced no required written evidence.

• They also failed to establish that Aimiuwu.com Inc. qualified as an eligible recipient under §170(c).

Result

The Tax Court sustained the IRS’s disallowance of the corporate expenses and the $49,986 charitable contribution deduction, with the final deficiency to be computed under Rule 155.

The Takeaway

This decision does not change the law, but it highlights two key rules: corporate expenses must stay with the corporation, and charitable deductions need documentation showing both the payment and the recipient’s eligibility.

List of Citations

• IRC §170: Allows deductions for qualifying charitable contributions.

• IRC §170(c): Defines organizations and recipients eligible to receive deductible charitable contributions.

• IRC §170(f)(17): Establishes substantiation requirements for cash contributions.

• IRC §7463: Governs small tax cases and provides that the resulting opinion is nonprecedential and generally not appealable.

• Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943): Establishes that a corporation generally remains a taxpayer separate from its shareholders.

• Deputy v. du Pont, 308 U.S. 488 (1940): Supports the principle that a taxpayer generally may deduct only that taxpayer’s own expenses.

• Columbian Rope Co. v. Commissioner, 42 T.C. 800 (1964): Applies the separate-taxpayer principle to deductions claimed by different taxpayers.

Holding

The Tax Court upheld §6663 civil fraud penalties for 2009 through 2012 after finding strong evidence that he intentionally hid taxable income by having his company pay his personal expenses and recording them as business costs.

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Why It Matters

• The decision uses established fraud rules and is based on a strong record of concealment. The court looked at several signs of fraud, not just one bookkeeping mistake.

• Having two sets of accounting records can be seen as evidence of fraud, even if one set was supposedly made for a reason unrelated to taxes.

• A taxpayer cannot avoid responsibility by blaming their tax preparer if they provided records that wrongly list personal expenses as business expenses.

• The ruling makes clear the difference between careless bookkeeping and intentional hiding of information. The court decided that repeatedly changing records, using fake payee names, leaving out payments, and not reporting personal benefits did not look like honest mistakes.

Key Facts

Walter Prezioso owned 25% of GSP Precision, Inc., a California aerospace manufacturing company, and became its chief executive officer in 2007.

GSP began paying some of Prezioso’s personal expenses in 2007. Corporate minutes authorized several categories of personal expenditures, including leased vehicles, insurance, medical coverage, life insurance, and certain credit card expenses.

The company paid substantially more than those expressly identified expenses. Payments included:

• Personal credit cards.

• Home renovations.

• A home-equity line of credit.

• Landscaping.

• Tennis Court and pool contractors.

• Home audio and visual equipment.

• Boat and recreational vehicle loans.

• Vehicle leases.

GSP issued more than 400 checks for Prezioso’s personal expenses during the years at issue.

Prezioso remained on GSP’s payroll and received a regular salary. GSP did not report the additional personal expenses on Forms W-2 or Forms 1099 issued to him.

Prezioso nevertheless understood that the payments increased his economic compensation. On an application for a Ferrari lease, he reported $52,950 of “Verifiable” W-2 income and $275,000 of “Actual” income.

Prezioso handled much of GSP’s bookkeeping. The company maintained two sets of charts of accounts.

The internal charts were available for shareholder review. Those records often replaced the true payees of Prezioso’s personal expenses with names of legitimate GSP vendors.

The accountant charts were provided to GSP’s outside accountant. Prezioso generally restored the correct payee names before generating those records, but personal expenses still carried business expense codes such as equipment repair, material purchases, and outside processing.

Those codes flowed into GSP’s financial statements and tax reporting. At least some of the personal expenses were ultimately included in cost of goods sold.

Prezioso and his wife filed joint individual income tax returns for 2009 through 2013. They reported his W-2 wages but did not report income arising from GSP’s payment of personal expenses.

The IRS determined deficiencies and fraud penalties for 2009 through 2013.

The Preziosos conceded all underlying deficiencies and conceded the fraud penalty for 2013. The only remaining dispute involved the §6663 fraud penalties for 2009 through 2012.

Statutory and Regulatory Framework

Section 6663(a) imposes a penalty equal to 75% of the portion of an underpayment attributable to fraud.

The IRS must prove fraud by clear and convincing evidence under §7454(a) and Tax Court Rule 142(b).

For each year, the IRS must establish:

• An underpayment of tax.

• Fraudulent intent with respect to at least part of that underpayment.

Fraud means intentional wrongdoing designed to evade tax the taxpayer knows or believes is due.

Because direct evidence of intent is uncommon, courts evaluate circumstantial evidence commonly called badges of fraud. Relevant indicators include consistently understated income, concealed income or assets, misleading books and records, false information supplied to tax preparers, implausible explanations, and false tax returns.

A corporation’s payment of a shareholder’s personal expenses generally creates taxable income to that shareholder, depending on the circumstances, as compensation or a constructive distribution.

Arguments

Taxpayer argued:

• The company legitimately paid certain personal expenses as part of Prezioso’s compensation arrangement.

• Prezioso supplied substantially accurate accounting information to GSP’s outside accountant.

• The company’s outside accountant knew about or approved the bookkeeping treatment.

• The internal accounting records concealed personal expenses from employees rather than from the IRS or the company’s accountant.

• Prezioso did not understand at the time that GSP’s payment of his personal expenses created taxable income.

• Any understatements resulted from mistake rather than fraudulent intent.

Government argued:

• Prezioso deliberately maintained misleading accounting records.

• He substituted legitimate vendor names for the true payees of personal expenditures.

• He classified personal expenses under business expense codes.

• Those classifications resulted in the payments being treated as corporate costs rather than compensation.

• Prezioso supplied incomplete or misleading information to the tax preparer.

• The repeated concealment, understatement of income, and double bookkeeping established fraudulent intent.

Court’s Reasoning

• The Court rejected Prezioso’s explanation that the company’s accountant authorized the bookkeeping system. The record contained no documents showing that the accountant knew personal expenses were being coded as ordinary business expenses.

• The available expense codes included specific categories for officer compensation, shareholder draws, and shareholder loans. The Court found it implausible that the accountant would instead instruct Prezioso to record home improvements, landscaping, personal credit card charges, and similar expenditures as material purchases or equipment repairs.

• The Court did not believe Prezioso created the misleading internal records merely to prevent employees from seeing his compensation. Prezioso repeatedly changed actual payees to legitimate company vendors and sometimes omitted direct payments entirely.

• The Court viewed the internal records as evidence that Prezioso sought to conceal both the frequency and the amount of personal expenditures from other shareholders.

• The existence of two sets of books supported a fraudulent intent, even if the misleading records originally served a non-tax purpose. The Court relied on prior cases treating double bookkeeping and falsified financial records as circumstantial evidence of fraud.

• The accountant charts did not cure the problem. Personal expenses continued to be recorded under misleading business expense codes, causing them to flow through the company’s books as ordinary corporate expenses.

• The Court found that Prezioso gave his return preparer incomplete or misleading information. Nothing in the accounting records clearly identified the personal expenditures as compensation or shareholder benefits.

• The consistent understatement of income also supported the finding of fraud. Prezioso failed to report substantial economic benefits, even though his Ferrari lease application showed he understood that his actual income substantially exceeded his reported W-2 wages.

• The Court rejected Prezioso’s claim that he did not know the payments constituted taxable income. His bookkeeping practices, failure to question the company’s recurring losses, and substantial difference between reported and actual income supported an inference of willful blindness at minimum.

• Taken together, the double bookkeeping, concealment, implausible explanations, inaccurate expense classifications, and repeated understatement of income satisfied the IRS’s clear and convincing evidence burden for each year from 2009 through 2012.

Result

The Tax Court sustained the §6663 fraud penalties for 2009 through 2012, with the final deficiency and penalty amounts to be computed under Rule 155.

The Takeaway

This case is important for closely held businesses where owners use company accounts to pay personal expenses. While there can be debates about how to treat certain payments for tax purposes, intentionally hiding personal expenses as business costs can turn a simple tax adjustment into a 75% fraud penalty.

List of Citations

• IRC §6663(a): Imposes the 75% civil fraud penalty on the portion of an underpayment attributable to fraud.

• IRC §7454(a): Places the burden of proving fraud on the IRS.

• IRC §7491(c): Establishes the IRS’s burden of production for penalties imposed on individuals.

• IRC §6751(b): Requires written supervisory approval for certain penalties.

• IRC §6013(d)(3): Makes spouses filing jointly jointly and severally liable for the tax due on the joint return.

• Neely v. Commissioner, 116 T.C. 79 (2001): Defines fraud as intentional wrongdoing designed to evade tax believed to be owing.

• Petzoldt v. Commissioner, 92 T.C. 661 (1989): Explains that fraud cannot rest on suspicion and may be proven through circumstantial evidence.

• Parks v. Commissioner, 94 T.C. 654 (1990): Addresses concealment and misleading conduct as evidence of fraudulent intent.

• Bradford v. Commissioner, 796 F.2d 303 (9th Cir. 1986): Identifies commonly used badges of fraud.

• Niedringhaus v. Commissioner, 99 T.C. 202 (1992): Explains that multiple badges of fraud can provide persuasive circumstantial evidence.

• Podlucky v. Commissioner, T.C. Memo. 2022-45: Supports treating double bookkeeping as evidence of fraudulent intent even when the false records also serve nontax purposes.

• Truesdell v. Commissioner, 89 T.C. 1280 (1987): Treats consistent and substantial understatement of income as strong evidence of fraud.

• Helvering v. Horst, 311 U.S. 112 (1940): Supports taxation of income to the person who earns or enjoys its economic benefit.

• Butler v. Commissioner, 114 T.C. 276 (2000): Addresses joint and several liability arising from a joint federal income tax return.

Holding

The Tax Court determined that HBM Holdings Co. could not use about $108 million in net operating loss carryovers from Delavau Holdings, LLC for consolidated NOL deductions in 2018, 2020, and 2021. Delavau was considered HBM’s predecessor under the consolidated return rules, and its preliquidation tax years were still separate return limitation years. HBM’s founding group members also did not qualify as an SRLY subgroup. The Court granted partial summary judgment to the IRS.

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Why It Matters

• This decision highlights an important limit on §381 attribute succession. An acquiring corporation can take on a liquidated corporation’s NOLs, but those losses do not automatically become unrestricted for the acquirer.

• The common parent exception to the SRLY rules does not cover losses created by a predecessor of the common parent. This difference was key to the outcome.

• The SRLY subgroup rules require that members were previously part of the same affiliated group. Simply having common ownership or economic ties before consolidation is not sufficient.

• This decision is especially important for restructurings that involve S corporations, QSubs, entity classification elections, §332 liquidations, and forming a consolidated group later on. The order of these transactions can affect whether inherited NOLs can be used to offset group income.

Key Facts

HBM Holdings Co. was the common parent of a consolidated corporate group.

Mississippi Lime Co. acquired Delavau Holdings, LLC in 2012. Delavau had approximately $78 million of NOL carryovers at that time and was treated as a loss corporation under §382.

HBM was formed in 2014 through an F reorganization and elected S corporation status. Several subsidiaries, including Mississippi Lime, later operated as qualified subchapter S subsidiaries, or QSubs.

HBM revoked its S corporation election effective July 1, 2018. The QSub status of four subsidiaries ended on the same date.

Delavau elected to be disregarded as a separate entity from HBM, effective July 1, 2018. That election caused Delavau to be deemed liquidated into HBM as of June 30, 2018.

The parties agreed that §§332 and 381 applied to the deemed liquidation. HBM therefore succeeded to Delavau’s NOL carryovers, which had grown to approximately $108 million.

HBM then became the common parent of a consolidated group beginning July 1, 2018. Delavau was never a member of that consolidated group.

HBM had no taxable income on a separate-entity basis for the short 2018 tax year through 2021.

The consolidated group nevertheless used Delavau’s NOL carryovers to claim CNOL deductions of approximately:

• $13.55 million for the short 2018 tax year.

• $14.97 million for 2020.

• Approximately $1.1 million for 2021.

The IRS disallowed the deductions under the SRLY rules.

Statutory or Regulatory Framework

Section 381 generally allows an acquiring corporation in certain tax-free corporate transactions, including qualifying §332 liquidations, to succeed to specified tax attributes of the distributor or transferor, including NOL carryovers.

The coThe consolidated return rules add another limit through the separate return limitation year (SRLY) rules. An SRLY usually includes a separate return year of a group member or its predecessor. Treas. Reg. §1.1502-21(c), an NOL generated during an SRLY generally may offset consolidated taxable income only to the extent that the consolidated group’s income is attributable to the member that generated or succeeded to the loss.

Treas. Reg. §1.1502-1(f)(2)(i), known as the lonely parent rule, excludes some separate return years of the current common parent from being considered SRLYs.

The subgroup rules offer another exception. Members can usually combine their income for SRLY purposes if they joined the current group together after being in the same affiliated group before.

Arguments

Taxpayer argued:

• Section 381 caused HBM to inherit Delavau’s NOL carryovers as HBM’s own tax attributes.

• Because HBM was the common parent of the consolidated group, the lonely parent rule should prevent Delavau’s historical separate return years from being treated as SRLYs.

• Delavau should not qualify as HBM’s predecessor because HBM was not yet a member of the consolidated group when the §381 transaction occurred.

• Alternatively, HBM and the other founding members should qualify as an SRLY subgroup because they were jointly controlled prior to the formation of the consolidated group.

