Offit Kurman Blogs
Commercial Litigation
Before You File in Tax Court: Should Your Client Take the IRS to a Jury?
When the IRS proposes a substantial tax liability, many taxpayers and their advisers instinctively assume that the next step is the United States Tax Court. That is often the correct forum. Tax Court lets taxpayers challenge a deficiency without first paying and also offers access to judges who deal with federal tax law every day. But Tax Court is not the only option. In an appropriate case, a taxpayer may instead pay the disputed liability, file an administrative refund claim, and bring a refund suit in federal district court. Unlike Tax Court, a federal district court can provide something potentially significant: a trial before a local jury. That alternative may be especially important when the taxpayer’s dispute falls within a category that the IRS has publicly targeted and in which the Tax Court has developed a substantial body of government-favorable precedent. Captive-insurance arrangements, Puerto Rico tax-incentive cases, conservation easements, listed transactions, and transactions of interest are prominent examples. Sometimes the Forum Is as Important as the Tax Issue I often say that jury trials are, at least in part, popularity contests — and it is hard to lose a popularity contest to the IRS. A jury may be particularly receptive when a taxpayer can present credible witnesses, contemporaneous business records, and a logical explanation for the transaction under examination. When the IRS’s position depends on portraying a legitimate business, its owners, or its advisers as abusive or dishonest, a local jury may provide a valuable opportunity to test that characterization. This does not mean that a jury will disregard the law or automatically side with the taxpayer. The taxpayer must still establish the elements necessary to recover a refund, and the district judge will decide the governing legal questions. But when the outcome depends heavily on facts, credibility, and business reality, the identity of the factfinder matters. The Concern Is Greatest in Heavily Targeted Categories Every tax case should be decided on its own facts. In practice, however, prior decisions inevitably shape how later cases are evaluated. That becomes particularly significant when the Tax Court has repeatedly considered a particular type of transaction and consistently ruled in the government’s favor. Over time, the disputed category can acquire a negative identity of its own. A taxpayer may then face not only the evidence in its particular case, but also an existing body of decisions involving other taxpayers, different advisers, different documents, and different facts. Captive-Insurance Arrangements The Tax Court has decided a series of micro-captive cases in favor of the government. Those decisions have developed a body of precedent addressing risk distribution, actuarial pricing, claims administration, circular cash flows, risk pools, and whether the arrangements constitute insurance in the commonly accepted sense. Many of the arrangements addressed in those opinions had significant factual weaknesses. Nevertheless, the accumulation of adverse decisions can make it difficult for a taxpayer with materially different facts to separate its case from the broader category. Once “micro-captive” or “§ 831(b)” appear in the case, the taxpayer may find itself defending not only its own insurance program but the reputation of the industry as a whole. Puerto Rico Tax-Incentive Cases The IRS has established a compliance campaign directed at taxpayers claiming benefits under Puerto Rico Acts 20 and 22, now incorporated into Act 60. The campaign addresses whether taxpayers were bona fide residents of Puerto Rico, whether income was properly sourced to Puerto Rico, and whether particular structures improperly shifted income away from the United States. The IRS has committed examination resources, technical guidance, data analysis, and other enforcement tools to these cases. Its published materials identify perceived noncompliance involving both residency and income sourcing. As these cases move from examination into litigation, taxpayers may confront a government narrative that treats the Puerto Rico incentive structure itself with suspicion. Yet the critical questions — where the taxpayer lived, where services were performed, how the business operated, and where the income was earned — are often highly factual. A jury may evaluate those questions through testimony, business records, travel records, communications, and other contemporaneous evidence. Conservation Easements Conservation-easement litigation has likewise produced a substantial body of government-favorable decisions. Many cases involve technical deed requirements, valuation disputes, partnership structures, promotional materials, and questions concerning the taxpayer’s charitable intent. The IRS has publicly identified abusive syndicated conservation easements as an enforcement priority. That designation can influence how the transaction is perceived before the taxpayer’s particular facts are examined. A jury will not cure a defective deed or disregard an applicable statutory requirement. But where the dispute turns on valuation, intent, reasonable reliance, or the credibility of competing experts, jury review may offer a materially different forum. Listed Transactions and Transactions of Interest The same concern applies more broadly to listed transactions and transactions of interest. An IRS designation creates reporting obligations and potentially significant penalties, but it does not establish that every taxpayer participating in the transaction acted improperly. Nor does it prove