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Valerm Law Group, San Juan (2026)

01/06/2026

OPERATIONAL AND COMPLIANCE GUIDELINES FOR PRIVATE EQUITY FUNDS UNDER PUERTO RICO INCENTIVES CODE

On March 11, 2026, the Puerto Rici Economic Development and Commerce of Puerto Rico (“DDEC”) issued Administrative Order DDEC 2026-002 (“Order”), providing operational and compliance guidelines for private equity funds operating under Act No. 60-2019, known as the "Puerto Rico Incentives Code". This Order responds to inquiries regarding investment eligibility in private equity funds and incorporates guidance from the Office of the Commissioner of Financial Institutions (“OCIF”) to ensure transparency, uniformity, and long-term financial integrity of such funds.

The Order applies to all private equity funds, including Puerto Rico-based funds, operating under a tax exemption decree issued by the DDEC pursuant to Sections 1020.04(a)(13), (14) and 2044.03 of the Incentives Code.

Its purpose is to formalize rules governing the administration, investment, and operation of private equity funds while clarifying definitions and eligibility standards for contributions, investments, and economic impact requirements.

We hereby provide an overview of the Order.

I. Key Definitions

The Order provides critical definitions to guide fund administration and investment compliance:

- Accredited Investor Contribution: The net amount invested by an accredited investor, excluding loans or financing from the fund to the investor. Paid-in capital cannot be used to provide loans to individuals.

- Active Business Entity: An entity actively engaged in economic operations in Puerto Rico, generating at least 80% of gross income from business activities on the island, with requisite personnel, facilities, or assets. Subsidiaries may be aggregated for compliance if the parent or managing member owns 50% or more of voting interests.

- Passive Entity: An entity primarily generating passive income such as dividends, interest, royalties, or rents. Investments in passive entities generally do not count toward the 15% or 60% minimum investment thresholds under Sections 2044.03(a)(1)(i) and 2044.03(b)(1)(i).

- Mixed Entity: An entity generating both active and passive income, where at least 80% of gross income derives from active business operations on the island.

II. Contribution and Investment Guidelines

To promote financial stability and long-term investment, the Order mandates that contributions of “Assets in Kind” (such as stocks, securities, and notes) must remain within the fund for a minimum “reasonable period” of 24 months. If these assets are sold before the period expires, the resulting capital must be reinvested in eligible assets for the remainder of the 24-month term.

Notably, the Order expressly prohibits the contribution of real property as an eligible in-kind investment.

Furthermore, funds must ensure that cash equivalents do not exceed 20% of the total contributed capital.

III. Prevention of Capital Recycling

The Order restricts reinvestment of contributed capital in entities related to the accredited investor holding a 20% or greater interest, except for new business activities, operational expansion, or job creation. Each related investment must be supported by documentation demonstrating measurable economic impact, retained for OCIF and OIN review during the decree term. A minimum 24-month retention period is required to ensure effective use of funds in the intended operations.

IV. Investment Timing and Deduction

For the purposes of claiming tax deductions under Section 2042.03(d)(1) of the Code, the Order clarifies that an investment is only considered "invested" once the fund assigns the cash to specific eligible projects or assets.

Furthermore, it introduces the concept of "Net Contribution," which requires subtracting any loan or financing granted by the fund to the investor within 120 days of their contribution from the total amount eligible for a deduction.

&TaxLawyers

25/05/2026

U.S. TAX COURT DENIES PUERTO RICO RESIDENCY TO TAXPAYER UNDER US CODE PROVISIONS

On March 13, 2023, the United States Tax Court (Court) decided Scott Ayers v. Commissioner, Docket No. 5336-24, whether it addressed whether the petitioner qualified as a bona fide resident of Puerto Rico for purposes of excluding Puerto Rico-source income under Internal Revenue Code (IRC) 933.