Government argued:

• Delavau remained the source of the NOLs even after HBM succeeded to them under §381.

• Delavau was HBM’s predecessor under Treas. Reg. §1.1502-1(f)(4).

• The lonely parent exception applies to the common parent’s own separate return years, not the separate return years of its predecessor.

• The founding members could not form an SRLY subgroup because they had never previously belonged to another affiliated group together.

• Since HBM did not have its own taxable income during the relevant years, the SRLY limitation stopped the inherited Delavau losses from being used to offset the income of other group members.

Court’s Reasoning

• Section 381 allows tax attributes to be transferred, but their origin still matters. The regulations still treat NOL carryovers inherited from another company differently from those created by the acquiring company.

• Delavau met the regulatory definition of a predecessor because it distributed assets to HBM in a transaction to which §381 applied. The regulations did not require that HBM be a consolidated group member when the liquidation occurred.

• The Court rejected HBM’s proposed timing limitation because Treas. Reg. §1.1502-1(f)(4) contains no such requirement.

• Delavau’s preliquidation years remained separate return years of HBM’s predecessor. Those years therefore fell within the general definition of SRLYs.

• The lonely parent rule did not apply. Its text refers to separate return years of the common parent itself and does not include separate return years of a predecessor.

• The founding members did not qualify as an SRLY subgroup. Before July 2018, HBM was an S corporation and the other entities were QSubs disregarded as separate from HBM. They therefore had not previously belonged to another affiliated group.

• Because HBM generated no separate taxable income during the years at issue, there was no HBM-attributable income against which the Delavau SRLY NOLs could be used. Income earned by the other founding members could not expand the limitation.

Result

The Tax Court approved the IRS’s request for partial summary judgment, denied HBM’s cross-motion, and did not allow the consolidated NOL deductions related to Delavau’s NOL carryovers for 2018, 2020, and 2021.

The Takeaway

Section 381 succession does not make inherited NOLs the same as a successor corporation’s own losses for consolidated return purposes. Groups that acquire or inherit losses before consolidation must check the SRLY rules separately before assuming those losses can offset other members’ income.

List of Citations

• I.R.C. §332: Governs qualifying liquidations of subsidiaries into parent corporations.

• I.R.C. §381: Governs succession to specified tax attributes, including NOL carryovers, in qualifying corporate transactions.

• I.R.C. §382: Limits the use of NOLs following certain ownership changes.

• I.R.C. §1361: Governs S corporations and qualified subchapter S subsidiaries.

• I.R.C. §1504: Defines affiliated groups for consolidated return purposes.

• Treas. Reg. §1.1502-1(e): Defines a separate return year.

• Treas. Reg. §1.1502-1(f): Defines SRLYs, predecessors, successors, and relevant exceptions.

• Treas. Reg. §1.1502-21: Governs consolidated NOL deductions and the SRLY limitation.

• Treas. Reg. §1.381(c)(1)-1: Governs treatment of NOL carryovers succeeded to under §381.

• Treas. Reg. §301.7701-3: Governs entity classification elections and deemed transactions resulting from changes in classification.

• Wolter Construction Co. v. Commissioner, 68 T.C. 39 (1977), aff’d, 634 F.2d 1029 (6th Cir. 1980): Supports applying SRLY restrictions to predecessor losses inherited by a successor common parent.

• Dover Corp. & Subsidiaries v. Commissioner, 122 T.C. 324 (2004): Addressed succession to business history under §381 but did not establish that inherited NOLs become indistinguishable from the acquirer’s own attributes.

• AptarGroup Inc. v. Commissioner, 158 T.C. 110 (2022): Supports interpreting consolidated return regulations according to their text and structure.

• Florida Peach Corp. v. Commissioner, 90 T.C. 678 (1988): States the Tax Court’s standard and purpose for summary judgment.

Holding

The Tax Court upheld a 2021 income tax deficiency against Lawrence Hubbard because he did not report $22,925 in unemployment compensation, could not prove he ran a trade or business, and did not provide enough evidence for $31,890 in refundable COVID-19 sick and family leave credits. The IRS dropped a $6,378.40 penalty under §6676 for an incorrect refund or credit claim.

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Why It Matters

• The decision is primarily a case of substantiation. The Court applied established burden-of-proof rules rather than announcing a new interpretation of the COVID-19 credit provisions.

• Self-employment was a threshold issue. The COVID-19 sick and family leave credits depended on income from a trade or business. Hubbard could not establish that his barber, music, and cooking activities met that requirement.

• Payment records alone did not prove business activity. Screenshots showing Zelle, Cash App, and cash deposits did not identify the business purpose of the payments or connect them to services performed.

• A fraud allegation does not overcome a Form 1099-G without supporting evidence. Hubbard disputed unemployment compensation reported by California EDD, but evidence that he filed a bank fraud claim did not establish that he never received the income.

Key Facts

Lawrence Hubbard filed a 2021 federal income tax return reporting self-employment activity as a barber.

His Schedule C reported:

• $10,344 of gross business income.

• $5,509 of business expenses.

• $4,835 of net business income.

He also claimed $31,890 of refundable COVID-19 sick and family leave credits:

• $14,960 for leave before April 1, 2021.

• $16,930 for leave after March 31, 2021.

Hubbard did not attach Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, to support the credits.

California EDD issued Hubbard a Form 1099-G reporting $22,925 of unemployment compensation and $1,260 of federal income tax withholding. Hubbard did not report either amount on his return.

The IRS issued a notice of deficiency determining $32,938 of additional income tax and initially imposed a $6,378.40 penalty under §6676. The IRS later conceded the penalty.

Regulatory Framework

Gross income generally includes income from all sources under §61.

Under §162, taxpayers may deduct ordinary and necessary expenses incurred in carrying on a trade or business. A taxpayer must conduct an activity with continuity and regularity and primarily for income or profit for the activity to qualify as a trade or business.

Section 6001 and Treas. Reg. §1.6001-1 require taxpayers to maintain records sufficient to establish their tax liability and substantiate deductions and credits.

Congress created refundable sick and family leave credits for qualifying self-employed individuals under the Families First Coronavirus Response Act, or FFCRA, and later extended similar credits through the American Rescue Plan Act, or ARPA.

The credits depended on self-employment income and required taxpayers to establish a qualifying COVID-19-related reason for not working. Required documentation generally included the dates of leave, the qualifying reason, written support for that reason, and a statement that the taxpayer could not work because of it.

Arguments

Taxpayer argued:

• He did not receive the $22,925 of unemployment compensation reported by California EDD for 2021.

• Fraud involving unemployment benefits occurred, and he filed a fraud claim with his bank and California EDD.

• He worked as a self-employed barber, musician, and chef.

• He received customer payments through Zelle, Cash App, and cash.

• He used part of his residence for barber services and as a music studio.

• His self-employment activity supported his claimed COVID-19 sick and family leave credits.

Government argued:

• The Form 1099-G established Hubbard’s receipt of $22,925 of unemployment compensation.

• Hubbard did not provide adequate evidence proving that the reported unemployment compensation resulted from fraud.

• His records did not establish that he operated a qualifying trade or business.

• His reported Schedule C income and expenses lacked adequate substantiation.

• He failed to establish either the self-employment or qualifying-leave requirements for the COVID-19 credits.

Court’s Reasoning

• California EDD’s Form 1099-G provided the required evidentiary connection between Hubbard and the reported $22,925 of unemployment compensation. That shifted the burden to Hubbard to establish that the amount was not taxable to him.

• Hubbard produced evidence that he filed a fraud claim with Bank of America, but he did not document the outcome of that claim or provide evidence of a fraud determination from the California EDD.

• Screenshots from his EDD account, primarily related to unemployment compensation received in another tax year. They did not establish that the 2021 Form 1099-G was incorrect.

• Hubbard’s business records did not demonstrate that he conducted a trade or business with continuity and regularity. His payment log showed transactions from several individuals but did not explain what services generated the payments.

• His expense records listed amounts paid but did not say what business purpose they served. For example, a $337 Airbnb payment and a $3,400 check were not explained.

• The payment log did not match his Schedule C. The log showed $9,330.69 in income, $5,452 in expenses, and $3,878.69 in net income, but his tax return reported $10,344, $5,509, and $4,835 for these amounts.

• Since Hubbard could not prove he ran a trade or business, he did not meet the basic requirement for the COVID-19 sick and family leave credits. Even if he had shown he had a business, he did not provide enough documents to show qualifying leave dates, a COVID-19 reason, or when he could not work.

Result

The Tax Court ruled in favor of the IRS on the income tax deficiency and in favor of Hubbard on the §6676 penalty, which the IRS had already dropped.

The Takeaway

Practitioners working on self-employed COVID-19 leave credit claims should treat proof of a trade or business and proof of qualifying leave as separate requirements. Screenshots and payment logs may show money was received, but they do not explain what the income was for, why an expense was business-related, or why the taxpayer qualified for the credit.

List of Citations

• §61(a). Defines gross income broadly to include income from all sources unless an exclusion applies.

• §162(a). Permits deductions for ordinary and necessary trade or business expenses.

• §6001. Requires taxpayers to maintain records supporting their tax liability.

• §6201(d). Addresses disputes involving information returns when taxpayers reasonably contest reported income.

• §6676(a). Provides a penalty for certain erroneous claims for refund or credit. The IRS conceded this penalty.

• §7491(a). Provides circumstances in which the burden of proof may shift to the IRS.

• Treas. Reg. §1.6001-1(a). Requires taxpayers to maintain adequate books and records.

• Welch v. Helvering, 290 U.S. 111 (1933). Establishes the general presumption of correctness for IRS deficiency determinations.

• Commissioner v. Groetzinger, 480 U.S. 23 (1987). Defines the continuity, regularity, and profit requirements for a trade or business.

• Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979). Requires an evidentiary foundation connecting a taxpayer to alleged unreported income before the presumption of correctness applies.

• Hardy v. Commissioner, 181 F.3d 1002 (9th Cir. 1999). Recognizes third-party information returns as sufficient evidence connecting a taxpayer to income.

• FFCRA §§7002 and 7004. Created refundable sick and family leave credits for qualifying self-employed individuals.

• ARPA §§9642 and 9643. Extended and modified refundable sick and family leave credits for qualifying self-employed individuals.

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Holding

The Tax Court agreed with a $4,917 tax deficiency after Charmaine Gray did not report $26,268 in Social Security benefits on her 2022 tax return. The Court found that $22,328, or 85% of her benefits, was taxable under §86.

Why It Matters

• The decision applies settled law. It does not change the taxation of Social Security benefits or create a new interpretation of §86.

• The $25,000 statutory base amount for most single taxpayers does not mean the first $25,000 of Social Security benefits is tax-free. The calculation depends on modified adjusted gross income plus one-half of Social Security benefits.

• Taxpayers with substantial wages or other income may have up to 85% of their Social Security benefits included in gross income.

• Arguments that Social Security taxation constitutes unconstitutional double taxation remain foreclosed by established Tax Court precedent.

Key Facts

Gray received $65,085 of wages from Stine Seed Co. during 2022.

She also received $26,268 in Social Security benefits, as reported by the Social Security Administration on Form SSA-1099.

Gray reported the wages on Form 1040-SR but reported none of the Social Security benefits.

She claimed the standard deduction, reported no adjustments to adjusted gross income, and reported taxable income of $50,385.

The IRS issued a notice of deficiency on June 23, 2025. It determined that $22,328 of Gray’s Social Security benefits was taxable and calculated a $4,917 deficiency.

Gray disputed the deficiency, claiming her Social Security benefits should not be taxed.

Statutory Framework

Section 61 says that income from all sources counts as gross income. Section 86 sets the rules for taxing Social Security benefits.

For most single taxpayers, §86 sets a $25,000 base amount and a $34,000 adjusted base amount. Social Security benefits become taxable when modified adjusted gross income plus half of the benefits is more than the base amount.

If this combined income is over the adjusted base amount, §86 may require up to 85% of Social Security benefits to be taxed.

The law does not say that Social Security benefits are excluded from tax just because the amount is under $25,000.

Arguments

Taxpayer argued:

• Her Social Security benefits were not taxable.

• She understood the $25,000 threshold enacted in 1983 to exempt benefits below that amount.

• Taxing her Social Security benefits after she had already paid Social Security taxes through payroll withholding amounted to double taxation.

• She also challenged the constitutionality of taxing the benefits.

Government argued:

• Gray received $26,268 of Social Security benefits and stipulated that she received the income.

• Her wages and Social Security benefits exceeded the statutory thresholds in §86.

• The statutory formula required $22,328 of her benefits to be included in gross income.

Court’s Reasoning

• Gray stipulated that she received the Social Security benefits. That evidence satisfied the IRS’s initial burden to connect her with the unreported income.

• Section 86 expressly requires taxpayers to include a portion of Social Security benefits in gross income when income exceeds statutory thresholds.

• Gray’s modified adjusted gross income was $65,085, since there were no adjustments shown in the record.

• Half of her $26,268 in Social Security benefits was $13,134.

• When $13,134 is added to her $65,085 modified adjusted gross income, the total is $78,219. This is much higher than the $34,000 adjusted base amount for her filing status.

• Because of this, the §86 formula required her to include up to 85% of her Social Security benefits as taxable income.

• 85% of $26,268 is $22,328. This was the correct amount to include in her gross income.

