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Valerm Law Group, San Juan (2026)

07/09/2026

INTERNAL REVENUE SERVICE INTRODUCES AUTOMATIC PENALTY RELIEF FOR TAXPAYERS WITH STRONG COMPLIANCE HISTORIES

On July 8, 2026, the Internal Revenue Service (IRS) announced the creation of the Automatic Exemption from Penalty program (AEP), a systemic administrative relief procedure intended to provide qualifying taxpayers with automatic relief from certain federal tax penalties. The new program will replace the IRS’s long-standing First Time Abate administrative relief and is expected to begin operating during the summer of 2026.

AEP is designed to reduce the administrative burden on taxpayers who have consistently complied with their federal tax filing and payment obligations. Unlike First Time Abate, eligible taxpayers will not be required to affirmatively contact the IRS or submit a formal request for relief.

We hereby highlight the new program.

I. Eligibility and Covered Penalties

AEP will generally apply to eligible original returns beginning with tax year 2025, quarterly returns filed for periods beginning in 2026, and qualifying returns for subsequent tax periods.

To qualify, a taxpayer must have timely filed the applicable return and paid all taxes due during the preceding three years. For quarterly returns, the taxpayer must demonstrate timely compliance for the preceding 12 consecutive quarters.

For eligible taxpayers, the IRS will refrain from assessing the following penalties during return processing:

- Failure-to-file penalties;
- Failure-to-pay penalties; and
- Failure-to-deposit penalties.

When relief is granted, the IRS will issue a notice confirming the taxpayer’s eligibility and the application of AEP.

II. Returns Excluded from Automatic Relief

Not all federal tax returns will qualify for AEP. Information returns and returns filed in connection with specific transactions or infrequent events will generally be excluded. The IRS specifically identified Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, and Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, as examples of returns that are generally ineligible.

III. Transition from First Time Abate

The IRS will begin phasing out First Time Abate during the summer of 2026. Because the transition will occur gradually, some taxpayers who otherwise qualify for relief may continue to receive penalty notices relating to tax year 2025 returns or 2026 quarterly returns. During this transitional period, affected taxpayers may contact the IRS and request relief under the existing First Time Abate procedures.

AEP will fully replace First Time Abate for eligible returns with original filing due dates on or after January 1, 2027.

IV. Reasonable-Cause Relief Remains Available

Taxpayers who do not qualify for AEP may continue to request penalty abatement based on reasonable cause. The IRS will evaluate those requests under its existing administrative standards and notify taxpayers of its determination.

AEP does not eliminate the taxpayer’s underlying liability. Taxpayers remain responsible for paying all taxes and accrued interest, together with any penalties that are not covered by the automatic relief program.

&TaxLawyer

31/08/2026

INTERNAL REVENUE SERVICE PROVIDES TRANSITIONAL GUIDANCE FOR QUALIFIED OPPORTUNITY ZONES UNDER OBBBA AMENDMENTS

On July 6, 2026, IRS Notice 2026-40 (Notice) announced that the Internal Revenue Service (IRS) intends to issue proposed regulations addressing the Qualified Opportunity Zone (QOZ) rules under Internal Revenue Code Sections 1400Z-1 and 1400Z-2, as amended by Section 70421 of the One, Big, Beautiful Bill Act (OBBBA). The Notice provides transitional guidance for QOZ designations, investors, Qualified Opportunity Funds (QOFs), and Qualified Opportunity Zone Businesses (QOZBs) pending issuance of forthcoming proposed regulations.

We hereby highlight the proposed guidance.

I. Designations and Limitations

Under prior law, QOZ designations were capped at 25% of a state's eligible low-income census tracts. The OBBBA amends Section 1400Z-1 to apply this limitation exclusively to the newly defined 10-year designation period beginning on a zone's “applicable start date.”

Previously designated QOZs (certified prior to OBBBA) will not diminish the number of census tracts a state chief executive may nominate for the upcoming cycle commencing January 1, 2027.

The new 10-year designation period for zones certified by the Secretary in 2026 will officially run from January 1, 2027, through December 31, 2036.

II. Investor Guidance and Deferral Mechanics

The Notice bifurcates the treatment of deferred eligible gains based on the ex*****on date of the qualifying investment:

- Pre-2027 Investments: Gains invested in a QOF on or before December 31, 2026, trigger a mandatory income inclusion on December 31, 2026. This “deemed included gain” cannot be subsequently deferred under any election. However, taxpayers retaining their qualifying QOF investments retain full eligibility for the Section1400Z-2(c) fair market value basis step-up upon ultimate disposition after a 10-year holding period.