I. Background

Mr. Ayers resided in Arizona from January through approximately June 2021, where he owned a home with his spouse through a revocable trust. In June 2021, he relocated to Puerto Rico, where he leased accommodations, obtained a driver’s license, and acquired personal property. He remained in Puerto Rico until the fall of 2022, at which point he moved to Japan due to family health circumstances and did not return thereafter.

During the 2021 taxable year, Mr. Ayers realized $933,782 in short-term capital gains, along with additional income consisting of an HSA distribution and interest income. None of these amounts were reported on his federal income tax return, which was filed after the extended due date.

II. Legal Analysis

Section 933 provides that income derived from sources within Puerto Rico is excluded from gross income for individuals who are bona fide residents of Puerto Rico “during the entire taxable year.” Courts have consistently interpreted this provision to deny the exclusion where residency begins mid-year.

Section 937 defines “bona fide resident” through a three-part test: (i) physical presence, (ii) tax home, and (iii) closer connection. Treasury Regulations further elaborate on these requirements and include a limited “year-of-move” exception, contingent upon continued residency for three subsequent taxable years.

We hereby highlight the Court’s analysis:

-Statutory Framework: The Court first applied the statutory framework, emphasizing that Section 933 requires bona fide residency for the entire taxable year. Because Mr. Ayers maintained a tax home in Arizona for approximately five months in 2021, he failed to satisfy Section 937(a)’s requirement that no tax home exist outside Puerto Rico during the taxable year.

The Court then evaluated the regulatory framework, including the year-of-move exception under Treas. Reg. 1.937-1(f). Although this provision can deem a taxpayer a bona fide resident in the year of relocation, it requires the taxpayer to remain a bona fide resident of the possession for the following three taxable years. Mr. Ayers’s relocation to Japan in 2022 and absence from Puerto Rico in 2023 and 2024 precluded satisfaction of this requirement.

- Objective Criteria: The Court further rejected arguments based on the taxpayer’s subjective intent to reside in Puerto Rico, holding that the statutory and regulatory framework relies on objective criteria rather than intent.

&TaxLawyers

19/05/2026

El Colegio de CPA invita a CPA, abogados y profesionales relacionados a participar de la XV Conferencia CPA-Abogados, un evento diseñado para discutir temas legales ycontributivos.

📅 Jueves, 28 de mayo
📅 Viernes, 29 de mayo
📍 Hotel Royal Sonesta, Isla Verde
⏰ Sesiones desde las 8:45 a.m.

Durante ambos días se ofrecerán conferencias sobre:

⚖️ Arbitraje comercial en acción: estrategia, procedimiento y ejecución
📌 Práctica y procedimiento administrativo ante el IRS: un enfoque comparado con el Departamento de Hacienda de Puerto Rico
📚 Análisis de jurisprudencia contributiva reciente
✅ Actualización de ética profesional comparada: CPA y abogados en Puerto Rico

Una excelente oportunidad para fortalecer conocimientos, compartir con colegas y mantenerse al día en temas clave para la práctica profesional.

📲 Para información y registro, accede al código QR incluido en la promoción o visita: colegiocpa.com

-Abogados

18/05/2026

DISTRICT OF PUERTO RICO DISMISSES CLAIMS ARISING FROM EURO PACIFIC BANK INVESTIGATION AND CLOSURE

In March 12, 2026, the United States District Court for the District of Puerto Rico (Court) decided Peter David Schiff v. IRS, No. 3:24-cv-01511, where the Court reviewed claims brought by Peter David Schiff arising from the closure of Euro Pacific International Bank.

I. Background

The Plaintiff, Peter David Schiff, initiated this action following the regulatory intervention and subsequent closure of Euro Pacific International Bank (Bank). The Bank was targeted by the "J5," a joint tax enforcement task force comprising the Internal Revenue Service (IRS) and the Puerto Rico Commissioner of Financial Institutions (OCIF). Plaintiff alleges that the Defendants conspired to obstruct a $17.5 million stock sale of the Bank, forcing a lower-value asset sale of $1.25 million during receivership.