• The Court did not accept Gray’s argument about the $25,000 threshold. It explained that this amount is part of the income calculation, not a general exclusion.

• The Court also rejected her double-taxation and constitutional arguments, citing long-standing precedent supporting § 86.

Result

The Tax Court upheld the IRS’s $4,917 deficiency for Gray’s 2022 tax year.

The Takeaway

This case is a standard use of §86, but it clears up a common misunderstanding. The Social Security thresholds are used to figure out how much of the benefits are taxable. They do not mean that benefits below $25,000 are automatically excluded from tax.

List of Citations

• IRC §61(a): Defines gross income broadly as income from all sources.

• IRC §86: Governs the inclusion of Social Security benefits in gross income and establishes the applicable income thresholds.

• IRC §86(d): Defines Social Security benefits for purposes of §86 and addresses reductions for repayments.

• Rule 122, Tax Court Rules of Practice and Procedure: Allows parties to submit a case for decision based on stipulated facts without trial.

• Rule 142(a)(1), Tax Court Rules of Practice and Procedure: Generally places the burden of proof on the taxpayer.

• Welch v. Helvering, 290 U.S. 111 (1933): Establishes the general presumption that the Commissioner’s deficiency determination is correct.

• Walquist v. Commissioner, 152 T.C. 61 (2019): Explains the IRS’s initial evidentiary burden in unreported-income cases.

• Day v. Commissioner, 975 F.2d 534 (8th Cir. 1992): Requires some evidence connecting a taxpayer to unreported income before the presumption of correctness applies.

• El v. Commissioner, 144 T.C. 140 (2015): Confirms that stipulated receipt of income satisfies the IRS’s initial burden.

• Jelle v. Commissioner, 116 T.C. 63 (2001): Applies the §86 formula when income exceeds the adjusted base amount.

• Cotroneo v. Commissioner, T.C. Memo. 2024-70: Applies the 85% Social Security inclusion rules under §86.

• Lin v. Commissioner, T.C. Memo. 2023-37: Applies §86 to determine the taxable portion of Social Security benefits.

• Holland v. Commissioner, T.C. Memo. 2021-129: Rejects arguments attempting to avoid the express taxation of Social Security benefits.

• Kelley v. Commissioner, T.C. Memo. 2021-2: Rejects challenges to the statutory Social Security taxation rules and emphasizes that the Tax Court must apply the statute enacted by Congress.

• McAdams v. Commissioner, 118 T.C. 373 (2002): Rejects constitutional challenges to §86.

• Clark v. Commissioner, T.C. Memo. 1998-280: Upholds the constitutionality of taxing Social Security benefits.

• Roberts v. Commissioner, T.C. Memo. 1998-172: Rejects constitutional objections to §86.

The IRS has set the annual applicable federal rates for August 2026 at 4.10% for short-term, 4.35% for mid-term, and 4.92% for long-term obligations.

Holding

Revenue Ruling 2026-13 sets the federal interest and tax rates for August 2026. These rates apply to sections 42, 382, 1274, 1288, and 7520.

Why It Matters

• The AFRs establish minimum interest benchmarks for many related-party loans, installment sales, below-market financing arrangements, and other debt instruments.

• The §7520 rate increases to 5.20% for August 2026 and applies when valuing annuities, life estates, term interests, remainders, and reversions.

• The §382 long-term tax-exempt rate is 3.77% for ownership changes occurring during August. That rate can affect the annual limitation on the use of pre-change tax attributes following an ownership change.

• The ruling also supplies monthly rates used for low-income housing tax credit calculations. These are routine monthly updates rather than a change in tax policy.

Key Rates

For annual compounding, the AFRs for August 2026 are:

• Short-term AFR: 4.10%

• Mid-term AFR: 4.35%

• Long-term AFR: 4.92%

The ruling also lists AFR multiples for provisions that require 110%, 120%, 130%, 150%, or 175% of the standard AFR.

For example:

• 120% short-term AFR: 4.93%

• 120% mid-term AFR: 5.23%

• 120% long-term AFR: 5.91%

The ruling also includes monthly, quarterly, and semiannual compounding equivalents.

Adjusted AFRs

The annual adjusted AFRs for August 2026 are:

• Short-term adjusted AFR: 3.10%

• Mid-term adjusted AFR: 3.29%

• Long-term adjusted AFR: 3.72%

Adjusted AFRs are used for certain tax-eAdjusted AFRs apply to certain tax-exempt obligations and other calculations under §1288.

• Adjusted federal long-term rate: 3.72%

• Long-term tax-exempt rate: 3.77%

The long-term tax-exempt rate is the highest adjusted federal long-term rate from the current month and the previous two months. This rate matters when applying §382 after an ownership change.

Low-Income Housing Credit Rates

The §42(b)(1) appropriate percentages for August 2026 are:

• 70% present value credit: 8.08%

• 30% present value credit: 3.46%

The ruling notes that for qualifying non-federally subsidized new buildings placed in service after July 30, 2008, the applicable percentage cannot be less than 9% under §42(b)(2).

Section 7520 Rate

The §7520 rate for August 2026 is 5.20%.

Practitioners use this rate to determine the present value of:

• Annuities

• Life interests

• Interests for a term of years

• Remainder interests

• Reversionary interests

This is a routine monthly rate ruling, but the numbers matter whenever a transaction closes or a valuation date falls on or after August 2026. Practitioners handling related-party financing, §382 limitations, estate-planning valuations, or housing credit calculations should use the August rates rather than carry forward rates from prior months.

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Holding

The Tax Court decided that Trisha Anderson qualified for innocent spouse relief under IRC section 6015(c). The IRS could not prove she knew the facts behind the disallowed mortgage interest deduction, so her former husband was assigned the entire deficiency.

Why It Matters

• This decision reinforces that the IRS bears the burden of proving a requesting spouse had actual knowledge of the item causing the deficiency under section 6015(c).

• The case distinguishes knowledge that a transaction occurred from knowledge that a tax deduction was legally unsupported.

• It shows that deficiencies arising from a failure to substantiate a deduction are treated differently from deficiencies caused by knowingly claiming an improper deduction.

• The opinion also demonstrates that allocation under section 6015(c) is determined without applying community property rules, even when the taxpayers lived in California.

Key Facts

• Trisha Anderson and her husband filed a joint federal income tax return for 2016.

• Her husband earned all of the couple’s income and managed the family’s finances, including preparing and filing their tax returns.

• The couple sold their home in 2016 after placing it into a family trust.

• Their joint return claimed approximately $108,220 of mortgage interest.

• During an audit, the IRS disallowed the deduction because the taxpayers failed to establish that the claimed interest was deductible and paid.

• The notice of deficiency was mailed only to Mr. Anderson. Ms. Anderson never received it.

• The couple divorced in 2021, and their divorce agreement required Mr. Anderson to pay the 2016 federal tax liability.

• Ms. Anderson requested innocent spouse relief in 2023 after the IRS began collection efforts.

Statutory Framework

IRC section 6015 provides three avenues for relief from joint and several liability on a joint return.

Section 6015(c) allows a divorced or separated spouse to allocate a deficiency between the spouses as if they had filed separate returns.

Relief is unavailable if the IRS proves the requesting spouse had actual knowledge, meaning knowledge of the facts that made the deduction improper, not merely knowledge that the underlying transaction occurred.

Arguments

Taxpayer argued:

• She had no involvement in managing the family’s finances.

• She believed the mortgage interest had been paid.

• She did not receive the notice of deficiency.

• The deficiency resulted from her former husband’s handling of the audit, not from any knowing misconduct on her part.

Government argued:

• Ms. Anderson had actual knowledge of the item giving rise to the deficiency.

• Because she knew about the mortgage interest deduction, she should remain jointly liable for the resulting tax.

Court’s Reasoning

• The IRS had the burden of proving actual knowledge by a preponderance of the evidence.

• The evidence showed the mortgage interest was in fact paid through the home sale, as reflected on the settlement statement.

• The deficiency appeared to result because Mr. Anderson failed to substantiate the deduction during the audit rather than because the interest had not been paid.

• Knowing that mortgage interest existed is not the same as knowing the deduction would ultimately be disallowed.

• Ms. Anderson credibly testified that she believed the interest had been paid.

• The Court found no evidence that she knew the deduction lacked adequate substantiation.

• Because only Mr. Anderson was liable on the mortgages and managed the financial affairs, the deduction would have belonged entirely to him if separate returns had been filed.

• As a result, the entire deficiency was allocated to Mr. Anderson, leaving Ms. Anderson fully relieved of liability.

Result

The Tax Court granted Ms. Anderson innocent spouse relief under IRC section 6015(c) and relieved her of the entire 2016 deficiency.

The Takeaway

This case applies existing innocent spouse rules rather than changing the law. It confirms that the IRS must prove a spouse actually knew the facts that made a deduction improper, not just that the spouse knew about the transaction. It also shows that if one spouse handled the finances and the other was not involved, a lack of audit proof may support relief.

List of Citations

• IRC § 6015(c), governing allocation of joint liabilities between divorced or separated spouses.

• IRC § 6015(e), granting Tax Court jurisdiction over innocent spouse determinations.

• Thomas v. Commissioner, 162 T.C. 9 (2024), addressing the Tax Court’s standard and scope of review in innocent spouse cases.

• Porter v. Commissioner, 132 T.C. 203 (2009), discussing de novo review under section 6015.

• Cheshire v. Commissioner, 115 T.C. 183 (2000), aff’d, 282 F.3d 326 (5th Cir. 2002), explaining actual knowledge under innocent spouse provisions.

• Culver v. Commissioner, 116 T.C. 189 (2001), confirming the IRS bears the burden of proving actual knowledge.

• Treas. Reg. § 1.6015-3, defining actual knowledge for purposes of section 6015(c).

• Golder v. Commissioner, 604 F.2d 34 (9th Cir. 1979), addressing mortgage interest deductions by liable taxpayers.

• Treas. Reg. § 1.163-1(b), explaining when an owner who is not personally liable on a mortgage may deduct mortgage interest.

Holding

The IRS used its authority under section 6033(a)(3)(B) to let some foreign FIFA member associations skip the annual Form 990 filing. This relief is for associations whose national teams play in the 2026 FIFA World Cup and whose only U.S. income is from the tournament.

This rule applies to tax years starting on or after January 1, 2025.

Why It Matters

• This relief removes a major U.S. reporting requirement for foreign soccer associations whose only U.S. activity is taking part in the 2026 World Cup.

• The exception means qualifying associations do not have to file Form 990, Form 990-EZ, or the Form 990-N electronic notice for those years.

• This relief does not exempt associations from federal income tax, cover unrelated U.S. activities, or remove other possible tax reporting duties.

• The exception is limited. If an association earns other U.S. income or does business in the U.S. outside the World Cup, it must still file the required annual return or notice.

Key Facts

The 2026 FIFA World Cup will have foreign national teams playing matches that are partly hosted in the United States.

Each national team takes part through its FIFA member association. The IRS calls a foreign association whose team plays in the tournament a participating member association, or PMA.

Some foreign PMAs may qualify as tax-exempt under section 501(a). Without this special relief, they would have to file Form 990 and report on their worldwide activities, even if their only U.S. presence is for the World Cup. Filing full Form 990 filings would impose a compliance burden that exceeded the value of the information collected.

This relief started on July 24, 2026, and applies to tax years beginning on or after January 1, 2025.

Organizations Covered

The revenue procedure applies to a foreign PMA that:

• Has a national team competing in the 2026 FIFA World Cup.

• Qualifies for exemption from federal income tax under section 501(a).

• Is not a private foundation.

• Is not a section 509(a)(3) supporting organization.

• Has no U.S.-source gross income or income effectively connected with a U.S. trade or business, other than income related to participating in the 2026 World Cup.

An association can still qualify even if it has not applied for or received an IRS letter confirming its tax-exempt status.

Income Covered by the Relief

This exception lets a qualifying PMA get income from World Cup participation without having to file Form 990.

The revenue procedure identifies the following examples:

• Prize money paid by FIFA.

• Promotional income paid by third parties in connection with the association’s participation in the tournament.

• Income arising from administrative or financial arrangements necessary or appropriate to facilitate tournament participation.

The relief only applies if the income is tied to World Cup participation. It does not give a general exemption for all U.S. income earned by a foreign soccer association.

Statutory and Regulatory Framework

Section 6033(a)(1) generally requires organizations exempt from federal income tax to file an annual information return, usually Form 990, Form 990-EZ, or Form 990-PF.

Section 6033(a)(3)(B) allows the Treasury Secretary or the Secretary’s delegate to waive the annual filing requirement when the filing is unnecessary for efficient tax administration. Treasury regulations delegate that authority to the IRS Commissioner.

Congress removed that waiver authority for section 509(a)(3) supporting organizations. The IRS therefore cannot extend this relief to those organizations.

Private foundations also remain outside the revenue procedure.

Section 6033(i) generally requires certain organizations excused from filing a full annual return because of low gross receipts to submit Form 990-N, commonly called the e-Postcard. The IRS determined that qualifying PMAs do not have to submit Form 990-N because this exception turns on the nature of their gross income, not merely the amount of their gross receipts.

Source Rules

The revenue procedure relies on existing tax rules to determine whether income comes from U.S. sources.

Gifts, grants, contributions, and membership fees received directly or indirectly from a U.S. person generally count as U.S.-source income under Treasury Regulation section 53.4948-1(b).

