Tax Coda Weekly Digest — January 18, 2026
This week was about lines being redrawn and enforced. The IRS moved to narrow long-standing exemptions. Courts cut off deductions, shut down preparers, and stripped tax-exempt status where records failed.
Outside enforcement, FOIA data showed how uneven capacity still shapes outcomes. The theme was clarity through contraction. Fewer assumptions. Fewer shortcuts. Fewer places to hide.
1. IRS Proposal Redraws Tax Lines for Sovereign Investors
The IRS proposed regulations that would narrow the §892 exemption for foreign sovereign investors. The changes focus on limiting when sovereign wealth funds and government-controlled entities can avoid U.S. tax on investment income. The proposal targets structures that blur the distinction between commercial activity and passive investment.
Why It Matters:
Shrinks the scope of a long-standing sovereign tax exemption.
Increases exposure for funds investing through complex entities.
Forces reassessment of U.S. investment structures.
Takeaway:
Sovereign investors may face a smaller tax-free footprint in the U.S.
2. FOIA Data Shows Uneven Federal Hiring Early in 2025
FOIA data from the Office of Personnel Management showed wide variation in federal hiring across agencies and regions in early 2025. Some offices expanded quickly while others remained thinly staffed. The gaps help explain uneven enforcement and processing outcomes.
Why It Matters:
Staffing levels shape enforcement capacity.
Regional disparities affect taxpayer experience.
Hiring patterns reveal where pressure is likely to land.
Takeaway:
Enforcement strength still depends on where people actually sit.
3. Milk Saving Starving Children Foundation v. Commissioner
The Tax Court revoked the foundation’s tax-exempt status after finding it failed operational and recordkeeping requirements. The court concluded the organization did not operate exclusively for exempt purposes. The exemption could not stand on intent alone.
Why It Matters:
Confirms strict enforcement of §501(c)(3) operational rules.
Shows documentation failures can be fatal.
Reinforces that charitable labels do not override facts.
Takeaway:
Tax-exempt status survives only with disciplined operations.
4. Court Bars Texas Tax Preparer From Filing Returns During 2026 Season
A federal court barred a Texas tax preparer from preparing or filing returns during the 2026 filing season. The injunction followed findings of repeated misconduct and improper filings. The court acted to prevent further harm to taxpayers and the Treasury.
Why It Matters:
Courts continue using injunctions to stop abusive preparers.
Filing bans remove preparers before damage spreads.
Signals aggressive use of §7407 remedies.
Takeaway:
Preparers who cross the line can be shut down quickly.
5. Fussell v. Commissioner
The Tax Court denied bad-debt and NOL deductions after the taxpayer failed to prove loans existed or establish proper timing. The court found the record thin and the documentation inconsistent. Without proof, the deductions failed.
Why It Matters:
Reinforces strict substantiation for bad-debt claims.
Shows timing errors can destroy NOL deductions.
Confirms courts will not infer facts taxpayers cannot prove.
Takeaway:
Deductions die when evidence does not show up.
Overall Takeaway
This week, tightened boundaries. Exemptions narrowed. Deductions collapsed without proof. Preparers lost access. Charities lost their status. And staffing data explained why outcomes vary.