Plaintiff further contends that former IRS Chief of Criminal Investigations, Jim Lee, and other individual IRS employees (Individual Defendants) disseminated false information and made defamatory statements at a press conference, implying Plaintiff’s involvement in tax evasion and money laundering.

Plaintiff asserted claims under 42 U.S.C. §1983, 42 U.S.C. §1985(3), Bivens v. Six Unknown Named Agents, and the Federal Tort Claims Act (FTCA) for tortious interference and defamation.

We hereby highlight the Court’s decision.

II. Legal Analysis

- Sovereign Immunity and Official-Capacity Claims: The Court agreed that, except for the Bivens claim, the complaint asserted claims against IRS officials only in their official capacities. As a result, the United States was the proper defendant for those claims. The Court held that sovereign immunity barred the claims because Schiff failed to identify any applicable statutory waiver permitting suit against the United States, the IRS, or federal officials acting in their official capacities under Section 1983, Section 1985(3), or Bivens.

The Court rejected Schiff’s attempt to rely on the Administrative Procedure Act and the Larson-Dugan doctrine because those arguments were undeveloped and unsupported. It also found that Schiff had effectively conceded the applicability of sovereign immunity and the substitution of the United States as the proper party for official-capacity claims.

- FTCA Deficiencies: The Court further held that Schiff’s tort claims for defamation and tortious interference were barred under the FTCA. In addition, Schiff admitted that he had not filed an administrative claim before commencing suit. That failure to exhaust administrative remedies provided an independent basis for dismissal. The Court found Schiff’s argument regarding substitution of the United States immaterial, because the underlying jurisdictional and exhaustion defects remained unresolved.

- Dismissal of the Bivens Claims: The Court independently addressed the remaining Bivens claims against the Individual Defendants in their personal capacities. Applying the "plausibility" standard established in Bell Atl. Corp. v. Twombly and Ashcroft v. Iqbal, the Court determined that the allegations were "threadbare" and "conclusory."

The Court found that Plaintiff failed to provide material facts demonstrating how the Defendants’ actions constituted an "unlawful seizure of property" under the Fourth Amendment or a deprivation of due process under the Fifth Amendment. Regarding the conspiracy allegations, the Court noted that merely asserting defendants acted "in concert" is insufficient without detailing the nature of the cooperation or how the conspiracy was "hatched."

&TaxLawyers

11/05/2026

TAX COURT HOLDS PROMISSORY NOTE CONTRIBUTED THROUGH DISREGARDED ENTITY PRODUCED ZERO BASIS FOR PARTNERSHIP AND PARTNER

On March 2, 2026, the United States Tax Court (Court) decided Continental Grand Limited Partnership v. Commissioner, Docket No. 859-22, where it addressed the interaction between the entity classification rules under the “check-the-box” regulations and the partnership basis rules governing property contributions.

I. Background

CSC Computer Sciences GmbH (CSC Germany),is a German holding company, wholly owned CSC Financial GmbH (CSC Financial), another German entity. On March 26, 2001, CSC Germany issued a promissory note to CSC Financial with a face value of approximately $610 million and a maturity amount exceeding $1.1 billion, reflecting deferred interest. The ultimate U.S. parent, Computer Sciences Corporation, guaranteed the note.

Shortly thereafter, CSC Financial contributed the note to Continental Grand Limited Partnership (Partnership) in exchange for a limited partnership interest. The Partnership, organized under Nevada law, leased computer equipment to affiliated entities within the corporate group.

More than one year later, on April 12, 2002, CSC Financial elected under Treasury Regulation 301.7701-3 to be treated as a disregarded entity separate from its owner, CSC Germany. The election was made retroactively effective March 23, 2001 (several days before the note was issued and contributed to the Partnership).

In March 2009, CSC Germany prepaid the note by transferring approximately $1.07 billion to the Partnership. On the same day, CSC Financial withdrew from the Partnership and received a distribution exceeding $1.08 billion.