- Post-2026 Investments: For corresponding amounts invested in a QOF on or after January 1, 2027, taxpayers may elect a new deferral. The inclusion event for these subsequent investments is deferred until the earlier of a disposition, a non-sale inclusion event, or five years from the date of the qualifying investment, at which point a 10% basis step-up may apply.

- Inclusion Event Gain: Gain triggered by an inclusion event remains eligible for deferral if reinvested in a QOF within 180 days of the event.

III. QOFs, QOZBs, and Property Acquisitions

Property acquired by purchase after December 31, 2026, generally cannot qualify as Qualified Opportunity Zone Business Property (QOZBP) if located in a previously designated QOZ. However, the Notice establishes specific safe harbors:

- Working Capital Plans: Property acquired post-2026 qualifies if purchased under a written working capital safe harbor plan adopted on or before December 31, 2026, provided the entity has received at least 10% of designated funds and expended at least 5% by that date.

- Ordinary Course Replacements: Tangible property acquired to replace or modernize existing assets in the ordinary course of a trade or business continues to qualify, expressly excluding acquisitions for business expansions.

IV. Post-Designation Compliance

Pre-OBBBA QOZ designations expire on December 31, 2027 (for Puerto Rico deemed designations) or December 31, 2028. To protect long-term investments, forthcoming regulations will permit QOFs and Qualified Opportunity Zone Businesses (QOZBs) to treat expired zones as legally valid for ongoing compliance testing. Entities may continue to satisfy the QOZBP "substantial use" test and the 50% active gross income test within these expired tracts through December 31, 2047.

&TaxAttorneys

24/08/2026

TAX COURT SUSTAINS CIVIL FRAUD PENALTIES AND CONSTRUCTIVE DIVIDEND ASSESSMENTS

On June 23, 2026, the United States Tax Court (Court), in Albert S.N. Hee v. Commissioner, Docket No. 24068-22 and Docket No. 24077-22, consolidated petitions from Albert and Wendy Hee and Waimana Enterprises, Inc., contesting Internal Revenue Service (IRS) deficiency determinations and civil fraud penalties spanning tax years 2003 through 2012. Albert Hee, the sole shareholder of Waimana, utilized personal credit cards to fund various expenditures, seeking corporate reimbursement.

We hereby highlight the Court’s analysis.

I. Disallowance of Corporate Deductions and Constructive Dividends

The Court evaluated Waimana's business deductions under Section 162(a) of the Internal Revenue Code (Code), which permits deductions for ordinary and necessary business expenses, and the heightened substantiation requirements of Section 274(d). The Court ruled against the petitioners. Personal expenses reimbursed by the corporation (including twice-weekly massage therapy sessions, tuition payments for Hee's children, and salaries paid to Hee's wife and children) lacked a substantiated, legitimate business purpose.

Furthermore, the Court disallowed extensive travel and entertainment deductions, such as family trips to France, Switzerland, Tahiti, and Walt Disney World. The Court found these trips were primarily personal, lacking documented business objectives or adequate receipts. The corporate purchase of a Santa Clara property, ostensibly for business travel, was revealed to be rent-free housing for Hee's children. Because these corporate disbursements failed to qualify as valid deductions and conferred a direct economic benefit upon the owner-taxpayer, the Court properly recharacterized them as constructive dividends.

II. Recharacterization of Shareholder Loans

The petitioners argued that numerous disbursements, including university tuition and housing costs, were bona fide shareholder loans. The Court rejected this characterization, applying established judicial factors to determine the existence of a true debtor-creditor relationship. The distributions lacked formalized promissory notes, collateral, and a fixed repayment schedule. Furthermore, Waimana did not contemporaneously record or charge interest. Consequently, the Court classified these purported loans as taxable constructive dividends benefiting the Hees.

III. Civil Fraud and the Statute of Limitations

Because the IRS issued Notices of Deficiency beyond the standard three-year assessment window, the agency bore the burden of proving fraud to suspend the statute of limitations under Section 6501(c)(1). Relying on the established "badges of fraud," the Court found clear and convincing evidence of fraudulent intent by both Hee and Waimana. The Court highlighted a pattern of understating income, maintaining inadequate records for personal expenses, providing implausible explanations, and supplying misleading information to corporate tax preparers. Hee's prior criminal conviction for filing false tax returns further eroded his credibility. Consequently, the Court sustained the Section 6663 civil fraud penalties and allowed the retroactive tax assessments.