Other categories of income are sourced under sections 861 through 865 and the related regulations.

A U.S. person generally includes:

• A U.S. citizen or resident.

• A domestic partnership.

• A domestic corporation.

• A nonforeign estate.

• Certain trusts subject to U.S. Court supervision and substantial control by U.S. persons.

For this revenue procedure, the term United States includes the 50 states and the District of Columbia.

IRS Rationale

The IRS gave three principal reasons for waiving the filing requirement.

• The associations are not expected to earn recurring U.S.-source income or repeatedly conduct a U.S. trade or business. Their U.S. activity arises from a discrete international sporting event.

• Their presence in the United States results from FIFA membership and World Cup participation, not from independent or continuing domestic operations.

• Form 990 asks for details about an organization’s worldwide operations. For these associations, most activities and revenue are outside the U.S., so filing a full return would be a lot of work for little benefit.

Filing Consequences

A qualifying foreign PMA does not have to file Form 990 or Form 990-EZ for a covered year.

It also does not have to submit Form 990-N for that year.

The relief applies separately to each taxable year. An association must test its eligibility annually.

If tIf the association gets other U.S. income or does business in the U.S. outside the World Cup, it must file the required annual return or notice unless another exception applies.

The revenue procedure addresses only the annual information-return requirement under section 6033.

It does not state that:

• World Cup income is excluded from gross income.

• Tournament income is exempt from federal income tax.

• Foreign players, coaches, employees, contractors, or other individuals receive personal tax relief.

• FIFA itself qualifies for the exception.

• Domestic soccer organizations qualify for the exception.

• Employment tax, withholding, information reporting, or unrelated business income requirements do not apply.

The practical effect is therefore narrower than an exemption from income reporting. In practice, this is not a full exemption from income reporting. It only removes one filing requirement for qualifying foreign tax-exempt associations. Certain foreign organizations are exempt from filing Form 990 when they normally receive no more than $50,000 in annual gross receipts from U.S. sources and have no significant U.S. activity.

The new rule expands on the earlier guidance for World Cup associations. It gives relief even if the association’s U.S. income from the World Cup is over $50,000.

Revenue Procedure 2011-15 remains in effect and is amplified rather than replaced.

The Takeaway

Tax advisers working with foreign national soccer associations should separate tournament-related receipts from all other U.S. income and activity. The filing relief is useful but conditional, and any unrelated U.S. income can restore the annual reporting requirement.

GAO’s Action

The Government Accountability Office asked Treasury Secretary Scott Bessent to focus immediately on three main IRS reform areas: managing the agency’s changes, reducing the tax gap, and improving the taxpayer experience.

GAO made recommendations, not rules. The letter does not change tax laws, taxpayer duties, audit procedures, or how the IRS enforces rules.

Why It Matters

• This is a consequential oversight warning, not routine administrative correspondence. GAO identified weaknesses that affect the IRS’s core enforcement, modernization, and taxpayer-service functions.

• IRS modernization has lost both funding and centralized leadership. Congress rescinded or restricted more than half of the approximately $79.4 billion originally appropriated under the Inflation Reduction Act. The IRS also disbanded the office that had led its transformation program.

• Enforcement capacity remains a central concern. GAO specifically highlighted shortages of employees qualified to examine high-income and high-wealth taxpayers, whose returns often involve complex entities, transactions, and valuation issues.

• Service improvements lack adequate performance measurement. GAO concluded that the IRS needs clearer goals, measures, and targets to determine whether taxpayer-service projects actually improve taxpayer outcomes.

• The letter signals likely congressional scrutiny. GAO expressly noted that Congress may use hearings, appropriations, legislation, and funding restrictions to press agencies to implement priority recommendations.

Key Facts

• GAO issued the letter on June 24, 2026.

• The letter was addressed to Treasury Secretary Scott Bessent.

• The IRS had 238 open GAO recommendations as of June 2026.

• GAO classified 27 recommendations as priorities, meaning implementation could materially improve government operations, reduce waste or abuse, generate significant savings, or address a high-risk area.

• The IRS had implemented only one of the priority recommendations identified in GAO’s September 2025 letter.

• The IRS’s implementation rate for recommendations made five years earlier was 72 percent, compared with a government-wide rate of 77 percent.

• Congress originally provided approximately $79.4 billion to the IRS under the Inflation Reduction Act of 2022.

• Subsequent legislation rescinded or restricted the use of more than half of that funding.

Priority Area One: Managing IRS Transformation

The IRS began a broad transformation program covering technology, organizational structure, taxpayer services, enforcement, and resource allocation. Its 2023 Strategic Operating Plan relied heavily on the multiyear funding provided by the Inflation Reduction Act.

That plan now operates under materially different conditions.

Congress reduced the available funding through later legislation. The administration’s fiscal year 2027 budget proposal recommended additional reductions. IRS officials also reported in March 2025 that the office responsible for leading the transformation had been disbanded.

GAO said the IRS was still determining which projects would continue and who would lead them.

GAO recommended that the IRS apply established organizational-reform practices, including:

• Setting clear and measurable transformation goals.

• Establishing an effective implementation process.

• Assigning responsibility for specific initiatives.

• Engaging Congress and other affected stakeholders.

• Allocating sufficient personnel and funding to the projects the agency decides to retain.

The issue is bigger than just saving certain technology projects. The IRS needs to figure out how to use its smaller budget to support enforcement, taxpayer service, cybersecurity, staffing, and old systems in a clear overall plan.

Priority Area Two: Addressing the Tax Gap

The tax gap is the difference between the amount of federal tax legally owed and the amount paid voluntarily and on time.

GAO described reducing that gap as a pressing IRS challenge. It also noted that tax-law enforcement has remained on GAO’s High-Risk List since 1990 because of its vulnerability to revenue loss, noncompliance, mismanagement, and operational weakness.

Audits are still a key part of how the IRS checks compliance. GAO found that insufficient staffing makes it hard for the IRS to handle complex audits, especially for high-income and wealthy taxpayers.

Those examinations often require specialized knowledge involving:

• Partnerships and pass-through entities.

• Closely held businesses.

• International transactions.

• Trusts and estates.

• Valuation issues.

• Related-party transactions.

• Complex ownership structures.

GAO previously reported that the IRS had lost a significant number of employees capable of handling these cases. That problem existed before the workforce reductions that occurred in 2025.

GAO recommended that the IRS:

• Develop and implement a strategy to recruit personnel qualified to examine complex returns.

• Train employees to handle high-income and high-wealth examinations.

• Evaluate the effectiveness of the models used to select returns for audit.

Choosing which returns to audit is important because the IRS has limited resources. Poor selection methods can waste skilled staff on less important cases and miss returns that are more likely to have problems.

GAO said that following these recommendations could strengthen enforcement, increase federal revenue, and ease the burden on taxpayers who already follow the rules.

The letter does not mean that any specific taxpayer is more likely to be audited. Instead, it points out problems in how the IRS chooses and reviews complex returns.

Priority Area Three: Improving the Taxpayer Experience

GAO also identified persistent weaknesses in IRS taxpayer service.

The IRS had planned numerous service projects using Inflation Reduction Act funding. Those projects were intended to improve taxpayer interactions with the agency, including access to assistance and the resolution of tax-account problems.

In April 2025, however, IRS officials told GAO that the office overseeing those efforts had been disbanded. The IRS was reassessing the projects because of funding and staffing constraints.

GAO identified several continuing problems:

• Limited evidence showing whether service initiatives improve taxpayer outcomes.

• Inadequate performance measures.

• Uncertain funding.

• Staffing limitations.

• Frequent changes in tax law.

GAO recommended that the IRS establish an evidence-based system for evaluating taxpayer-service improvements. That system should connect each initiative to defined performance goals, measurable targets, and reliable data.

The goal is not just to track activity. Numbers like calls answered or accounts created do not always show that taxpayers got correct answers or had their issues resolved.

A better way to measure results would help the IRS decide which service projects deserve more funding, which ones need changes, and which ones should end.

Additional Operational Concerns

GAO linked the priority recommendations to several broader government-management risks.

Cybersecurity is very important because the IRS holds a lot of sensitive taxpayer and financial information. Decisions about updating systems affect both how the IRS serves people and how it protects data.

GAO also cited fragmentation and duplication within IRS operations. It specifically noted that IRS business units could improve coordination when using artificial intelligence.

The problem is not just that different IRS units might buy the same technology. If AI development is not coordinated, it can lead to mixed-up controls, extra costs, systems that do not work together, or conflicting uses of taxpayer data.

Significance for Tax Professionals

The letter does not change filing, reporting, or procedures right now. Its main value is in showing what the IRS can and cannot do.

Tax professionals should distinguish between three separate effects.

First, reduced funding and changes at the IRS may slow updates and service projects. Tax professionals might still see uneven service, slow problem-solving, and trouble reaching IRS staff.

Second, GAO still sees enforcement for high-income and wealthy taxpayers as a top priority. Even though staffing is lower, the main goal is to address complex cases of noncompliance.

Third, new IRS projects may need to show clear results. Congress and GAO will probably judge programs by what they actually achieve, not just by plans or spending.

Limits of the Letter

GAO does not direct IRS operations and cannot compel implementation of its recommendations.

The letter also does not:

• Announce a new IRS enforcement campaign.

• Change audit-selection criteria.

• Suspend any modernization project.

• Restore or rescind IRS funding.

• Establish taxpayer-service standards.

• Impose deadlines on Treasury or the IRS.

The letter’s real impact comes from Congress watching over the IRS. GAO said Congress might turn recommendations into laws, check on progress in hearings, or use funding to push for changes.

The Takeaway

The letter shows that the IRS is trying to update and enforce the tax system despite having less money, leadership changes, fewer staff, and weak ways to measure progress. There are no new rules for tax professionals right now, but the problems GAO described will keep affecting audits, case handling, and taxpayer service.

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Holding

The D.C. Circuit upheld Charles Littlejohn’s five-year prison sentence for unlawfully disclosing tax returns under section 7213(a)(1). The court found the sentence reasonable, even though it was higher than the recommended 12 to 18 months.

Why It Matters

• This decision gives courts more freedom to impose longer sentences in large tax disclosure cases when the Guidelines do not fully reflect the seriousness or impact of the conduct.

• The court saw the number of victims, targeting a sitting president, trying to influence policy and an election, and the risk of more disclosures as separate reasons to increase the sentence.

• Pleading guilty, cooperating, accepting responsibility, and having no criminal record do not stop a court from giving the maximum sentence if it explains why other factors are more important.

• The opinion explains that an upward departure under the Guidelines is different from an upward variance under section 3553(a). Courts can use both if they address different aspects of the case.

• The ruling does not mean every unauthorized disclosure deserves the maximum sentence. The court stressed that Littlejohn’s case was unusual because of its scale, planning, political motive, and ongoing effects.

Key Facts

Charles Littlejohn worked as a contractor with access to IRS systems.

He sought the position in part to obtain and disclose President Donald Trump’s tax information. He used broad search parameters to gather the information without triggering detection controls.

Littlejohn transferred the information through a private website, moved it to a personal computer, and stored copies in multiple locations. He later provided Trump’s tax information to a New York Times reporter and assisted with the reporter’s analysis.

The New York Times published articles based on the information shortly before the 2020 presidential election.

Littlejohn also obtained tax information concerning approximately 600 entities and about 7,600 wealthy individuals. He disclosed that information to ProPublica.

ProPublica used information concerning at least 152 taxpayers in approximately 50 articles. It retained additional unpublished taxpayer information at the time of sentencing.

Victims reported reputational damage, lost business, threats, emotional harm, and concerns for their families’ safety. Taxpayers whose information had not yet been published remained uncertain whether ProPublica might disclose it later.

Littlejohn attempted to conceal his conduct. He destroyed virtual machines, canceled the private website’s domain registration, and deleted nearly all files from his IRS laptop before returning it.

The government charged Littlejohn with one count of unauthorized disclosure of tax returns and return information under section 7213(a)(1).

He pleaded guilty.

The advisory Guidelines calculation, after an upward departure, produced a range of 12 to 18 months.

The district court imposed:

• Five years in prison

• Three years of supervised release

• 300 hours of community service

• A $5,000 fine

• A $100 special assessment

Five years was the statutory maximum.

Statutory and Sentencing Framework

Section 7213(a)(1) makes it a felony for certain federal employees and other covered persons to willfully disclose tax returns or return information without authorization.

Return information includes taxpayer-identifying and tax-related information held by the IRS in connection with a filed return or potential tax liability.

Federal sentencing involves two related but distinct concepts.

An upward departure changes the advisory Guidelines range based on circumstances recognized in the Guidelines.

An upward variance imposes a sentence outside the final Guidelines range based on the broader sentencing factors in 18 U.S.C. section 3553(a).

Section 3553(a) requires the court to consider:

• The nature and circumstances of the offense

• The defendant’s history and characteristics

• The seriousness of the offense

• Respect for the law

• Just punishment

• Deterrence

• Protection of the public

• Available sentences

• The advisory Guidelines and policy statements

• Avoidance of unwarranted sentencing disparities

An appellate court reviews the substantive reasonableness of a sentence for abuse of discretion. It does not replace the district court’s weighing of the sentencing factors with its own.

Arguments

Taxpayer argued:

• The district court predetermined the sentence before the sentencing hearing.