Following examination of the Partnership’s 2009 tax return, the Internal Revenue Service issued a Notice of Final Partnership Administrative Adjustment (FPAA). The Commissioner determined that:

- CSC Germany’s adjusted basis in the promissory note at the time of contribution was zero;

- CSC Germany’s basis in its partnership interest immediately after the contribution was zero; and

- The Partnership’s basis in the note was likewise zero.

II. Court’s Analysis

A. Effect of the Disregarded Entity Election

The Court first addressed the impact of CSC Financial’s retroactive election to be treated as a disregarded entity under the check-the-box regulations. Under Treasury Regulation 301.7701-3(g)(1)(iii), when an entity elects to become disregarded, it is deemed to liquidate and distribute all assets and liabilities to its single owner.

Applying these rules, the Court held that CSC Financial was treated as having liquidated into CSC Germany effective March 23, 2001. Consequently, for federal tax purposes CSC Financial was merely a branch or division of CSC Germany at the time of the transactions.

As a result, the issuance of the promissory note by CSC Germany to CSC Financial was disregarded. The subsequent assignment of the note to the Partnership was therefore treated as if CSC Germany had contributed its own note directly to the Partnership.

The Court rejected the petitioner’s argument that this treatment impermissibly disregarded state-law property rights, explaining that state law determines the existence of legal rights, while federal tax law determines the tax consequences of those rights.

B. Basis Consequences of the Note Contribution

Section 722 provides that a partner’s basis in a partnership interest acquired by contributing property equals the contributing partner’s adjusted basis in the property at the time of contribution. Section 723 similarly provides that a partnership’s basis in contributed property equals the contributing partner’s adjusted basis in that property.

The key issue therefore became the adjusted basis of the promissory note in the hands of its maker, CSC Germany.

Relying on prior precedent, including VisionMonitor Software, LLC v. Commissioner, Dakotah Hills Offices Ltd. Partnership v. Commissioner, and Oden v. Commissioner, the Court reaffirmed the established rule that a taxpayer has no tax basis in its own promissory note. Because CSC Germany incurred no cost to create the note, its basis under Section 1012 was zero.

The Court rejected arguments that the obligation embodied in the note constituted “cost” under Ssection 1012, distinguishing Commissioner v. Tufts, which involved borrowing used to acquire property. In contrast, the note here merely evidenced CSC Germany’s own obligation and did not represent consideration paid to acquire property.

C. Partnership Basis Determination

Because CSC Germany’s adjusted basis in the note was zero, Section 722 required that CSC Germany’s basis in its partnership interest following the contribution also be zero. Similarly, under Section 723, the Partnership’s basis in the note was zero.

&TaxLawyers

04/05/2026

YA GLOBAL V. COMMISSIONER: APPELLANTS URGE THIRD CIRCUIT TO REVERSE TAX COURT ON USTB CHARACTERIZATION, DEALER STATUS, AND WITHHOLDING TAX PENALTIES

In its February 24, 2026 reply brief to the U.S. Court of Appeals for the Third Circuit (Docket No. 25-2026), YA Global Investments, LP (formerly Cornell Capital Partners) and related Yorkville entities seek reversal of an adverse U.S. Tax Court (Court) decision. The appeal centers on whether the fund’s activities carried out through its investment manager, Yorkville Advisors, created a U.S. trade or business (USTB) and effectively connected income (ECI) for foreign partners.

I. No USTB or ECI: Investor Activity Mischaracterized as Services

Appellants contend the Court’s USTB finding rests on a legal and evidentiary inversion treating routine fund-manager conduct (sourcing opportunities, conducting due diligence, negotiating terms, and monitoring positions) as “personal services” allegedly rendered to portfolio companies, rather than services rendered to YA Global as the client. The brief argues the record shows portfolio companies retained their own counsel and advisors, and transaction documents included disclaimers that Yorkville/YA Global were not acting as the companies’ advisors. Appellants maintain the Tax Court inferred “services” from the existence of amounts labeled “fees,” but that labeling cannot, as a matter of law, prove payment for services rather than cost-of-capital economics typical in financing arrangements.