&TaxLawyers

17/08/2026

PUERTO RICO SUPREME COURT CLARIFIES ESTATE TAX BURDENS BEFORE DISTRIBUTION OF INHERITANCE

On June 11, 2026, the Puerto Rico Supreme Court (Court) decided Ángel Manuel Torres Cubano v. Sucesión de Miriam Magdalena Domenech Rosado, in which the Court addressed the proper treatment of tax liabilities and valuation issues in the administration and liquidation of an estate.

I. Background

The case arose after the intestate death of Miriam M. Herrero Domenech in 2011. She was survived by her husband, Ángel Manuel Torres Cubano, and initially by her mother, Miriam Magdalena Domenech Rosado, who was the universal heir. Because the decedent had no descendants, the surviving spouse was entitled to a usufructuary widower’s share under the Puerto Rico Civil Code of 1930.

After years of litigation, the parties stipulated an inventory of estate assets with an asserted fair market value of approximately $1.49 million. The Court of First Instance calculated the widower’s usufructuary share, but then applied various deductions, including rents, assets allegedly retained by the surviving spouse, and a tax burden related to a capital transaction involving an estate asset. The lower court ultimately concluded that Torres Cubano owed a negative balance to the estate. The Court of Appeals modified the judgment in part, but substantially upheld the treatment of the tax burden.

We hereby highlight the Court’s analysis.

II. Court’s Analysis

The Supreme Court focused on whether the lower courts erred by assigning the full tax burden to the surviving spouse and by treating that liability as a deduction after calculating the usufructuary share. The Court also examined whether the correct age range had been used to determine the surviving spouse’s life expectancy for purposes of computing the present value of the usufructuary share.

- Payment of Debts Prior Distribution of Estate Assets: The Court reaffirmed the principle that debts must be paid before inheritance is distributed. In the context of estate administration, this includes tax debts and informational filing obligations owed to the Puerto Rico Department of Treasury. The Court emphasized that tax liabilities arising from estate assets are obligations of the estate and should not be allocated solely to one heir or beneficiary in his personal capacity.

Accordingly, the tax burden should have been deducted from the estate before calculating the distributable shares. The Court explained that the fair market value of the estate must be determined net of debts at the time of commutation or disbursement. Only after the estate is properly valued, and all debts are accounted for, may the usufructuary share be calculated.

- Age for the Usufructuary Calculation: The Court also held that the lower courts used the wrong age reference in determining life expectancy. For purposes of the usufructuary computation, the surviving spouse’s age must be measured as of the decedent’s death, not as of the later judgment date.

On remand, the Court of First Instance must confirm that the required estate tax returns were filed, ensure that all estate debts (including tax liabilities) were paid, recalculate the fair market value of the estate net of debts, use the widower’s age at the date of death to determine life expectancy, and then recompute and distribute the estate accordingly.

&TaxLawyers

10/08/2026

COURT PRESERVES FREEDOM OF INFORMATION ACT ACTION AGAINST THE INTERNAL REVENUE SERVICE

In Schiff v. Internal Revenue Service, No. 1:24-cv-2230 (D.D.C. Mar. 25, 2026), Peter David Schiff brought a Freedom of Information Act (FOIA) action against the Internal Revenue Service (IRS) seeking records connected to the IRS’s handling of matters involving Euro Pacific International Bank, the Joint Chiefs of Global Tax Enforcement (“J5”), and related public statements and investigative activity.

I. Background

In its March 25, 2026 memorandum opinion, the United States District Court for the District of Columbia (Court) previously ruled in favor of the IRS on one issue; the adequacy of the agency’s search in response to Schiff’s first FOIA request.

However, the Court otherwise ruled substantially in Schiff’s favor. It held that the IRS had failed to justify its withholding of responsive records under FOIA Exemptions 5, 7(A), and 7(E), including because it had not made the required showing of foreseeable harm. The Court also rejected the IRS’s position that Schiff’s second FOIA request was insufficiently described, except as to an overly broad portion concerning records mentioning certain domestic and foreign tax authorities.

Following the March 25 decision, the IRS moved for reconsideration. On June 12, 2026, the Court’s issued its opinion on the reconsideration filed.

We hereby highlight the Court’s analysis.