• The court improperly concluded that the offense was politically motivated and directed at a sitting president.

• The court incorrectly characterized the conduct as an attack on constitutional democracy.

• The court improperly found that Littlejohn intended to harm thousands of taxpayers.

• The court considered a letter from 25 members of Congress requesting the maximum sentence.

• The court failed to explain adequately why it imposed a sentence above the Guidelines range.

• The court relied on factors already accounted for through the upward departure.

• The five-year sentence created an unwarranted disparity compared with sentences in other disclosure cases.

Government argued:

• The district court kept an open mind and considered both aggravating and mitigating evidence.

• Littlejohn’s own statements supported the findings that he acted for political and policy-related purposes.

• The congressional letter had no effect on the sentencing decision.

• The district court gave detailed reasons for imposing the statutory maximum.

• The Guidelines did not fully account for the scale, sophistication, targeting, and continuing effects of the conduct.

• The comparison cases involved fewer victims, less serious conduct, or materially different mitigating circumstances.

Court’s Reasoning

• The district court did not predetermine the sentence. It expressed sympathy for Littlejohn, reviewed letters supporting him, acknowledged his positive personal characteristics, questioned both parties, and stated that it had not decided the sentence before hearing argument.

• The district court’s off-the-record communications should have occurred on the record. The appellate court nevertheless found no prejudice and no evidence that the court had already fixed the sentence.

• The record supported the finding that Littlejohn acted for political purposes. He stated that he wanted voters to see the president’s tax returns before voting and wanted the public to understand how wealthy taxpayers minimized their tax burdens.

• The district court reasonably treated the conduct as targeting a sitting president and attempting to influence an election through unlawful activity.

• The court also reasonably concluded that the offense harmed confidence in the impartial administration of government institutions.

• Littlejohn’s own admissions supported the finding that he intentionally violated the privacy of thousands of taxpayers. The district court did not need proof that he intended every specific business, reputational, or personal consequence experienced by each victim.

• The district court did not rely on the congressional letter. It expressly stated that the letter had no effect on the sentence and contained no material information that was not already in the record.

• The district court adequately explained the upward departure. The disclosure involved a substantial number of individuals, caused or risked substantial nonmonetary harm, and produced a significant invasion of privacy.

• The court separately justified the upward variance. It relied on Littlejohn’s targeting of the president, the targeting of thousands of other taxpayers, the calculated and multi-year nature of the scheme, his sophisticated efforts to avoid detection, and the continuing risk that unpublished information could appear in future articles.

• The departure and variance did not improperly duplicate the same facts. The departure primarily addressed the large number of affected taxpayers and the invasion of privacy. The variance addressed additional aggravating circumstances, including political targeting, technical sophistication, deliberate concealment, and ongoing harm.

• Littlejohn’s professional experience increased the seriousness of the offense. His training and access gave him detailed knowledge of taxpayer confidentiality requirements and the consequences of unauthorized disclosure.

• The district court considered his lack of criminal history, guilty plea, cooperation, acceptance of responsibility, and positive personal relationships. It had discretion to conclude that those considerations did not outweigh the seriousness of the offense and the need for deterrence.

• The court could impose the statutory maximum without finding that Littlejohn was the most culpable person who could violate section 7213. A statutory maximum necessarily applies to defendants whose conduct may differ in degree.

• General deterrence carried substantial weight because Littlejohn used trusted access to government systems to obtain confidential taxpayer information. The district court could reasonably conclude that a severe sentence was necessary to deter other employees and contractors from using government access to pursue personal or political objectives.

• The district court acknowledged that public protection and correctional treatment weighed against an upward variance. It nevertheless found that the remaining factors justified the maximum sentence.

• Littlejohn failed to identify a sufficiently similar case involving comparable scale and circumstances. Most cited cases involved fewer records, fewer victims, different offenses, greater cooperation, mental health considerations, or other material differences.

• None of the comparison cases involved disclosure of a sitting president’s tax information together with information concerning thousands of additional taxpayers.

Procedural Reasonableness

A sentence is procedurally unreasonable when the district court commits a significant error in calculating the Guidelines, treating the Guidelines as mandatory, relying on clearly erroneous facts, failing to consider the statutory factors, or failing to explain the sentence.

The D.C. Circuit found no such error.

The district court correctly calculated the Guidelines range, considered the relevant sentencing factors, addressed the parties’ arguments, and explained why the statutory maximum better reflected the offense than the advisory range.

The appellate court criticized the use of off-the-record communications but found that those communications showed uncertainty rather than prejudgment. Littlejohn also failed to object at the time.

Substantive Reasonableness

A sentence is substantively unreasonable only when it falls outside the range of permissible outcomes under the facts and sentencing law.

The D.C. Circuit held that the five-year sentence remained within that range.

The opinion treated Littlejohn’s conduct as materially more serious than a routine disclosure offense because it involved:

• Entry into government service with an intent to obtain confidential information

• A multi-year plan

• Deliberate targeting of a president

• Disclosure involving thousands of taxpayers

• Coordination with media organizations

• Technical measures designed to evade detection

• Destruction of evidence

• Concrete harm to identified victims

• Continuing uncertainty for taxpayers whose information remained unpublished

The court viewed the sentence as severe but not outside the district court’s discretion.

Limits of the Decision

The decision does not create a presumption that section 7213 violations require a five-year sentence.

It does not hold that disclosure to a journalist automatically supports an upward variance.

It does not hold that political motivation alone justifies the statutory maximum.

It does not eliminate the need for a sentencing court to calculate the Guidelines correctly or explain why the Guidelines do not adequately address the offense.

The result depended on the combined effect of scale, intent, planning, concealment, victim harm, and continuing exposure.

The opinion also leaves the government’s charging decision largely outside the appellate issue. The district court questioned why prosecutors charged only one count, but the D.C. Circuit reviewed the sentence imposed on that count rather than the wisdom of the charging arrangement.

Result

The D.C. Circuit affirmed the five-year prison sentence, supervised release, community service requirement, fine, and special assessment.

The Takeaway

Tax professionals, government contractors, and advisers who handle protected taxpayer information should see this decision as a clear warning. Courts may give the maximum sentence when someone with inside access deliberately discloses information on a large scale, especially if the effects go beyond the first release.

List of Citations

• 26 U.S.C. §7213(a)(1): Criminalizes willful unauthorized disclosure of tax returns and return information by covered persons.

• 18 U.S.C. §3553(a): Lists the factors federal courts must consider when imposing a criminal sentence.

• U.S.S.G. §2H3.1, Application Note 5: Authorizes an upward departure for disclosures involving substantial numbers of individuals, substantial nonmonetary harm, or substantial invasions of privacy.

• United States v. Miller, 35 F.4th 807 (D.C. Cir. 2022): Provides the clear-error standard for factual findings.

• United States v. Flores, 912 F.3d 613 (D.C. Cir. 2019): Addresses review of preserved and unpreserved procedural sentencing objections.

• United States v. Fry, 851 F.3d 1329 (D.C. Cir. 2017): Applies abuse-of-discretion review to substantive sentencing challenges.

• United States v. Abney, 957 F.3d 241 (D.C. Cir. 2020): Explains that a sentencing judge must approach the decision with an open mind.

• United States v. Pyles, 862 F.3d 82 (D.C. Cir. 2017): Recognizes that active questioning may show that a judge considered the parties’ positions.

• United States v. Brown, 857 F.3d 403 (D.C. Cir. 2017): Requires specific and legitimate grounds for a sentence above the Guidelines.

• United States v. Williamson, 903 F.3d 124 (D.C. Cir. 2018): States the standard for determining whether a sentence is substantively unreasonable.

• United States v. Johnson, 934 F.3d 498 (6th Cir. 2019): Explains that a statutory maximum need not be reserved for a single hypothetical category of the most culpable offenders.

Holding

The Tax Court decided that the IRS was right to make a supplemental assessment under §6204 after it mistakenly set Hough Beck & Baird Inc.’s employment tax liability at zero. The court ruled in favor of the IRS and allowed the proposed levy.

Why It Matters

• The decision confirms that the IRS need not file an erroneous refund suit under §7405 to recover money it mistakenly returned to a taxpayer.

• The method of recovery depends on the source of the error. The IRS may use a supplemental assessment when the original assessment materially misstated the tax liability.

• A different rule may apply when the IRS correctly assessed and fully collected the tax but later issued a refund because of an unrelated payment-processing or accounting error.

• The decision gives the IRS access to the ordinary administrative collection process, including liens and levies, when a timely supplemental assessment corrects a materially defective original assessment.

• The holding does not authorize reassessment of every erroneous refund. The IRS must identify a material defect in the original assessment and act within the applicable assessment period.

The decision is consequential because the Tax Court had not directly resolved when an IRS calculation error makes an assessment “imperfect” under §6204. The Court adopted the approach already used by the Second, Seventh, and Ninth Circuits.

At the same time, the outcome largely follows established appellate precedent. Hough Beck & Baird was based in Washington, so an appeal would ordinarily go to the Ninth Circuit. The Ninth Circuit had already approved a supplemental assessment in materially similar circumstances.

Key Facts

Hough Beck & Baird Inc. is a Seattle landscape architecture firm.

The company timely filed Form 941 for the quarter ending March 31, 2021. It correctly reported federal employment tax of $121,003 and made three deposits totaling the same amount.

The company did not claim an employment tax credit.

The IRS nevertheless treated the company as entitled to a credit. It assessed the company’s employment tax liability as zero and treated the $121,003 in deposits as an overpayment.

The IRS refunded $121,003 to the company, plus $89 of interest.

After learning about the refund, the company’s accountant contacted the IRS. An IRS representative stated that the refund resulted from COVID-related employee retention credits available to certain employers.

In May 2023, the IRS sent Letter 6552 stating that the company might have received a refund to which it was not entitled. The company did not respond or repay the amount.

On July 17, 2023, the IRS reversed the credit and made a supplemental assessment of $121,003. The IRS also charged $12,582 of interest as of that date.

The company did not pay the assessed balance.

In April 2024, the IRS issued a final notice of intent to levy. The company requested a collection due process hearing and disputed the underlying liability.

The IRS Independent Office of Appeals sustained the proposed levy. The company then petitioned the Tax Court.

Statutory Framework

Section 6201 authorizes the IRS to determine and assess taxes imposed by the Internal Revenue Code.

An assessment records the taxpayer’s liability in the government’s accounts. When the IRS rejects the liability shown on a return, it may calculate and record a different amount.

Section 6204 permits the IRS to make a supplemental assessment when an existing assessment is “imperfect or incomplete in any material respect.”

A supplemental assessment generally must comply with the three-year assessment limitation period under §6501.

After making a timely assessment, the IRS generally has ten years to collect the liability under §6502.

Section 7405 separately authorizes the government to file a civil action to recover an erroneous refund. Different limitation periods apply to those suits under §6532(b).

The dispute concerned which recovery mechanism applied. The company argued that the IRS had issued an erroneous refund after the tax was correctly assessed and paid. The IRS argued that its original assessment was materially defective because it recorded the liability as zero.

Arguments

Taxpayer argued:

• The company correctly reported and fully paid its employment tax liability.

• The original assessment was complete and accurate in all material respects.

• The IRS later returned money that the company had already paid.

• Once a correctly assessed tax has been paid, the liability is extinguished.

• The refund created a separate erroneous refund claim rather than a continuing employment tax liability.

• The government could recover the money only by filing a civil erroneous refund action under §7405.

• Because the government did not file such an action, the IRS could not collect the amount through a levy.

Government argued:

• The IRS did not correctly assess the company’s reported employment tax liability.

• The IRS mistakenly applied a credit and assessed the liability as zero.

• The zero assessment understated the actual liability by the entire $121,003 reported on the return.

• That error made the original assessment imperfect in a material respect.

• Section 6204 authorized the IRS to correct the error through a supplemental assessment.

• The timely supplemental assessment supported the IRS’s administrative collection action.

Court’s Reasoning

• The IRS recorded the company’s original employment tax assessment as zero. It did not merely issue a refund after correctly assessing the reported liability.

• The zero assessment resulted from the IRS’s mistaken application of an employment tax credit that the company had never claimed.

• The assessment understated the company’s liability by $121,003, which represented the full amount shown on the company’s return.

• An assessment that records no liability when the taxpayer actually owes $121,003 contains a material defect.

• Section 6204 does not limit supplemental assessments to taxpayer errors or newly discovered facts. The provision also applies when the IRS itself causes the material defect.

• The Ninth Circuit’s decision in Brookhurst, Inc. v. United States closely matched the facts. There, the IRS mistakenly assessed employment taxes at an amount below the amount reported and paid, issued a refund, and later made a supplemental assessment. The Ninth Circuit upheld the reassessment and collection by levy.

• The Seventh Circuit reached a similar result in United States v. Frontone. The IRS miscalculated the taxpayers’ liability, issued a refund, and later made an accurate supplemental assessment. The Court treated the continuing claim as one for the original tax liability.

• The Second Circuit also recognized in Johnson v. United States that the IRS may use a supplemental assessment to replace an invalid or defective original assessment.

• These cases establish that an IRS calculation error can make an assessment imperfect or incomplete in a material respect.

• The company relied heavily on O’Bryant v. United States, but the Tax Court found that case materially different.

• In O’Bryant, the IRS correctly assessed the negotiated tax liability and the taxpayers paid it in full. The IRS later posted the payment twice and issued a refund because its records incorrectly showed an overpayment.