On standard of review, appellants argue the “trade or business” characterization is ultimately a legal conclusion when drawn from undisputed facts and therefore warrants de novo review, not deference framed as clear-error fact review.

Trading Exceptions Under § 864(b)(2)

Appellants further argue that, even assuming extensive U.S.-based activity, the trading safe harbors apply because the fund’s conduct fits “effecting transactions in stocks or securities” and closely related activities under Treasury regulations. They dispute the Commissioner’s “waiver/forfeiture” arguments and assert Yorkville’s office should not be attributed to YA Global where Yorkville qualifies as an independent agent; they also argue YA Global was not a dealer with “customers,” defeating the IRS’ attempt to negate the Section 864(b)(2)(A)(ii) trading exception.

II. Not a Dealer Under Section 475

The reply brief challenges the Court’s conclusion that YA Global was a “dealer in securities” subject to mark-to-market under Section 475. Appellants argue the Tax Court improperly expanded “customers” to mean any counterparty, which would sweep ordinary investing or trading into dealer treatment. They emphasize that dealer status turns on the nature of profits (e.g., market-making/customer-facing activity), and that buying securities for investment/trading gains does not create “customers” merely because transactions are frequent or structured.

III. Penalties: Malpractice Suit as an Improper Proxy for Lack of Reasonable Cause

Appellants argue the Court committed legal error by using a later-filed malpractice lawsuit against an advisor to negate reasonable cause. The brief emphasizes the court found timely professional advice supported the no-USTB position and that the issue was uncertain, yet still sustained penalties based on inferences drawn from litigation filed after receipt of FPAAs to preserve claims.

IV. Statute of Limitations: Forms 1065 as Adequate Substitutes

Finally, appellants argue assessments for 2006 and 2007 are time-barred because the limitations period began when YA Global filed Forms 1065, which allegedly contained the same underlying information needed to compute Section 1446 withholding (Form 8804). They also contend extensions executed later could not revive already-expired periods and that the IRS’ attempt to broaden extension language post-expiration is ineffective.

&TaxLawyers

27/04/2026

SUPREME COURT PETITION SEEKS REVIEW OF CIRCUIT SPLIT ON FRAUD EXCEPTION TO IRS ASSESSMENT LIMITATIONS PERIOD PROCEDURAL POSTURE

On February 17, 2026, Stephanie Murrin (‘Taxpayer’) filed a certiorari petition in the case Stephanie Murrin v. Commissioner, Docket No. 24-2037, requesting the United States Supreme Court to resolve whether the “false or fraudulent return” exception in Section 6501(c)(1) of the United States Internal Revenue Code (Code) permits assessment beyond the ordinary three-year period in Section 6501(a) based solely on a return preparer’s fraudulent intent—when the taxpayer neither intended to evade tax nor knew of wrongdoing.

The case concerns returns filed between 1993 and 1999. The parties stipulated that Murrin’s preparer inserted false or fraudulent entries with intent to evade tax, but that Murrin herself acted in good faith and lacked knowledge of the fraud. Murrin conceded the underlying unpaid tax but challenged the timeliness of the IRS’s deficiency determination under Section 6501(a). The notice of deficiency asserted approximately $65,318 in tax and $13,064 in accuracy-related penalties, with accrued interest allegedly exceeding $250,000—placing total exposure above $328,000 for decades-old tax years.

I. Statutory Framework

Section 6501(a) generally requires the IRS to assess tax within three years after a return is filed. Congress created exceptions in Section 6501(c), including Section 6501(c)(1), which removes any time limit “[i]n the case of a false or fraudulent return with the intent to evade tax,” allowing assessment “at any time.” The petition emphasizes that the statute does not expressly identify whose “intent to evade tax” is required—creating the interpretive dispute. The petition also situates Section 6501 within the broader assessment regime in Section 6201(a) and related definitional provisions.