II. Court’s Analysis

- No Reconsideration on the Merits: The Court rejected the IRS’s attempt to revisit the sufficiency of Schiff’s second FOIA request. The IRS argued that the request was unreasonably burdensome and relied on authority involving broad searches for records relating to an entire computer system. The Court found that analogy unpersuasive, distinguishing a search for “Peter Schiff” from a search for a broad technical system. The Court also concluded that the IRS had forfeited its undue-burden argument by failing to properly develop it at the summary judgment stage.

The Court likewise declined to reconsider its ruling requiring disclosure of records withheld under Exemptions 5 and 7. The IRS submitted additional declarations and sought another opportunity to justify its withholdings. The Court refused to provide what it characterized as a second chance to satisfy FOIA’s requirements. Because the IRS had already submitted declarations but failed to establish the applicability of the exemptions or foreseeable harm, summary judgment for Schiff remained appropriate.

- Limited Amendment to the Production Order: The Court granted reconsideration only in a narrow respect. Because the IRS had not yet conducted a search in response to Schiff’s second FOIA request, the Court amended its order to clarify that the IRS must produce only non-exempt responsive records from that second search. Both parties agreed that continued judicial supervision was appropriate and that the case was not yet concluded. Accordingly, the Court removed the prior characterization of the order as final.

&TaxLawyers

03/08/2026

COORDINATION MEASURES FOR THE OECD’S GLOBE INFORMATION RETURN FILING AND EXCHANGE

Thirty-seven jurisdictions have formally implemented a Qualified Income Inclusion Rule (QIIR) and/or a Qualified Domestic Minimum Top-up Tax (QDMTT) effective for the 2024 Reporting Fiscal Year. Pursuant to the GloBE Model Rules and Commentary, in-scope Multinational Enterprise (MNE) Groups subject to these rules are required to file their initial GloBE Information Return (GIR) by June 30, 2026.

Under the established central filing and exchange framework, the central filing jurisdiction is mandated to distribute relevant GIR data to implementing partner jurisdictions by December 31, 2026. This dissemination is governed by the GIR Multilateral Competent Authority Agreement (GIR MCAA). To ensure the proper operationalization of this framework, implementing jurisdictions must execute the GIR MCAA and formally activate the underlying bilateral exchange relationships to establish the necessary legal basis for information sharing.

I. Transitional Relief and Penalty Waivers

As the initial filing deadline approaches, administrative and infrastructural delays have been identified within certain implementing jurisdictions. Specifically, it is anticipated that select jurisdictions may fail to deploy a fully operational, reliable GIR digital filing portal in time for MNE Groups to complete their local submissions. Furthermore, while bilateral exchange relationships are projected to be operational by the end of 2026.

In recognition of the compliance burdens and coordination difficulties, the 2024 implementing jurisdictions have bilaterally agreed, to the extent permitted under their respective domestic legislation, jurisdictions will employ administrative mechanisms to provide the following relief:

- Waiver of Penalties: Jurisdictions may waive administrative penalties that would otherwise accrue due to a failure to satisfy local GIR filing obligations; or

- Deferral of Enforcement: Jurisdictions may elect not to enforce local GIR filing requirements prior to the December 31, 2026 exchange deadline.

This transitional relief is strictly conditioned upon the MNE Group centrally filing the GIR within an approved qualifying jurisdiction (as listed in the text's annex) by the prescribed deadline, and successfully executing the required local GIR notification within the local jurisdiction by its respective due date.

II. Reservation of Enforcement Rights

The administrative relief and non-enforcement policies extended by participating jurisdictions remain temporary and conditional. A jurisdiction that has elected to waive penalties or defer local filing enforcement reserves the right to initiate formal enforcement actions against an MNE Group (including demanding immediate local filing) in the event that the centrally filed GIR is not successfully transmitted to said jurisdiction via the international exchange framework by the relevant December 31, 2026 exchange deadline.

&TaxLawyers

30/07/2026

A few days ago, I was able to participate in the Going Global Roundtable - Xpand between the Puerto Rico Chapter of The Global Chamber and Parallel18.

It is always a pleasure to meet local entrepreneurs and be able to discuss global expansion opportunities.

&TaxAdvisors

27/07/2026

INTERNAL REVENUE SERVICE ISSUE FINAL REGULATIONS MODIFYING INFORMATION REPORTING FOR SECTION 751(a) PARTNERSHIP EXCHANGES

The Internal Revenue Service (IRS) issued final regulations under Treasury Decision 10048, effective May 20, 2026, modifying the information reporting obligations applicable to certain sales or exchanges of partnership interests involving unrealized receivables or inventory items under Section 751(a) of the Internal Revenue Code (IRC), to alleviate immediate administrative burdens on partnerships regarding the sale or exchange of partnership interests.

