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## Synthesized Legal Research on IRS Code Sections, Precedents, and Emerging Tax Trends

### 1. Key IRS Code Sections & Current Interpretations

#### Section 1402(a)(13) – Limited Partner Self-Employment Tax (SECA)

The central issue here is whether limited partners are subject to self-employment tax under the Self-Employment Contributions Act (SECA). **Section 1402(a)(13)** of the Internal Revenue Code provides an exception from self-employment tax for limited partners.

*   **Current Interpretation:** For several years, the IRS has used a "functional analysis" test, as seen in *Soroban Capital Partners LP* (2023), to argue that limited partners who actively participate in the business do not qualify for this exception and are therefore subject to SECA tax. The IRS argued that only passive investors should benefit from this exception.

*   **2026 Shift:** A significant change occurred in January 2026 when the Fifth Circuit, in *Sirius Solutions LLLP v. Commissioner*, reversed the Tax Court and rejected the IRS's functional analysis test. The court held that if a partner has limited liability under state law, they qualify for the Section 1402(a)(13) exception, regardless of their level of activity. This ruling creates a split in authority, as the Second Circuit has taken a different position. Practitioners await further appellate rulings to clarify whether a "bright-line" state-law rule will be restored or if the functional test will become the national standard.

#### Section 41 & Section 174 – R&D Tax Credits and Amortization

This section addresses the rules surrounding the research and development tax credit under **Section 41**, which allows a credit for increasing research activities. It also addresses the treatment of research expenses under **Section 174**, which governs the deduction or amortization of research and experimental expenditures.

*   **Documentation Rigor:** The Tax Court and IRS are now requiring strict contemporaneous documentation to support R&D tax credits. In *Kyocera AVX* (2025) and *Phoenix Design Group, Inc. v. Commissioner* (2024/2025), the court found that "after-the-fact" interviews and evidence of "routine engineering" were insufficient to meet the "process of experimentation" test required to claim the Section 41 credit. *Phoenix Design Group* further tightened these requirements, stating that taxpayers must identify "specific technological uncertainties" *before* beginning research. This emphasizes the need for detailed records created during the research process. The "80% Rule," established in *Little Sandy Coal Co., Inc. v. Commissioner* (2021), also requires that at least 80% of activities must constitute a "process of experimentation."

*   **Legislative Reversal (OBBBA):** The **One Big Beautiful Bill Act (OBBBA)** of 2025 introduced **Section 174A**, reversing a previous change made by the Tax Cuts and Jobs Act (TCJA). Section 174A restores the ability to immediately deduct (expense) domestic research costs for tax years beginning after December 31, 2024. Previously, the TCJA required these costs to be amortized over five years. Businesses that capitalized R&D from 2022–2024 can now fully deduct those costs in 2025 or split them between 2025 and 2026.

#### Section 170 – Conservation Easements

The core issue here is the valuation of conservation easements and the resulting charitable deductions. **Section 170** of the Internal Revenue Code allows a deduction for charitable contributions, including the donation of a conservation easement.

*   **Valuation Scrutiny:** The IRS is actively scrutinizing conservation easement valuations, particularly for "gross valuation misstatements" under **Section 6662(h)**, which imposes penalties for substantial valuation misstatements. Recent 2025 cases such as *Beaverdam Creek Holdings, LLC* and *Ranch Springs, LLC* demonstrate that speculative "highest-and-best-use" assumptions (e.g., unrealized quarrying potential) will likely result in the near-total disallowance of multimillion-dollar deductions. The IRS and courts require realistic and well-supported valuations.

#### Section 831(b) – Micro-Captive Insurance

The central issue here is the use of micro-captive insurance companies as a tax planning strategy. **Section 831(b)** of the Internal Revenue Code provides a tax benefit for certain small insurance companies, often referred to as micro-captives.

*   **Listed Transactions:** Final regulations issued in January 2025 (effective April 2025) officially designated certain micro-captive arrangements as "listed transactions" or "transactions of interest." These designations are based on loss ratios (under 30% for listed, under 60% for interest) and financing provided to related parties. This means that these arrangements are subject to increased scrutiny and potential penalties. *Kadau v. Commissioner* (Aug 2025) ruled against a micro-captive arrangement, finding it "not insurance" for federal tax purposes and imposing 40% valuation penalties. *Patel v. Commissioner* (Nov 2025) addressed accuracy-related penalties (IRC § 6662) for micro-captive transactions, specifically under the economic substance doctrine (§ 7701(o)).