II. Taxpayer’s Arguments

- Conflicting Appellate Approaches: The petition frames the dispute as a direct split between the Third Circuit and the Federal Circuit. The Federal Circuit, in BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015), held that Section 6501(c)(1) suspends the limitations period only when the taxpayer acted with intent to evade tax. The petition argues this approach aligns with historical understanding, related Code provisions addressing fraud, and the origins of the limitations and fraud-penalty language in the Revenue Act of 1918.

By contrast, the Third Circuit held that Section 6501(c)(1) is “agnostic” as to whose intent matters and that the unlimited period can be triggered by a third party’s fraudulent intent even if the taxpayer is blameless. The Third Circuit relied on textual and grammatical considerations, including passive-voice structure, and reasoned Congress did not expressly limit intent to the taxpayer. Although acknowledging Murrin’s reading as “fair” and recognizing her frustration, the Third Circuit concluded the statute permits an “indefinite limitations period” where a return is fraudulent and someone intended to evade tax.

- Claimed Importance and Vehicle Considerations: The petition argues the issue is exceptionally important because it determines whether innocent taxpayers can face effectively perpetual exposure based on concealed preparer misconduct and because evidentiary burdens become severe with the passage of time. It also stresses uniformity concerns: taxpayers able to prepay and litigate in the Court of Federal Claims may obtain the Federal Circuit’s more taxpayer-protective rule, while Tax Court litigants in circuits adopting the Third Circuit’s approach may face open-ended assessment. The petition asserts the case is an ideal vehicle because the facts are stipulated and the appeal turns on a single, outcome-determinative question of statutory interpretation.

&TaxLawyers

20/04/2026

UNITED STATES TAX COURT UPHOLDS DEFICIENCY AGAINST RESTAURANT OWNER AND REBUKES USE OF FABRICATED AI CITATIONS

On Feb. 9, 2026, the United States Tax Court (Court) decided Peter L. Clinco v. Commissioner, Docket No. 8077-23 (U.S. Tax Ct. Feb. 9, 2026), wher it addressed deficiencies arising from alleged underreported restaurant income and unsubstantiated depreciation deductions for the 2015 tax year.

Peter L. Clinco, now deceased, and his wife filed a joint return reporting income from Clinco’s law practice, a family-owned restaurant (MedCafe Westwood, LLC), and two Pasadena rental properties. The Commissioner determined that MedCafe’s gross receipts were substantially understated and that the claimed Schedule E depreciation deductions were unproven. Following issuance of the notice of deficiency, Clinco passed away, and the petition was timely pursued by his successor in interest.

We hereby highlight the Court’s analysis.

I. Validity of the Notice of Deficiency

Petitioners argued that the notice of deficiency was invalid because it lacked a proper “wet” signature by an authorized IRS official. The Court rejected this contention. It clarified that Letter 53, not Form 4549-A, constituted the statutory notice of deficiency. The Letter bore the name of a delegated signing official, and the Internal Revenue Manual (IRM) expressly permits signatures by delegation, typed names, or electronic means.

Moreover, longstanding precedent establishes that the Internal Revenue Code does not require a notice of deficiency to be signed at all. The Court cited appellate authority confirming that even an unsigned notice is valid. Accordingly, jurisdiction was proper.

In an unusual but pointed discussion, the Court also criticized petitioners’ counsel for citing nonexistent or “hallucinated” case authorities apparently generated through artificial intelligence. The Court characterized the practice as unacceptable and warned that such conduct may implicate Rule 11(b) and professional responsibility standards.

II. Underreported Gross Receipts

The Commissioner reconstructed MedCafe’s income using a bank-deposits analysis and third-party Information Return Processing (IRP) data, including Forms 1099-MISC and 1099-K from UCLA, First Data, American Express, and Grubhub. The reconstruction also incorporated Clinco’s admission that approximately 10% of restaurant revenue was received in cash.