• The error in O’Bryant concerned the posting of a payment, not the assessment amount. The original assessment remained correct.

• Hough Beck & Baird’s account presented the opposite sequence. The IRS first calculated and recorded the tax liability incorrectly, then issued a refund because the defective assessment created an apparent overpayment.

• The distinction determines the available recovery mechanism. A refund caused by a defective assessment may support a supplemental assessment. A refund caused solely by a payment-posting error may require an erroneous refund action.

• The company’s original payment did not extinguish the liability because the IRS returned the same amount after incorrectly recording the liability.

• The ultimate source of the government’s claim remained the company’s first-quarter 2021 employment tax liability. The government was not attempting to collect a new or unrelated obligation.

• The IRS made the supplemental assessment within the applicable assessment period.

• The supplemental assessment therefore supported the proposed levy under the ordinary collection rules.

Result

The Tax Court granted the IRS’s motion for summary judgment, denied the company’s cross-motion, and sustained the proposed levy.

The Takeaway

Tax professionals should first figure out why the IRS issued an erroneous refund before assuming a lawsuit is needed. If the assessment was seriously wrong, the IRS may be able to fix it under §6204 and use its usual collection process.

This decision does not remove the difference between reassessments and erroneous refund lawsuits. The key difference now depends on the type of accounting error, not just on whether the taxpayer got money from the IRS.

List of Citations

• §6201: Authorizes the IRS to determine and assess federal taxes.

• §6203: Governs the method of assessment by recording the taxpayer’s liability.

• §6204(a): Authorizes a supplemental assessment when an assessment is materially imperfect or incomplete.

• §6501(a): Generally requires the IRS to assess tax within three years after the return is filed.

• §6502(a)(1): Generally gives the IRS ten years after assessment to collect the liability by levy or Court proceeding.

• §7405: Authorizes the government to bring a civil action to recover an erroneous refund.

• §6532(b): Establishes the limitation period for erroneous refund suits.

• United States v. Galletti, 541 U.S. 114 (2004): Explains that an assessment records the taxpayer’s liability in the government’s books.

• Brookhurst, Inc. v. United States, 931 F.2d 554 (9th Cir. 1991): Upholds a supplemental assessment after the IRS materially understated employment tax and issued a refund.

• United States v. Frontone, 383 F.3d 656 (7th Cir. 2004): Treats a refund resulting from an understated assessment as part of the original tax liability rather than as a separate refund claim.

• Johnson v. United States, 123 F.3d 700 (2d Cir. 1997): Recognizes the IRS’s authority to make a supplemental assessment after a defective original assessment.

• O’Bryant v. United States, 49 F.3d 340 (7th Cir. 1995): Distinguishes an erroneous refund resulting from a duplicate payment posting from a refund resulting from an incorrect assessment.

• Estate of Wilbanks v. Commissioner, T.C. Memo. 1991-45: Applies §6204 when an earlier assessment omitted a material addition to tax.

• Golsen v. Commissioner, 54 T.C. 742 (1970): Requires the Tax Court to follow controlling precedent from the appellate circuit to which the case is appealable.

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Holding

The U.S. District Court for the Southern District of Florida found that President Trump, the IRS, and the Treasury Department were not truly on opposing sides, which is required for an Article III case. The court said the lawsuit was filed for the wrong reasons, gave nonmonetary sanctions under Rule 11, and allowed for possible monetary sanctions to cover costs caused by the parties’ actions.

Why It Matters

• This is not a routine jurisdictional ruling. The Court concluded that a sitting President cannot establish a genuine federal controversy by suing agencies that remain subject to his supervision and control.

• The order limits the legal value of the purported settlement. The parties may not cite or use the agreement as evidence of a settlement reached in the federal case.

• The Court treated the litigation process itself as sanctionable conduct. The voluntary dismissal ended the merits proceeding but did not eliminate the Court’s authority to examine Rule 11 violations and other abuses of the judicial process.

• The ruling does not decide whether every provision of the private agreement is independently valid. It addresses the absence of a judicial controversy, the improper use of the lawsuit, and the parties’ ability to characterize the agreement as a court-connected settlement.

Key Facts

Charles Littlejohn, an IRS contractor employed by Booz Allen Hamilton, unlawfully disclosed tax information associated with President Trump and thousands of other taxpayers. He pleaded guilty in 2023 and received a five-year prison sentence in January 2024.

President Trump, Donald Trump Jr., Eric Trump, and the Trump Organization sued the IRS and Treasury Department on January 29, 2026. They sought at least $10 billion under IRC §7431, which permits taxpayers to recover damages for unauthorized inspections or disclosures of tax return information.

The complaint arrived more than two years after an attorney representing Trump appeared at Littlejohn’s October 2023 plea hearing and identified Trump as a victim. IRC §7431 generally requires a taxpayer to file suit within two years after discovering the unauthorized inspection or disclosure.

The government never filed an appearance, an answer, a motion to dismiss, or any other substantive response. Instead, the parties requested additional time to discuss settlement.

The Court questioned whether it had subject matter jurisdiction because President Trump headed the executive branch and exercised authority over the defendant agencies. It ordered the parties to brief whether a genuine case or controversy existed.

Neither side submitted the required jurisdictional briefing. Plaintiffs instead voluntarily dismissed the case with prejudice on May 18, 2026.

The Justice Department then announced an agreement that included:

• A formal apology to the plaintiffs.

• A proposed $1.776 billion Anti-Weaponization Fund financed through the Treasury Judgment Fund.

• A separate Justice Department release purporting to protect Trump, his relatives, affiliated businesses, and others from broad categories of existing and potential government claims.

• Restrictions on future IRS audits and investigations involving the plaintiffs.

Acting Attorney General Todd Blanche later told Congress that the Anti-Weaponization Fund would not proceed. He did not provide the Court with the settlement for review before the dismissal.

Thirty-five former federal judges and other nonparty movants asked the Court to reopen the matter or grant related relief. They alleged that the litigation and settlement resulted from collusion and constituted a fraud on the Court.

The Court ordered the plaintiffs to respond to questions regarding collusion, adverse conduct, deception, and possible misuse of the judicial process.

Procedural Framework

Article III limits federal judicial power to genuine cases and controversies. A case must involve parties with adverse legal interests. Nominally placing parties on opposite sides of a caption does not establish adverseness when one party controls both sides of the litigation.

Federal Rule of Civil Procedure 41(a)(1) permits a plaintiff to voluntarily dismiss an action before the opposing party files an answer or motion for summary judgment. The dismissal generally ends the Court’s authority over the merits but does not eliminate jurisdiction over collateral matters such as sanctions, costs, attorney fees, and contempt.

Federal Rule of Civil Procedure 11 requires attorneys and parties to certify that filings serve a proper purpose and have a reasonable legal and factual basis. A Court may impose sanctions when a party files an action to achieve an improper objective rather than obtain a legitimate judicial resolution.

Federal courts also possess inherent authority to sanction bad-faith conduct that abuses the judicial process. Unlike Rule 11, this authority does not depend entirely on the timing and procedural requirements of a sanctions motion.

IRC §7431 authorizes damages for unauthorized inspections or disclosures of return information. The statute generally provides statutory damages of $1,000 for each unauthorized act, plus actual and punitive damages when the statutory requirements apply.

IRC §7217 prohibits specified executive branch officials from requesting that the IRS begin or terminate an audit or investigation of a particular taxpayer.

Arguments

Taxpayer argued:

• The voluntary dismissal automatically ended the Court’s jurisdiction.

• The Court could not continue reviewing the underlying dispute after plaintiffs dismissed the case.

• The lawsuit involved ordinary settlement activity between parties that had the power to resolve their disputes without judicial involvement.

• Donald Trump Jr., Eric Trump, and the Trump Organization held claims distinct from President Trump’s official authority over the executive branch.

• The parties remained sufficiently adverse because plaintiffs sought damages from government agencies.

• Rule 11 restricted the Court’s ability to impose sanctions after the voluntary dismissal.

• The nonparty movants raised political grievances rather than legally cognizable objections.

Government argued:

• The government filed no appearance or substantive position in the litigation.

• Justice Department officials defended the agreement publicly but did not present the agreement or the government’s legal analysis to the Court.

• Acting Attorney General Blanche asserted that the dismissal left no judge or mechanism available to review the agreement.

Nonparty movants argued:

• President Trump controlled the officials of the IRS, the Treasury Department, and the Justice Department who acted for the defendants.

• The parties filed the lawsuit to create legal cover for an agreement they had already decided to reach.

• The government abandoned defenses that it had asserted in similar unauthorized disclosure cases.

• The proposed settlement provided remedies far beyond the relief available under IRC §7431.

• The litigation lacked genuine adverseness and therefore never presented an Article III case or controversy.

• Plaintiffs and government officials used the lawsuit to give apparent judicial legitimacy to an agreement involving taxpayer funds, audit restrictions, and broad governmental releases.

Court’s Reasoning

• President Trump controlled the defendant agencies. The Constitution places executive power in the President. The Treasury Department and IRS operate within the executive branch, and their senior officials remain subject to presidential supervision and removal authority.

• The administration’s executive order reinforced that control. Executive Order 14215 required executive branch employees to follow legal interpretations established by the President and Attorney General, including positions advanced in litigation. The Court concluded that the order restricted the government defendants’ ability to take a litigation position contrary to President Trump.

• The parties’ conduct showed no genuine adverseness. The IRS and Treasury Department never appeared, defended the case, disputed damages, raised the statute of limitations, or challenged whether the government was the proper defendant. The same agencies had vigorously asserted those defenses in similar disclosure litigation brought by private taxpayers.

• The other plaintiffs did not create an independent controversy. Donald Trump Jr., Eric Trump, and the Trump Organization shared counsel, interests, ownership relationships, and settlement objectives with President Trump. They did not present distinct positions that restored a sense of adversity.

• The settlement extended far beyond the pleaded tax disclosure claims. The agreement proposed a $1.776 billion fund for undefined weaponization and lawfare claims involving unidentified third parties. A separate release purported to restrict audits, investigations, and other government actions involving the plaintiffs and their affiliates.

• The timing supported an improper-purpose finding. Plaintiffs filed the case after President Trump returned to office. The government remained silent. The parties dismissed the action shortly after the Court ordered jurisdictional briefing. They then announced the settlement without submitting it for judicial review.

• The Court viewed the lawsuit as a mechanism for legitimizing a predetermined agreement. Because the parties lacked adverse interests, the lawsuit could not provide the judicial foundation the agreement appeared designed to claim.

Article III Adverseness

The Court treated adverseness as a constitutional requirement rather than a discretionary procedural consideration.

A federal Court may decide only disputes between parties with genuinely conflicting legal interests. Courts must examine the parties’ actual relationship and cannot rely solely on labels such as plaintiff and defendant.

The Court applied decisions holding that Article III jurisdiction does not exist when:

• The parties seek the same result.

• One party controls the nominal opposing party.

• The litigation asks a Court to approve or validate an agreed outcome rather than resolve an actual dispute.

• A party effectively operates as the controlling litigant on both sides.

President Trump served as both the lead plaintiff and the official responsible for supervising the executive agencies named as defendants. The Court concluded that this authority prevented the IRS and Treasury Department from functioning as genuinely adverse litigants.

The Court therefore found that the action never presented a case or controversy and that no party could properly obtain judicial approval of the settlement through the proceeding.

Rule 11 Sanctions

The voluntary dismissal did not prevent the Court from considering sanctions. Rule 11 violations occur when a party files the offending pleading. A later dismissal does not erase the violation.

The Court found that plaintiffs used the lawsuit for an improper purpose. It concluded that the action sought to confer judicial legitimacy on a settlement rather than to obtain an adjudication of a genuine dispute.

Rule 11 limited the Court’s ability to impose monetary sanctions on its own initiative because plaintiffs dismissed the case before the Court issued a sanctions show-cause order. The Court therefore imposed nonmonetary sanctions under Rule 11:

• Attorney Alejandro Brito was referred to The Florida Bar for possible disciplinary review.

• Daniel Epstein may not obtain pro hac vice admission in the Southern District of Florida for one year or until further Court order.

• The parties may not describe, introduce, cite, or rely on the purported agreement as evidence of a settlement reached in the federal case.

The final restriction applies to President Trump, Donald Trump Jr., Eric Trump, the Trump Organization, the IRS, the Treasury Department, and related agents, affiliates, representatives, and persons acting under their control.

Inherent-Authority Sanctions

The Court separately invoked its inherent authority, which permits sanctions for subjective bad faith and broader abuses of the judicial process.

The Court found that plaintiffs acted in bad faith by:

• Filing claims that appeared untimely.

• Seeking damages with no demonstrated relationship to the remedies authorized by IRC §7431.

• Using the litigation to obtain benefits unavailable through an ordinary adjudication.

• Dismissing the case after the Court raised jurisdictional questions.

• Announcing a purported settlement without permitting judicial review.

The Court also criticized the government’s failure to defend the public fisc, assert available defenses, or explain its legal position.

The Court concluded that monetary sanctions could include attorneys' fees incurred by amici whose participation became necessary due to the parties’ conduct.

The court-appointed amici declined reimbursement. Other amici, including former federal judges who filed the motion that led to the order, may submit reimbursement requests. Plaintiffs may respond to any such request.

The order also directed the clerk to send copies to:

• The Florida Bar regarding Alejandro Brito.