#### Section 1062(a) - Farmland Sales

The **One Big Beautiful Bill Act (OBBBA)** created a new deferral election under **Section 1062(a)** for the sale or exchange of qualified farmland to qualified farmers. Taxpayers must strictly adhere to farmer-qualification tests to be eligible for this election. Notice 2026-3 provides relief from additions to tax under Sections 6654 and 6655 (underpayment of estimated tax) for taxpayers making this election.

#### One Big Beautiful Bill Act (OBBBA) Provisions

Signed into law on July 4, 2025 (Public Law 119-21), the OBBBA represents a massive overhaul of the U.S. tax code. It makes permanent several provisions from the 2017 Tax Cuts and Jobs Act (TCJA) and introduces new incentives for workers and businesses. Key provisions include making the lower individual income tax rates, the increased Standard Deduction, and the $10,000 cap on State and Local Tax (SALT) deductions permanent. The act also established the "No Tax on Tips" provision, effective 2025-2028, under which employees can deduct qualified tips up to $25,000 annually. Taxpayers in Specified Service Trades or Businesses (SSTBs) as defined under Section 199A, a classification (e.g., law, health, accounting) used to limit eligibility for certain deductions, are generally ineligible. The OBBBA also includes a "No Tax on Overtime" provision, eliminating federal income tax withholding on overtime wages for eligible workers; a "No Tax on Car Loan Interest" provision, creating a new deduction for interest paid on loans for U.S.-assembled personal vehicles (up to $10,000 annually); restoration of 100% immediate expensing under Section 168(k), which had been phasing out; and increases the deduction for pass-through entities under Section 199A from 20% to 23%.

Additionally, the OBBBA replaces the Global Intangible Low-Taxed Income (GILTI) regime with Net CFC Tested Income (NCTI) under Sections 951A and 250, modifying tested income calculations for foreign subsidiaries, and expands Health Savings Account eligibility to participants in "bronze" and "catastrophic" health plans starting Jan 1, 2026.

**Trump Accounts (IRC § 530A, § 6434, § 128):** The OBBBA established Trump Accounts, a new category of tax-advantaged savings accounts for American children, intended to function as traditional IRAs after a "Growth Period." Section 530A outlines the general rules, while Section 6434 provides for a one-time $1,000 "pilot program" deposit for children born between January 1, 2025, and December 31, 2028. Section 128 addresses employer participation, allowing employers to contribute up to $2,500 per year tax-free as a fringe benefit (counting toward the $5,000 total annual limit). Aggregate private contributions (parents, relatives, etc.) are capped at $5,000 per year (indexed for inflation after 2027). No withdrawals are permitted until the beneficiary turns 18, after which the account is treated as a traditional IRA subject to standard IRC § 408 rules.

**Expanded HSA Availability (IRC § 223):** The OBBBA significantly broadened Health Savings Account (HSA) eligibility and usage under Section 223, effective primarily for plan years starting January 1, 2026. The Act effectively reclassified bronze and catastrophic plans as HSA-qualifying High-Deductible Health Plans (HDHPs), regardless of whether they meet the standard HDHP definition. The pandemic-era relief allowing first-dollar coverage of telehealth before meeting a deductible is now permanently reinstated (retroactive to January 1, 2025). Under the amended IRC § 223(d)(2)(C), Direct Primary Care (DPC) service arrangements are no longer disqualifying "other coverage." Fees (up to $150/month for individuals, $300/month for families) are now treated as qualified medical expenses.

**Net CFC Tested Income (NCTI) Modifications (IRC § 951A, § 250):** The OBBBA renames and replaces the Global Intangible Low-Taxed Income (GILTI) regime with Net CFC Tested Income (NCTI). The 10% QBAI (Qualified Business Asset Investment) deduction is eliminated, meaning NCTI now captures all returns from foreign tangible assets. The IRC § 250 deduction for NCTI is reduced from 50% to 40%, resulting in an increased U.S. effective tax rate (ETR) of 12.6% (up from 10.5%). The Foreign Tax Credit (FTC) "haircut" is improved; corporations may now claim 90% of foreign taxes paid (previously 80%). Moving away from the "last day of the year" ownership rule, a U.S. shareholder must now include their share of NCTI if they own stock on any day during the CFC’s taxable year.

