Tax Coda Weekly Digest — December 21, 2025
This week showed how quietly risk can build before it surfaces all at once.
Economic substance waited until litigation made it unavoidable. Transfer pricing edged closer to a permanent enforcement tool. Courts shut down claims that stretched statutes past recognition. And enforcement data showed where attention is actually landing.
1. When Economic Substance Becomes a Litigation Surprise
We looked at how the economic substance doctrine now appears late, not early. It no longer announces itself at the planning stage. It shows up after positions harden and facts settle. By the time it appears, it is no longer a theory. It is leverage.
Why It Matters:
Economic substance is no longer telegraphed during examinations.
Taxpayers lose the chance to course-correct early.
Litigation risk increases even for otherwise technical compliance.
Takeaway:
Economic substance has learned to wait.
2. Facebook Reignites Transfer Pricing Battle With the IRS
Facebook returned to court over periodic transfer pricing adjustments tied to intangible migration. The dispute tests whether the IRS can impose ongoing adjustments without revaluing each year independently. If sustained, the approach moves from theory to standing enforcement practice.
Why It Matters:
Periodic adjustments could become routine audit tools.
Long-tail exposure increases for multinational groups.
Documentation alone may not contain valuation risk.
Takeaway:
Transfer pricing volatility is shifting from episodic to structural.
3. Temnorod v. Commissioner
The Tax Court rejected Broadvox’s attempt to claim bankruptcy-related losses outside the statutory framework. The court found the losses were not deductible in the manner claimed and did not meet timing or character requirements. The IRS position prevailed.
Why It Matters:
Confirms strict limits on bankruptcy loss deductions.
Reinforces statutory boundaries for timing and characterization.
Signals little tolerance for creative loss repackaging.
Takeaway:
Bankruptcy does not rewrite loss deduction rules.
4. IRS-CI Flags $10.6 Billion in Financial Crime
IRS Criminal Investigation reported $10.6 billion in financial crime tied to tax, fraud, and money laundering cases. The report showed increased referrals, asset seizures, and joint operations with other agencies. Digital assets and offshore activity remained central themes.
Why It Matters:
Enforcement focus continues shifting toward complex financial structures.
Criminal tax risk extends beyond traditional return issues.
Visibility into priorities helps assess downstream audit exposure.
Takeaway:
IRS-CI is not shrinking its footprint.
5. Reynolds v. United States
A federal court halted discovery after a taxpayer sued the government to claim a dog as a dependent. The court paused proceedings pending resolution of threshold legal issues. The ruling stopped what the court viewed as unnecessary procedural expansion.
Why It Matters:
Courts continue enforcing limits on discovery scope.
Novel claims do not guarantee procedural latitude.
Judicial patience remains finite in tax litigation.
Takeaway:
Creative arguments do not earn unlimited process.
Overall Takeaway
This week was about timing and restraint. Doctrines waited. Enforcement sharpened quietly. Courts narrowed claims before they could sprawl. The system did not move fast, but it moved deliberately.