The Commissioner initially determined gross receipts of approximately $2.29 million, later reducing the amount to reflect substantiated capital contributions of $82,242.18. The resulting adjustment still reflected roughly $2.2 million in unreported income.

The Court held that the Commissioner was authorized under Section 446(b) of the United States Internal Revenue Code (Code) to reconstruct income when a taxpayer’s method does not clearly reflect income. The reconstruction was reasonable and based on credible third-party documentation and admissions. Petitioners failed to demonstrate that the analysis was arbitrary or erroneous. Assertions regarding possible record confusion or generalized IRS errors were deemed speculative and unsupported by evidence.

The Court therefore sustained the Commissioner’s determination of underreported gross receipts.

III. Disallowed Depreciation Deductions

Clinco claimed approximately $56,798 in depreciation for two rental properties allegedly placed in service in May 2015, reporting bases of approximately $1.8 million and $700,000, respectively. However, he provided no substantiation for basis, placed-in-service dates, or prior depreciation.

Under Sections 167(a) and 6001, taxpayers bear the burden of proving entitlement to depreciation through adequate records. The Court emphasized that claiming depreciation in subsequent years does not establish entitlement in the year at issue. Because petitioners failed to provide purchase documents, closing statements, or other competent evidence, the depreciation deductions were disallowed.

&TaxLawyers

13/04/2026

UNITED STATES FEDERAL COURT ENJOINS TAX PREPARER

On January 29, 2026, the United States District Court for the Eastern District of Kentucky (Court) on the case United States V. Brandon Ross Williams, Docket No.3:24-cv-00075, issued a preliminary injunction against Brandon Ross Williams and his company, Refund HQ, LLC, to stop Williams from preparing federal tax returns, alleging a pattern of fraudulent filings designed to illicitly maximize refunds.

I. Background

The Internal Revenue Service (IRS) investigated Williams following penalties previously assessed in 2015 and 2018. The government alleged that Williams and Refund HQ engaged in schemes to inflate Earned Income Tax Credits (EITC) for customers.

The allegations centered on two specific fraudulent tactics:

- Fabricated Expenses: Williams allegedly inflated or fabricated business losses on Schedule C forms to reduce taxable income artificially.

- Filing Status Manipulation: The government claimed Williams encouraged married couples to file separately as "Head of Household" to increase standard deductions unlawfully.

Evidence presented showed that in 2023, Williams’s EITC claims exceeded the Kentucky average by over $3 million. Furthermore, the IRS accused Williams of acting as a "ghost preparer," failing to sign returns or utilizing other preparers' identification numbers to conceal his involvement.

We hereby highlight the Court’s analysis.

II. Legal Analysis

The Court analyzed the motion under Sections 7402, 7407, and 740 of the US Internal Revenue Code (Code), and under Sixth Circuit precedent the Court weighed the totality of the circumstances rather than traditional equitable factors.

The Court focused on five factors:

- Gravity of Harm: The IRS estimated the harm to the government at $1.4 million annually since 2020.

- Scienter (Intent): The Court found evidence that Williams acted knowingly, rejecting his defense that discrepancies were merely "human error."

- Recurrence: Given Williams's history of penalties and the systematic nature of the errors, the likelihood of repeat offenses was deemed high.

- Culpability and Assurances: As Williams denied the allegations, he offered no recognition of culpability or assurances against future violations.

The Court determined that the government met its burden under all three statutes. The Court noted that while a total shutdown would harm Williams personally, the risk of continued fraud constituted an irreparable harm to the United States and the tax system.

The Court granted a preliminary injunction, in which Williams is enjoined from preparing tax returns unless he agrees to a third-party monitoring system. Under this option, Williams must pay for a neutral, government-approved auditor to review his books and inspect a random 3% sample of all daily tax returns for compliance. If Williams declines this supervision, he is completely barred from preparing or filing federal tax returns for the duration of the litigation.

&TaxLawyers

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