I. Statutory Framework

Under Section 741, gains or losses realized from the sale of a partnership interest are generally treated as capital gains or losses, except as provided in Section 751. Section 751(a) dictates that any amount received by a transferor partner attributable to the partnership's unrealized receivables or inventory items must be recognized as ordinary income or loss. Partnerships are required under Section 6050K to file Form 8308, Report of a Sale or Exchange of Certain Partnership Interests for each Section 751(a) exchange.

Prior to these amendments, Treasury Regulation §1.6050K-1(c)(2) mandated that partnerships furnish transferor partners with a completed Form 8308, specifically including Part IV, which details the partner's share of deemed gains or losses from Section 751 property, by January 31 of the succeeding calendar year. Industry stakeholders notified the IRS that compliance was practically unfeasible because partnerships rarely possess the comprehensive asset-valuation data required to calculate Part IV figures so early in the year.

II. Key Regulatory Change

In response to industry feedback, the final regulations adopt the August 19, 2025, proposed rules without change, officially removing Treasury Regulation §1.6050K-1(c)(2) and amending Treasury Regulation §1.6050K-1(c)(1).

Under the revised framework, partnerships are no longer required to provide the complete Form 8308 to transferors and transferees by the January 31 deadline (or 30 days after notice). Instead, they are only required to furnish a copy of Form 8308 filled out with the information required in Parts I, II, and III, or a substitute statement containing identical information.

Crucially, the partnership’s ultimate disclosure obligations remain intact but are realigned with realistic compliance timelines:

- Form 1065 Attachment: Partnerships must still file a fully completed Form 8308, including Part IV, as an attachment to their Form 1065, U.S. Return of Partnership Income for the applicable taxable year.

- Schedule K-1 Reporting: Pursuant to Treasury Regulation §1.6031(b)-1T(a)(3), partnerships will continue to deliver the definitive Section 751(a) ordinary income calculations to transferor partners via Schedule K-1 (Form 1065).

&TaxLawyers

20/07/2026

INTERNAL REVENUE SERVICE REINSTATES SIGNIFICANT ISSUE LETTER RULING PROGRAM FOR CORPORATE TRANSACTIONS

On May 21, 2026, the Internal Revenue Service (IRS) published Revenue Procedure 2026-21, establishing a new program that allows taxpayers to request private letter rulings on specific, significant legal issues under the sole jurisdiction of the Associate Chief Counsel (Corporate). It was issued in response to extensive feedback from taxpayers and practitioners seeking a more efficient use of IRS resources and a reduction in the time required to process ruling requests.

I. Historical Context and Scope

The IRS's policy on ruling on parts of integrated transactions has evolved significantly over the past two decades. Most recently, Rev. Procs. 2024-1 and 2024-3 ended the practice of issuing “significant issue” rulings, opting instead to allow "comfort rulings" covering entire transactions. Rev. Proc. 2026-21 reverses this trend by reinstating the significant issue ruling program.

Under the new program, the IRS will issue rulings on just a portion of an integrated transaction or on a single legal issue, rather than evaluating the transaction's overall tax qualification. The scope of this program is strictly limited to transactions falling under Internal Revenue Code Sections 332, 351, 355, 368, or 1036. For example, the IRS may rule on a narrow issue under Section 355(e) or Treasury Regulation Section 1.368-1(d) without ruling on the overall validity of the underlying spin-off or reorganization.

The revenue procedure defines a significant issue as a germane and specific issue of law that is not a comfort ruling (meaning it is not clearly addressed by established authority) and where the legal conclusion is not essentially free from doubt.

II. Procedural Requirements

Taxpayers seeking a ruling under this program must comply with standard Rev. Proc. 2026-1 requirements, alongside several new stipulations:

- Pre-Submission Conference: Taxpayers must schedule a pre-submission conference to discuss whether the Office of Associate Chief Counsel (Corporate) will accept the ruling request.

- Targeted Information: Transaction descriptions and representations from related revenue procedures are required only to the extent they relate directly to the significant issue.

- Overall Transaction Representation: Taxpayers must provide a representation that, to the best of their knowledge and belief, the transaction otherwise satisfies all statutory and regulatory requirements of the relevant Code section.