#### State Conformity to OBBBA

State conformity to the OBBBA is currently a "patchwork" of differing models (rolling, static, or selective), leading to significant compliance burdens for multistate taxpayers. Static conformity (e.g., Minnesota) means that the state conforms to the IRC as of a specific date (e.g., May 1, 2023) and does not automatically adopt OBBBA changes. Taxpayers must make nonconforming adjustments on state returns unless the legislature updates the "tie-in" date. Many states (e.g., Maryland, Virginia, California) have updated their tie-in dates but explicitly decoupled from OBBBA’s bonus depreciation and business interest limitation (Section 163(j)) to protect state revenues. Partial conformity (e.g., Maine) means the state has adopted a dual system for depreciation and personal deductions, requiring separate recordkeeping for state vs. federal purposes.

Maryland uses a hybrid "rolling" conformity model, but it automatically conforms only if the revenue loss does not exceed $5 million. Otherwise, the change is delayed for one year to allow legislative review.

### Key Legal Terms

* **Notice of Deficiency (NOD):** The "90-day letter" sent by the IRS, which is the legal prerequisite for a taxpayer to file a petition in Tax Court without first paying the disputed tax.
* **Abatement (Section 6404):** The IRS's authority to reduce or eliminate interest/penalties, often a central issue in "Failure to Abate" cases in Tax Court.
*   **Constructive Receipt:** A doctrine stating income is taxable when it is made available to the taxpayer without substantial limitations, even if they haven't physically received it.
* **Specified Service Trade or Business (SSTB):** A classification (e.g., law, health, accounting) used to limit eligibility for certain deductions like Section 199A or the OBBBA "No Tax on Tips" provision.
* **Tested Income (NCTI):** The new OBBBA metric for taxing foreign earnings, replacing the previous GILTI formula.

### Procedural and Administrative Cases

*Kristen B. Hillenbrand v. Commissioner* (2026) addresses whether USPS tracking data can overcome the presumption of delivery for a Notice of Deficiency if the taxpayer claims non-receipt. *Meyer, Borgman & Johnson, Inc. v. Commissioner* (2024) upheld the IRS’s right to use automated "Classifier" review systems to summarily deny refund claims that lack specific documentation.

### Substantive Tax and Income Cases

*CF Headquarters Corp. v. Commissioner* (2025) analyzed whether relocation grants constitute taxable income or "contributions to capital."

#### Administrative Law Challenges (Post-Loper Bright)

*   **Key Case:** *Foothill Packing v. CIR* (2026 Watchlist).
*   **Current Interpretation:** This case explores the boundaries of **Section 7805**, which grants the IRS authority to prescribe rules and regulations. In light of *Loper Bright Enterprises v. Raimondo* (2024), the Supreme Court case that struck down *Chevron* deference, the IRS has shifted its defense to argue that Section 7805(a), combined with specific statutory grants, provides "discretionary authority" that does not violate the **Nondelegation Doctrine**.
*   **Significance:** This represents a strategic pivot in tax litigation, where taxpayers are now challenging the very constitutionality of Treasury’s broad rulemaking power. The case specifically concerns the validity of Treasury Regulation § 301.6330-1(e)(3), which relates to Collection Due Process hearings.

### 2. Recent Precedents (2020–2026)

| Case Name | Date | Key Ruling / Significance |
| :--- | :--- | :--- |
| *Aventis, Inc. v. Commissioner* | Jan 28, 2026 | The Tax Court dismantled a legacy Financial Asset Securitization Investment Trust (FASIT) structure, rejecting the "substantial compliance" doctrine and recharacterizing debt as equity. |
| *Sirius Solutions LLLP v. Commissioner* | Jan 2026 | Reversed the Tax Court; held that state-law limited partners are exempt from SECA tax regardless of participation level. |
| *Kadau v. Commissioner* | Aug 2025 | Ruled against a micro-captive arrangement, finding it "not insurance" for federal tax purposes; imposed 40% valuation penalties. |
| *Patel v. Commissioner* | Nov 2025 | Resolved accuracy-related penalties (IRC § 6662) for micro-captive transactions, specifically under the economic substance doctrine (§ 7701(o)). |
| *Smith et al. v. Commissioner* | Jan 2025 | A victory for taxpayers in the architectural sector; the court denied the IRS summary judgment on the "funded research" exception. |
| *Plastic Film, LLC v. United States* | Jan 2026 | Addressed pleading requirements for Employee Retention Credit (ERC) refund suits and the viability of APA challenges against IRS Notice 2021-20. |
| *Loper Bright Enterprises v. Raimondo* | 2024 | While not a Tax Court case, this SCOTUS ruling overruled *Chevron* deference, inviting a surge of challenges to Treasury Regulations in 2025 and 2026. |

### 3. Practical Implications & News

#### The "One Big Beautiful Bill Act" (OBBBA) Impact

*   **Section 174 Catch-up:** As previously noted, businesses that capitalized R&D from 2022–2024 can now fully deduct those costs in 2025 or split them between 2025 and 2026, due to the introduction of **Section 174A**.