• The New York disciplinary authorities, where Todd Blanche is admitted.

• The District of Columbia disciplinary authorities, where Stanley Woodward is admitted.

The Court did not impose a final monetary amount in the order.

Limits of the Decision

The order does not adjudicate the underlying merits of the unauthorized disclosure claims. Plaintiffs dismissed those claims with prejudice before the government responded.

The Court did not definitively decide whether the settlement agreement remains enforceable as a purely private executive branch agreement. It instead prohibited the parties from treating it as a settlement reached through the federal lawsuit.

The Court also declined to make a final determination under Rule 60(d)(3), which permits relief for fraud on the Court. It left open the possibility of future proceedings under that rule.

The decision comes from a federal district Court. It does not establish binding precedent outside the case in the same manner as a federal appellate decision.

Result

The Court found no Article III case or controversy, imposed nonmonetary Rule 11 sanctions, permitted possible monetary sanctions, and barred the parties from using the agreement as evidence of a Court settlement.

The Takeaway

Tax professionals should see this order mainly as a decision about constitutional issues and litigation sanctions, not as a detailed interpretation of IRC §7431. The main point is that the court refused to accept a tax settlement when the plaintiff controlled the government agencies being sued and there was no real adversarial review.

List of Citations

• U.S. Constitution, Article III, §2: Limits federal judicial power to genuine cases and controversies.

• U.S. Constitution, Article II, §1: Vests executive power in the President and supported the Court’s control analysis.

• IRC §7431: Authorizes civil damages for unauthorized inspections or disclosures of tax return information.

• IRC §7431(d): Establishes the two-year limitations period for unauthorized disclosure actions.

• IRC §7217: Prohibits executive branch influence over specific IRS audits and investigations.

• IRC §7803(a): Governs appointment and removal authority for the IRS Commissioner.

• Federal Rule of Civil Procedure 11: Authorizes sanctions for filings presented for an improper purpose.

• Federal Rule of Civil Procedure 41(a)(1): Governs voluntary dismissals before a defendant files an answer or summary judgment motion.

• Federal Rule of Civil Procedure 60(d)(3): Preserves judicial authority to address fraud on the Court.

• Lord v. Veazie, 49 U.S. 251 (1850): Rejects jurisdiction where nominally adverse parties share the same interests.

• Muskrat v. United States, 219 U.S. 346 (1911): Requires actual adverse parties for an Article III controversy.

• Aetna Life Insurance Co. v. Haworth, 300 U.S. 227 (1937): Defines a justiciable controversy as concrete and involving adverse legal interests.

• GTE Sylvania Inc. v. Consumers Union, 445 U.S. 375 (1980): Explains that no controversy exists when parties seek the same result.

• South Spring Hill Gold Mining Co. v. Amador Medean Gold Mining Co., 145 U.S. 300 (1892): Rejects litigation when the same persons control both sides.

• Cooter & Gell v. Hartmarx Corp., 496 U.S. 384 (1990): Holds that voluntary dismissal does not eliminate Rule 11 jurisdiction.

• Absolute Activist Value Master Fund Ltd. v. Devine, 998 F.3d 1258 (11th Cir. 2021): Confirms that courts retain jurisdiction over collateral sanctions issues after dismissal.

• Chambers v. NASCO Inc., 501 U.S. 32 (1991): Recognizes the federal courts’ inherent authority to sanction bad-faith litigation conduct.

• Trump v. Clinton, 640 F. Supp. 3d 1329 (S.D. Fla. 2022): Supports sanctions for litigation filed for an improper or performative purpose.

Holding

The DOJ asked for a new hearing after the Seventh Circuit said the claim of right doctrine could be used to exclude certain payments from income. The court sent Hyatt’s loyalty fund case back to the Tax Court.

Why It Matters

• This is consequential because the government frames the panel decision as a threat to the basic definition of gross income under §61.

• The petition argues that the claim-of-right doctrine is a rule of income inclusion, not a taxpayer election to exclude controlled receipts from income.

• The dispute matters beyond Hyatt because many businesses receive and administer funds tied to customer programs, vendor arrangements, rebates, deposits, or restricted-use accounts.

• The government’s concern is administrative. If the panel decision stands, taxpayers may try to avoid income recognition by denying a claim of right while still controlling and benefiting from the funds.

Key Facts

The IRS issued Hyatt a notice of deficiency asserting an additional $70 million in corporate income tax for the years between 2005 and 2012.

The deficiencies arose from payments made into a fund used to administer Hyatt’s Gold Passport customer loyalty program. Most payments came from third-party hotel owners.

Hyatt administered the fund. The IRS determined that Hyatt improperly omitted those payments from income.

The Tax Court addressed three issues:

• whether payments into the fund were income to Hyatt

• whether the IRS could make an accounting adjustment based on Hyatt’s earlier omission of that income

• whether Hyatt could use a Treasury regulation to reduce the amount it had to include in income

The Tax Court ruled for the Commissioner on the income inclusion and regulation issues. It ruled against the Commissioner on the accounting adjustment issue.

Hyatt appealed. The Seventh Circuit did not resolve the Tax Court’s analysis of the trust fund doctrine. It instead held that the claim of right doctrine may provide an independent and broader basis for income exclusion.

The panel remanded the case to the Tax Court to consider whether the fund payments were income to Hyatt under the claim-of-right doctrine.

Statutory or Regulatory Framework

Section 61 defines gross income broadly as all income from whatever source derived. The claim of right doctrine generally requires inclusion of income when a taxpayer receives earnings under a claim of right and without restriction on disposition, even if the taxpayer may later have to repay the money.

The trust fund doctrine can exclude funds from income when a taxpayer merely holds funds for another party and lacks beneficial ownership. The DOJ’s petition treats that doctrine as a narrow exclusion and argues that the panel’s claim-of-right analysis would make it largely unnecessary.

Arguments

Taxpayer argued:

• Hyatt did not have to include the loyalty fund payments in income.

• The claim of right doctrine provided an independent basis for excluding the payments.

• The fund payments should not be treated as Hyatt’s income if Hyatt lacked the required claim of right over the money.

Government argued:

• The claim of right doctrine is a rule of inclusion.

• Failure to satisfy the claim-of-right test does not automatically exclude a receipt from income.

• The panel's decision conflicts with Supreme Court precedent that broadly defines income.

• Indianapolis Power did not convert the claim-of-right doctrine into an exclusionary rule.

• The decision would allow taxpayers to control and benefit from funds while denying income treatment by disclaiming a claim of right.

Court’s Reasoning

The petition challenges the panel’s reasoning. It does not announce a new Court ruling.

The DOJ makes these points:

• The claim-of-right doctrine identifies one situation in which a taxpayer must include disputed receipts in income for the year of receipt.

• The doctrine does not define the outer boundary of income.

• The panel allegedly confused a sufficient condition for income inclusion with a necessary condition for income recognition.

• The DOJ argues that the panel revived the error of Commissioner v. Wilcox, which treated the presence of a claim of right as a condition for taxable income.

• The DOJ argues that James v. United States rejected that approach by overruling Wilcox and holding that unlawful gains can constitute taxable income even absent a bona fide claim of right.

• The DOJ contends that Indianapolis Power turned on dominion and an obligation to repay customer deposits, rather than on an exclusionary version of the claim-of-right doctrine.

• The DOJ argues that the panel's decision could weaken broader income principles grounded in control, dominion, and readily realizable economic value.

Result

The DOJ wants the Seventh Circuit to rehear the case, cancel the panel’s decision, and not allow the claim of right doctrine to be used as a way to exclude income.

The Takeaway

Tax professionals should see this as an important case about gross income, not just a loyalty program issue. The main question is whether the Seventh Circuit will let the claim of right doctrine become a broader way for taxpayers to exclude income when they handle disputed or restricted funds.

List of Citations

• §61: Defines gross income broadly as income from whatever source derived.

• Hyatt Hotels Corp. v. Commissioner, 174 F.4th 535: Seventh Circuit panel decision that the DOJ seeks to rehear.

• James v. United States, 366 U.S. 213: Central Supreme Court authority cited by the DOJ for the broad definition of income and the rejection of Wilcox.

• Commissioner v. Wilcox, 327 U.S. 404: Overruled case that treated claim of right as a condition for taxable income.

• Rutkin v. United States, 343 U.S. 130: Supreme Court case holding that unlawful gains are taxable income when the taxpayer has control and economic value.

• Commissioner v. Glenshaw Glass Co., 348 U.S. 426: Foundational case defining income as undeniable accessions to wealth, clearly realized, over which the taxpayer has complete dominion.

• Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203: Customer deposit case that the panel relied on and that the DOJ argues the panel misread.

• United States v. Skelly Oil Co., 394 U.S. 678: States the classic claim-of-right formulation and ties it to annual accounting.

• North American Oil Consolidated v. Burnet, 286 U.S. 417: Original claim-of-right case requiring inclusion of income in the year of receipt despite ongoing entitlement litigation.

• Healy v. Commissioner, 347 U.S. 278: Applies the claim-of-right doctrine to salary received without restriction, even though a later repayment liability arose.

• Macias v. Commissioner, 255 F.2d 23: Seventh Circuit authority cited by DOJ as rejecting claim of right as an exclusion doctrine.

• Commissioner v. Schleier, 515 U.S. 323: Cited for the sweeping scope of gross income.

Generative AI changes how we work, but it does not change legal responsibility. A tool that quickly creates a polished memo can also make up citations, invent safe harbors, or suggest transaction structures that look right but miss the real requirements. In tax, this is not just a drafting issue—it is a compliance issue.

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People often say AI is risky because it sometimes makes things up. That is true, but it is not the whole story. AI works by guessing what is likely, while tax law relies on clear authority, rules, and checking facts. The system does not care if an answer sounds correct—it cares if you can trace it to a real law, regulation, ruling, case, or record.

The Event

Generative AI is now used to read statutes, draft memos, summarize legal sources, and help with tax analysis. It really does save time and makes complicated material easier to handle.

But this same ability also changes the risks. Large language models do not perform legal reasoning as tax professionals do. They predict what text should come next. When asked about rules like IRC §351 or §199A, the model might give an answer that looks finished but actually makes up a safe harbor, gets a Treasury Regulation wrong, or invents a precedent. The real risk is not messy output—it is a polished answer that is actually wrong.

Courts have already seen what can go wrong. There are examples of AI-generated legal filings that cited fake cases, leading to sanctions, thrown-out memos, and disciplinary actions. In tax, these mistakes are even more serious because the system relies on people following the rules themselves. Fake authority does not just mislead a Court—it also adds misinformation to a system that is already very complex.

This issue became even more important after Loper Bright. Now that Chevron has been overruled, courts must interpret ambiguous laws on their own, without relying on agency explanations. This means the actual text, structure, legislative history, and real records matter even more. AI can quickly find and summarize lots of material, but finding information is not the same as interpreting it. If AI invents a Senate report or Treasury explanation, it is not just harmless background—it can actually distort the record.

The Real Driver

The real reason behind these changes is not technology itself—it is the incentives people face.

Tax professionals are under pressure to work faster, cut costs, and get more done in less time. AI fits these needs well. It makes it seem like you have more help. You can ask for a memo, a transaction outline, or a list of citations and get something that looks professional. Because the output looks smart, people are more likely to trust it without checking.

That is the trap. AI is not a junior associate or a paralegal. It is not someone you can supervise like a regular team member. You give it prompts, but it is not trained in the same way. It lacks loyalty, cannot exercise judgment, and does not understand what happens if it is wrong. Treating AI like a legal assistant is misleading and reduces accountability.

The better model is instrumentality. It is better to think of AI as a tool that helps people do more. But unlike a calculator or a word processor, AI can create legal claims. If a calculator makes a mistake, you can usually see it. If AI makes a mistake, it might look convincing even though it is wrong. Because of this, the human practitioner must check every legal point before it goes out. As drawn from United States v. Boyle, reliance on another actor does not excuse failure to perform a non-delegable duty. The source material applies that principle to AI verification. Checking whether a case exists, whether a quotation is accurate, and whether a cited authority supports the proposition is not the kind of judgment that can be outsourced to a machine. It is ordinary professional diligence.

Circular 230 points in the same direction. Section 10.22 requires due diligence in determining the correctness of representations made to Treasury. A large language model is not a person who can be supervised within the meaning of that framework. The current rules were built to account for human error and misconduct. AI changes scale. One practitioner can make an isolated mistake. One AI workflow can generate thousands of plausible errors.

The Pattern

The recurring pattern is institutional lag.

A new tool is used in professional practice before rules and controls are in place. People start using it because it saves time. Firms allow it because it cuts costs. Regulators and courts react only after problems surface in filings, client advice, or public records. By that point, the issue has grown from a single mistake to a bigger process risk.

Tax is especially at risk because technical details matter a lot. AI is good at getting the form right. For example, it can describe a §351 exchange with property transferred, stock received, and control met. But tax law also considers whether the deal has real economic substance, a business purpose, and an actual economic impact. These questions depend on intent, context, and real facts. AI can replicate the language of these rules, but it cannot determine whether the facts actually fit.