Additionally, requests must explicitly include a narrative description putting the issue in context, a detailed legal analysis of why the issue is unresolved and significant, the precise ruling requested, and a statement confirming that no rulings outside Corporate jurisdiction are being sought.

III. Effective Date and IRS Discretion

The significant issue ruling program is effective for all letter ruling requests postmarked or received by the IRS after May 5, 2026. The IRS maintains ultimate discretion under this program and reserves the right to rule on any other aspect of the transaction (including ruling adversely) or decline to rule entirely if deemed necessary for sound tax administration.

&TaxLawyers

13/07/2026

FEDERAL CIRCUIT AFFIRMS TRANSFEREE LIABILITY FOR DILLON TRUSTS IN MIDCO TRANSACTION

On May 14, 2026, the United States Court of Appeals for the Federal Circuit (Court), in the case Dillon Trust Co. LLC v. United States, Docket No. 24-1314, affirmed that several Dillon family trusts are liable as transferees for approximately $80 million in unpaid taxes, penalties, and interest.

I. Background

The dispute arose from the Dillon trusts’ 2002 sale of stock in Humboldt Corporation and Shelby Corporation, two C corporations holding appreciated assets, including blue-chip securities and farmland. By 2000, the trusts’ assets had appreciated to approximately $90 million, and the corporations held substantial built-in gain.

The Dillon family sought to avoid the double tax consequences that would result from an asset sale followed by liquidation. Instead, the trusts pursued a stock sale, which would generally shift the embedded corporate tax liability to the buyer. The winning bidder, associated with Diversified Group Incorporated and James Haber, purchased the stock through newly formed Humboldt Shelby Holding Corporation (“HSHC”). After closing, HSHC caused Humboldt and Shelby to sell assets and later claimed artificial losses from abusive Son-of-BOSS transactions to offset the resulting gains. The Internal Revenue Service (IRS) disallowed the losses and assessed taxes, penalties, and interest against HSHC, which did not pay.

We hereby highlight the Court’s analysis.

II. Court’s Analysis

- Transferee Liability Under Section 6901: The Federal Circuit held that the Court of Federal Claims properly applied Section 6901 of the Internal Revenue Code (IRC), which provides a procedural mechanism for collecting unpaid taxes from a transferee, while state law determines the substantive liability. Applying New York fraudulent conveyance law, the lower court collapsed the trusts’ stock sale and HSHC’s subsequent asset sales into a single transaction.

The Court relied heavily on the Second Circuit’s framework in Diebold Foundation, Inc. v. Commissioner, which permits multistep transactions to be collapsed where the seller had actual or constructive knowledge of the broader scheme. The Court found no clear error in the trial court’s determination that the Dillon trusts were on inquiry notice. The trusts were sophisticated parties represented by experienced tax counsel, knew the corporations had significant built-in gain, understood the IRS scrutiny associated with intermediary tax shelter transactions, and accepted bids that made little economic sense unless the buyer expected to avoid the embedded tax liability.

- Constructive Knowledge and Willful Ignorance: The Court rejected the trusts’ argument that they lacked knowledge of Haber’s fraudulent plan. The relevant standard did not require proof that Haber would have disclosed the entire scheme if asked. Rather, the surrounding facts created a duty to inquire further. The trial court found that the trusts’ failure to investigate reflected willful ignorance, not commercial reasonableness. The Court deferred to the lower court’s factual findings and credibility determinations, emphasizing that appellate review does not permit reweighing expert testimony.

- Scope of Liability, Penalties, and Interest: The Court also rejected the trusts’ attempt to limit their liability under New York law. Relying on Ruderman v. United States, the Court held that constructive fraud under NYUFCA § 273 could constitute actual fraud for purposes of denying the statutory cap on recovery. Accordingly, the trusts were not entitled to limit liability to the net value received.

The Court further upheld liability for HSHC’s gross valuation misstatement penalty. Because HSHC’s total tax liability, including penalties and pre-notice interest, was collectible under federal transferee-liability principles, the trusts could be held liable for those amounts.

Finally, the court affirmed dismissal of the illegal exaction claim related to the trusts’ Section 6603 deposits. Although the trusts deposited $71.7 million to stop interest from accruing, the IRS did not apply all deposits as payments because certain deposits were made by successor trusts rather than the original assessed taxpayers. The Court held that the IRS’s conduct was not unlawful and noted that Congress gave the IRS discretion in determining whether to apply a deposit as payment.

&TaxLawyers

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07/09/2026

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