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## Legal Research Dossier: 2020-2026

This legal research dossier analyzes significant US Tax Court cases and regulatory developments from 2020 to 2026, focusing on IRS authority, procedural validity under the Administrative Procedure Act (APA), and emerging interpretations of the Internal Revenue Code (IRC).

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### **1. IRS Assessment Authority: *Farhy v. Commissioner***
**Relevant Code:** IRC § 6038(b) (Penalties for failure to report foreign corporations)

#### **Core Text & Holding**
*   **Tax Court (2023):** In *Farhy v. Commissioner*, 160 T.C. No. 6 (2023), the Tax Court initially held that the IRS lacked statutory authority to "assess" penalties under Section 6038(b), which concerns penalties for failing to report information about foreign corporations. The court reasoned that, while Congress authorized assessment for many penalties, it did not explicitly do so for penalties imposed under Section 6038(b). Therefore, the court concluded that the IRS was required to collect such penalties through a civil suit in federal district court rather than through administrative levy.
*   **Appellate Reversal (2024):** The D.C. Circuit reversed this decision in *Farhy v. Commissioner*, No. 23-1179 (D.C. Cir. 2024), ruling that Section 6038(b) penalties *are* assessable. The appellate court found that the term "taxes" in Section 6201(a), which grants the IRS the authority to make assessments of all taxes, includes these penalties. The D.C. Circuit also cited 40 years of congressional "acquiescence" to this IRS practice as supporting its interpretation.

#### **Practical Implications**
Taxpayers can no longer rely on the Tax Court's initial procedural shield against immediate administrative collection of international information return penalties. The IRS has resumed administrative assessment and collection (liens/levies) for failures to file Form 5471, which is used to report information about certain foreign corporations controlled by U.S. persons.

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### **2. Conservation Easements & APA Challenges: *Valley Park Ranch LLC v. Commissioner***
**Relevant Code:** IRC § 170(h); Treas. Reg. § 1.170A-14(g)(6)(ii) ("Proceeds Regulation")

#### **Core Text & Holding**
*   **Ruling (March 28, 2024):** In *Valley Park Ranch LLC v. Commissioner*, 162 T.C. No. 6 (2024), the Tax Court invalidated Treasury Regulation § 1.170A-14(g)(6)(ii), often referred to as the "Proceeds Regulation." This regulation addresses the allocation of proceeds upon the extinguishment of a conservation easement, which is governed by Section 170(h) of the Internal Revenue Code and allows a deduction for the donation of a qualified real property interest to a qualifying organization for conservation purposes. The court held that the Treasury Department failed to adequately respond to significant public comments during the 1986 rulemaking process, thereby violating the Administrative Procedure Act (APA).
*   **Impact:** This decision effectively allows taxpayers to claim conservation easement deductions even if their deeds do not strictly follow the proportional allocation formula for extinguishment proceeds required by the now-invalidated regulation.

#### **Recent Precedent**
This case marks a significant reversal for the Tax Court, which had previously upheld the regulation in *Oakbrook Land Holdings, LLC v. Commissioner* (2020). It aligns the Tax Court with the Eleventh Circuit's decision in *Hewitt v. Commissioner* (2021), which also found the Proceeds Regulation to be invalid under the APA.

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### **3. Micro-Captive Insurance: *Ryan LLC v. IRS* & T.D. 10029**
**Relevant Code:** IRC § 831(b) (Small insurance companies); T.D. 10029 (Final Regulations, Jan 2025)

#### **Core Text & Holding**
*   **Federal Register T.D. 10029 (Jan 14, 2025):** Treasury Decision 10029, published in the Federal Register on January 14, 2025, finalized regulations identifying certain micro-captive insurance transactions as "listed transactions" or "transactions of interest." These designations were based on a 10-year loss-ratio computation, with thresholds of 30% and 60% respectively. Micro-captive insurance arrangements are governed by Section 831(b), which provides special tax treatment for certain small insurance companies.
*   **District Court Ruling (Nov 2025):** In *Ryan LLC v. IRS*, a federal district court in Texas struck down the loss-ratio thresholds (30% and 60%) established in T.D. 10029 as "arbitrary and capricious." The court found that the Treasury Department failed to adequately explain why these specific percentages were chosen to distinguish abusive micro-captive transactions from legitimate ones.

#### **News & Implications**
The *Ryan LLC* ruling delivers a significant blow to the IRS's 2025 regulatory framework for micro-captive insurance. While micro-captive transactions remain under heightened scrutiny, the specific, objective "loss ratio" tests are currently in legal limbo, potentially requiring the IRS to issue new, more thoroughly justified regulations to identify abusive transactions in this area.

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### **4. Self-Employment Tax & Limited Partners: *Soroban* & *Sirius Solutions***
**Relevant Code:** IRC § 1402(a)(13) (Limited partner exception)

#### **Core Text & Holding**
*   **Tax Court (2025):** In *Soroban Capital Partners LP v. Commissioner*, T.C. Memo 2025-52, the Tax Court addressed the limited partner exception under Section 1402(a)(13) relating to self-employment tax. The court applied a "functional analysis" to determine whether partners were acting as "limited partners, as such." It held that three individual partners who were fundamental to the fund's management were *not* acting as limited partners and were therefore subject to self-employment tax on their distributive shares of partnership income.
*   **Fifth Circuit Update (Jan 23, 2026):** In *Sirius Solutions, LLLP v. United States*, the Fifth Circuit recently overturned a similar Tax Court position, rejecting the "functional analysis" that limited the exception to passive investors. The Fifth Circuit held that the partners' income was not subject to self-employment tax.

#### **Current Interpretation**
There is a growing circuit split regarding the application of the limited partner exception to self-employment tax. The Tax Court continues to favor a functional approach (focusing on the partner's activities within the partnership), while the Fifth Circuit appears to support a more formalistic approach (focusing on the partner's state law status as a limited partner).

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### **5. IRS Guidance: Required Minimum Distributions (RMDs)**
**Relevant Document:** IRS Notice 2024-35

#### **Summary of Relief**
*   **Notice 2024-35:** The IRS extended transitional relief for beneficiaries subject to the "10-year rule" under the SECURE Act. It waived the excise tax (penalty) for failing to take required minimum distributions (RMDs) in 2024 for certain inherited IRAs.
*   **Final Regulations (July 19, 2024):** The IRS finalized regulations confirming that annual distributions *are* required during the 10-year period if the original owner died after their required beginning date. However, the penalties for non-compliance are waived through 2024.

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### **Research Summary Table**

| Case/Document | Issue | Key Holding |
| :--- | :--- | :--- |
| *Farhy v. Comm'r* (2024) | § 6038(b) Assessment | IRS **can** assess foreign reporting penalties administratively. |
| *Valley Park Ranch* (2024) | Conservation Easements | "Proceeds Regulation" is **procedurally invalid** under APA. |
| *Ryan LLC v. IRS* (2025) | Micro-Captive Regs | 30%/60% loss-ratio thresholds are **arbitrary and capricious**. |
| *Sirius Solutions* (2026) | § 1402(a)(13) | Rejects Tax Court's "passive investor" functional test for partners. |
| Notice 2024-35 | RMD Penalties | Penalty waiver for 10-year rule beneficiaries through **2024**. |