That produces synthetic compliance. A transaction can appear properly assembled yet fail the doctrine that matters. Under IRC §7701(o), economic substance requires meaningful economic change and substantial non-tax purpose. A model can draft business justifications from common patterns, but those justifications are not facts. They are generated language. The same problem appears in step transaction analysis. AI can sequence steps neatly. A Court may collapse them if they were part of a fixed plan. This pattern also shows up in jurisdictional analysis. AI often misses important differences because it learns from the most common patterns in its training data. Federal tax rules might be overrepresented, while state, local, and international rules are less visible. This can cause mistakes, such as using the wrong Court circuit, treating OECD guidance as U.S. law, or mixing up VAT with U.S. sales tax. Tax law needs specific answers, but AI often turns specifics into general responses.

Implication

The responsibility stays with the practitioner, not the tool.

If AI creates a fake authority, the Court does not punish the software. If client data is put into a public model, the privilege problem is not the model’s fault. If an AI-generated structure fails the economic substance test, the machine is not penalized under §6662 or subject to promoter issues under §6700. The person is responsible for the submission, the advice, and any breach of confidentiality.

The privilege issue is especially clear. Most generative AI tools run in the cloud. Putting client facts, return positions, or tax strategies into these tools can send sensitive information to a third-party provider. If that provider logs, stores, or reuses the data, confidentiality can be lost. The Kovel analogy does not fix this. Kovel protects some non-lawyer helpers who work under a confidential relationship. Public AI tools do not fit this model because they lack agency, loyalty, or a clear confidentiality framework.

IRC §7216 brings up a similar concern when tax return information is shared without permission. The source material says this is more than just an ethics issue—it is a structural problem caused by data being stored, hidden, or reused. The main lesson is simple: a public AI prompt box is not a private conference room, no matter how friendly it seems.

Lessons for Practitioners

• When using AI, the real work is in verifying the results. The draft might come from the tool, but responsibility for accuracy lies with the practitioner.

• Just because something sounds fluent does not mean it is reliable. A polished list of citations is risky because it makes it look like someone has already checked it.

• Anti-abuse rules show the limits of drafting based only on form. AI can put steps together, but economic substance and step transaction analysis rely on facts, purpose, and context.

• Confidentiality risks begin as soon as you enter information. Putting client facts into a public or poorly controlled AI system can cause privilege and disclosure problems before you even draft a memo.

• Governance is more than just a policy memo in a folder. Good controls include keeping records of source checks, usage logs, and version histories; using restricted tools; having zero-retention contracts; and ensuring a human reviews everything before it goes to a client, Court, or agency.

Human Element

When people are under pressure, they are more likely to take shortcuts if those shortcuts look professional. AI makes this easier by hiding the rough parts of early drafts. The draft comes out looking finished and confident, which makes people trust it before they have checked it.

Forward View

The continuing pattern is not prohibition. AI will remain in tax practice because the efficiency gains are too large to ignore. The profession will not stop using tools that can summarize material, organize research, and accelerate drafting. The question is whether those tools are placed within a system that makes errors harder to detect. That system must make human review the main checkpoint. Courts might require proof that AI-assisted filings have been checked. Treasury could update Circular 230 to cover generative AI. Firms might limit public tools and require verified databases for legal work. All these steps lead to the same point: AI can help with tax work, but it cannot take on legal responsibility.

The tax system can handle faster tools, but it cannot handle unverified information that appears to be professional judgment.

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Holding

The Tax Court agreed with the IRS and denied the taxpayer’s deductions for travel, meals, entertainment, security, telephone, and duplicate fees. However, it allowed some deductions for bank charges, dues and subscriptions, taxes and licenses, and postage. The final amount owed will be calculated under Rule 155.

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Why It Matters

• This is a routine substantiation case, but it is useful because the taxpayer had receipts, credit card records, and spreadsheets. Those records still failed where they did not prove business purpose.

• The opinion reinforces that travel with friends, romantic partners, or family members invites scrutiny when the taxpayer claims business deductions.

• Post-examination reconstruction had limited value. The Court gave little weight to emails created in 2024 to support travel taken in 2021.

• The Court allowed expenses when the taxpayer tied them directly to the business. It rejected expenses when the evidence showed personal use or no allocation.

Key Facts

Gregory Rodrigues filed a 2021 federal income tax return reporting $575,232 of W-2 wages from Ecologic Brands.

He also reported income and expenses from Western Land Financial, LLC, a real estate investment company he founded in 2003.

Western Land Financial reported:

• $1,999 of gross receipts.

• $52,426 of expenses.

• A Schedule C loss of $50,427.

The disputed deductions included:

• $16,206 for travel.

• $6,218 for meals and entertainment.

• $12,683 for “Other” expenses.

The “Other” expenses included bank charges, dues and subscriptions, fees, postage, security, taxes and licenses, and telephone expenses.

Rodrigues traveled in 2021 to West Palm Beach, Miami, San Jose del Cabo, Carmel, Healdsburg, and California’s Central Valley. He also booked a canceled trip to Austin and a later “Backroads” trip scheduled for 2022.

He claimed the travel was related to real estate investment activity, including efforts to sell land in Anza, California, and interests in land in Holbrook, Arizona.

Some travel involved members of a Harvard Business School friend group called the Loveshack Investors. Some members worked in real estate.

Jennifer George, an attorney employed by PwC, accompanied Rodrigues on several trips. Rodrigues and George shared a residence and had a child together. They did not have a retainer agreement for legal services during 2021.

Rodrigues did not maintain contemporaneous travel logs. He later prepared spreadsheets using receipts, credit card records, and bank statements.

Statutory or Regulatory Framework

§162 allows deductions for ordinary and necessary business expenses. “Ordinary” means common in the taxpayer’s business. “Necessary” means appropriate and helpful to that business.

§262 disallows deductions for personal, living, or family expenses.

§274(d) imposes strict substantiation rules for travel, meals, entertainment, gifts, and listed property. A taxpayer must prove the amount, time, place, business purpose, and, for entertainment or gifts, the business relationship.

§6001 and the regulations require taxpayers to keep records sufficient to establish their deductions.

The Cohan rule allows courts to estimate some business expenses when the taxpayer proves the expense occurred but not the exact amount. The rule does not apply when strict substantiation is required or when the Court lacks a reasonable basis for allocation.

Arguments

Taxpayer argued:

• The travel expenses related to Western Land Financial’s real estate business.

• The trips involved meetings with investors and real estate professionals.

• George accompanied him as his attorney.

• The Loveshack Investors trips had a business purpose because some members were real estate professionals.

• The “Other” expenses were ordinary and necessary expenses of Western Land Financial.

Government argued:

• Rodrigues failed to prove that the disputed expenses were paid or business-related.

• The travel appeared personal.

• The records did not satisfy §274(d).

• Several expenses were personal, duplicative, or inadequately allocated.

Court’s Reasoning

• The Court accepted that Rodrigues paid many of the expenses. Payment alone did not establish deductibility.

• The Court did not find Rodrigues’s spreadsheets reliable as proof of business purpose.

• The Court found his testimony regarding the business purpose of the travel and meals not credible.

• The Court treated the travel as predominantly personal because it involved friends and George, with whom Rodrigues shared a residence and child.

• The Court rejected the claim that George traveled as his attorney because there was no documentary evidence of an attorney-client relationship for the trips.

• The Court gave little weight to 2024 emails sent to Loveshack Investors members because they were not contemporaneous with the 2021 travel and were created after the IRS examination began.

• The Court found that a 2005 concept plan for the Anza property did little to prove that 2021 travel had a business purpose.

• The Court held that Rodrigues failed the §274(d) business-purpose requirement for travel and meals.

• The Court allowed bank charges because Rodrigues substantiated $120 in wire transfer fees associated with real estate loans.

• The Court allowed $4,758 of dues and subscriptions because the record tied the HOA fees, Wall Street Journal subscription, and Ring subscription to Western Land Financial’s business or property security.

• The Court denied a separate $168 fee deduction because it duplicated amounts included in taxes and licenses.

• The Court allowed $577 for substantiated taxes and licenses.

• The Court allowed $336 for postage because the record linked the expense to the shipping and notarization of real estate documents.

• The Court denied the $216 security expense because Rodrigues failed to substantiate its business purpose.

• The Court denied telephone expenses because the charges included personal cable television services and Rodrigues did not provide a reasonable allocation between personal and business use.

Result

Decision will be entered under Rule 155 after allowing limited deductions and sustaining the IRS’s remaining disallowances.

The Takeaway

This decision is a clear reminder that receipts and spreadsheets alone are not enough to prove a deduction unless they show a business purpose. Accountants should treat travel, meals, mixed-use subscriptions, and home-related expenses as high-risk for Schedule C unless the taxpayer has up-to-date records and a solid way to separate business from personal use.

List of Citations

• Welch v. Helvering: burden-and-necessity standard for business expenses.

• INDOPCO, Inc. v. Commissioner, deductions are a matter of legislative grace.

• Cohan v. Commissioner, estimation allowed only when the record provides a basis.

• Vanicek v. Commissioner, estimation requires a reasonable evidentiary foundation.

• Sanford v. Commissioner: strict substantiation limits on §274(d) expenses.

Holding

The Tax Court refused to allow the proposed levy. It denied the IRS’s request for summary judgment, treated the taxpayer’s response as a cross-motion, and ruled in favor of the taxpayer.

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Why It Matters

• The decision limits the IRS's collection discretion when the DOJ has already resolved the same tax liabilities through a settlement agreement.

• The ruling does not invalidate restitution-based assessments, or RBAs. It limits how the IRS may collect them when collection conflicts with a later DOJ compromise.

• The case turns on timing and consistency, not double collection. The Tax Court accepted that payments against RBAs would be credited against civil tax liabilities.

• The practical point is procedural. Appeals must consider whether a levy is more intrusive than necessary when the government has already agreed to installment payment rights.

Key Facts

Joseph White owed federal income tax liabilities for 2000 through 2011.

In 2017, he was convicted under §7201 for willfully attempting to evade payment of those taxes. The sentencing Court ordered $1.2 million in restitution to the IRS. The IRS then made RBAs under §6201(a)(4) for the same $1.2 million.

In 2022, DOJ brought a civil collection action under §6502 to reduce White’s unpaid 2000 through 2011 tax liabilities to judgment. By August 2023, the liabilities had grown to about $1.893 million with interest and additions to tax.

DOJ and White settled that action in September 2023. White agreed to a judgment of about $1.893 million. DOJ agreed to treat the judgment as satisfied and take no further collection action for the 2000 through 2011 income tax liabilities if White paid $1.6 million by July 1, 2027, under a specified payment plan.

White stayed current on the payment plan. By March 2026, he had paid almost $1 million.

While the civil collection case was pending, the IRS issued a levy notice to collect about $1.102 million of unpaid RBAs. Appeals sustained the levy.

Statutory Framework

Section 6201(a)(4) allows the IRS to assess and collect criminal tax restitution as if it were tax. An RBA is a tax collection assessment issued pursuant to a restitution order. Section 6201(a)(4)(C) bars the taxpayer from challenging the amount of restitution by disputing the underlying tax liability in a tax proceeding.

Section 6330 requires Appeals to verify legal requirements, consider issues the taxpayer raises, and decide whether the proposed collection action balances efficient collection with the taxpayer’s legitimate concern that collection be no more intrusive than necessary.

Arguments

Taxpayer argued:

• The RBAs matched the same unpaid income tax liabilities for 2000 through 2011 that were covered by the DOJ settlement.

• The levy conflicted with the settlement because DOJ agreed to accept $1.6 million over time.

• Immediate collection of the levy would disregard his contractual right to pay through July 2027.

• The levy would be more intrusive than necessary.

Government argued:

• The RBAs were separate and distinct from White’s civil income tax liabilities.

• DOJ’s settlement resolved only the civil tax liabilities reduced to judgment.

• Appeals properly sustained the levy because White could not challenge the restitution assessment under §6201(a)(4)(C).

• White did not provide financial information supporting a collection alternative.

Court’s Reasoning

• The Tax Court reviewed the Appeals for abuse of discretion because White could not challenge the underlying RBA liability in the CDP proceeding.

• The Court rejected White’s double collection theory. The IRS could not collect the same tax loss twice, but any RBA collection would be credited against the related tax liabilities.

• The Court found that the RBAs were distinct in assessment procedure, but not separate in economic substance. They represented the same 2000-2011 income tax liabilities.

• DOJ had already agreed to a different collection mechanism for those same liabilities. The settlement gave White until July 1, 2027, to complete payment.

• Appeals sustained a levy that would have collected the remaining balance immediately, and potentially more than the unpaid balance under the settlement.

• The settlement officer failed to account for White’s ongoing compliance with the DOJ payment plan.

• The levy conflicted with the government’s settlement and was more intrusive than necessary under §6330(c)(3).

Result

Decision entered for White, and the proposed levy was not sustained.

The Takeaway

This case is not a sweeping victory for taxpayers against restitution assessments. Instead, it says the IRS cannot use an RBA levy to get around a DOJ settlement that covers the same tax debts and payment plan.

Practitioners should pay attention to how the tax debts, the settlement terms, and the taxpayer’s payment plan fit together. This is the important part of the case, since it shows that different parts of the government may not always coordinate their actions.

List of Citations

• Klein v. Commissioner, 149 T.C. 341, supports the treatment of RBAs and limits on interest or additions assessed on restitution.

• Carpenter v. Commissioner, 152 T.C. 202, addresses RBA procedures and limitations.

• Zuch v. Commissioner, 145 S. Ct. 1707, cited for mootness after liabilities were fully paid.