*   **New Account Types:** The act created "Trump Accounts," a type of traditional IRA for minors under 18, and expanded Health Savings Account (HSA) availability under **Section 223**, which allows tax-advantaged savings for healthcare expenses. IRS Notice 2025-68 clarifies rules for Trump Accounts, while Notice 2026-5 provides further guidance on the expanded availability of HSAs.

*   **State Conformity:** Taxpayers must monitor "rolling" vs. "static" state conformity, as many states may not immediately adopt the OBBBA’s federal changes to Section 174 or ERC treatment. Static states like California will require taxpayers to manage significant "book-tax differences" between federal and state filings, especially regarding the new NCTI rules and Trump Account basis.

#### IRS Enforcement & Budgetary Shifts

*   **Funding Rescissions:** Recent 2025/2026 appropriations have reduced the IRS enforcement budget by nearly $500 million. Experts predict the IRS may shift away from "complicated returns" (large corporate audits) back to simpler, high-ROI enforcement actions due to staffing shortages.

*   **ERC Deadlines:** The OBBBA established that the IRS will automatically deny Employee Retention Credit (ERC) claims for the latter half of 2021 if filed after January 31, 2024, and extended the assessment period for those quarters to six years.

#### Cannabis Deductions (Section 280E)

*   **Ongoing Litigation:** Cases like *Ultra Health* (2026) are testing whether the IRS can continue to deny operating expense deductions under **Section 280E** as the federal government moves toward rescheduling cannabis to Schedule III. Section 280E prohibits businesses from deducting expenses related to the trafficking of controlled substances, which has historically included cannabis.

#### Administrative Law Challenges (Post-Loper Bright)

*   **Key Case:** *Foothill Packing v. CIR* (2026 Watchlist) explores the boundaries of **Section 7805**, which grants the IRS authority to prescribe rules and regulations. In light of *Loper Bright*, the IRS has shifted its defense to argue that Section 7805(a), combined with specific statutory grants, provides "discretionary authority" that does not violate the Nondelegation Doctrine. This represents a strategic pivot in tax litigation, where taxpayers are now challenging the very constitutionality of Treasury’s broad rulemaking power.

*   **Practical Impact:** Challenges to Treasury regulations are becoming more common, requiring tax advisors to carefully analyze the statutory authority underlying any regulation that adversely affects their clients.

*   **Private Letter Rulings for PFIC Shareholders:** In international tax, **Revenue Procedure 2026-10** establishes a formal, streamlined framework for shareholders of Passive Foreign Investment Companies (PFICs) to request Private Letter Rulings (PLRs) for retroactive Qualified Electing Fund (QEF) elections under **Section 1295(b)**. Tightened documentation requirements and a strict "no prejudice to the interests of the Government" test are now in place.

*   **Farmland Sales:** Taxpayers should note **Notice 2026-3**, which provides relief from additions to tax under **Sections 6654 and 6655** (underpayment of estimated tax) for taxpayers making a **Section 1062(a)** election for the sale/exchange of qualified farmland to qualified farmers. Taxpayers must strictly adhere to farmer-qualification tests.

Sources: *IRS Bulletins 2026-01 to 2026-04; US Tax Court Memorandum Decisions 2025; 5th Circuit Court of Appeals (Sirius Solutions, 2026); Bloomberg Law (Tax Court to SCOTUS 2026); Thomson Reuters (Section 174/OBBBA Analysis); Aventis, Inc. v. Commissioner, 166 T.C. No. 1; KPMG/McDermott Tax Controversy Roundup (Jan 2026); irs.gov: One, Big, Beautiful Bill Act provisions and Dyed Fuel Claims; ustaxcourt.gov: News, DAWSON system updates, and Chief Judge election (Patrick J. Urda); whitehouse.gov: OBBBA Summary and Endorsements; Tax Foundation & PWC: State conformity and OBBBA impact analysis; Current Federal Tax Developments (Ed Zollars): Notice 2026-11 and Statutory Construction.*