that the IRS’s proposed tax treatment is correct in every case. Nevertheless, the designation itself can become a central feature of the dispute. The taxpayer may be viewed as a participant in an abusive strategy before the court considers the specific facts, legal advice, business purposes, and economic consequences of the transaction. In those circumstances, presenting the case to a jury without the same history of category-specific Tax Court decisions may be strategically important. Tax Court and District Court Offer Different Paths A taxpayer who receives a statutory notice of deficiency may petition the Tax Court without paying the proposed liability. The case is decided by a Tax Court judge, not a jury. Alternatively, the taxpayer may allow the liability to be assessed, pay the amount required to pursue a refund action, file a proper administrative claim for refund, and, after satisfying the applicable procedural requirements, bring suit in federal district court. Federal law gives district courts jurisdiction over qualifying federal tax-refund suits, and either party may request a jury trial. The taxpayer may also bring a refund suit in the United States Court of Federal Claims, but that court does not provide a jury. When jury review is part of the litigation strategy, federal district court is therefore the relevant alternative. The Principal Drawback: Payment Usually Comes First The most obvious advantage of Tax Court is that the taxpayer ordinarily does not have to pay the asserted deficiency before obtaining judicial review. A district-court refund suit generally works in the opposite order. Under the Supreme Court’s full-payment rule, the taxpayer ordinarily must pay the assessed tax before filing suit to recover it. For a large deficiency, that can create a substantial financial burden and may make the district-court route impractical. There are important exceptions for certain divisible taxes and penalties. Employment taxes, trust-fund recovery penalties, and some assessable penalties may permit refund litigation after payment of only the divisible portion required by the applicable statute. Internal Revenue Code § 6703 also provides a special procedure for challenging certain promoter penalties, including penalties under § 6700. The payment requirement must therefore be evaluated based on the particular tax or penalty. CPAs should not assume either that the entire assessment must always be paid or that a partial payment will necessarily be sufficient. Where the taxpayer has access to the necessary funds, or where a divisible assessment permits a more limited payment, the strategic value of a jury may justify the cost of pursuing the refund route. Ankner Demonstrates the Value of Escaping a Category-Based Narrative The potential value of a district-court jury was illustrated in Ankner v. United States, where I served as lead trial counsel for a captive-insurance manager and its chief executive officer in their successful challenge to approximately $4 million in promoter penalties imposed under § 6700. Although Ankner involved promoter penalties rather than a direct challenge to captive-insurance deductions, the government’s theory depended on its characterization of the underlying micro-captive arrangements. The verdict represented the first courtroom victory for a taxpayer in the § 831(b) micro-captive arena and, to date, remains the only taxpayer victory — standing apart from an otherwise uninterrupted series of government victories in Tax Court. After making the payment required to invoke the special statutory refund procedure, the taxpayers challenged the penalties in the United States District Court for the Middle District of Florida. At trial, the government could not prevail merely by characterizing the underlying arrangements as micro-captives or relying on adverse decisions involving other taxpayers. It was required to prove the specific statutory elements of § 6700 based on the evidence involving these taxpayers. The jury heard the witnesses, reviewed the documents, and considered what the taxpayers had actually said, what they knew, and whether the statements identified by the government were materially false. The jury rejected the government’s position and found that the taxpayers were not liable for the penalties. The lesson is not that juries will always rule for taxpayers. It is that a jury can require the parties to move beyond the label attached to a transaction and return the focus to the particular witnesses, documents, representations, and business facts in the case. Although the burden of proof in Ankner was governed by the provisions applicable to § 6700 penalties, the broader lesson applies to other disputes: an IRS enforcement designation or a series of adverse cases involving other taxpayers should not replace individualized consideration of the evidence. The Refund Claim Should Be Prepared With Litigation in Mind Choosing district court requires more than paying the assessment. Internal Revenue Code § 7422 generally requires the taxpayer to file an administrative refund claim before bringing suit. The claim should identify each ground on which the refund is sought and provide sufficient facts to advise the IRS of its basis. The refund claim should therefore be prepared as the foundation for potential litigation. Counsel should consider the legal theories, relevant tax periods, supporting documents, potential witnesses, and expert issues before the claim is filed. A strong refund claim may also improve the prospects for resolving the dispute administratively. It demonstrates that the taxpayer has developed the case, understands the evidentiary requirements, and is prepared to proceed if the IRS does not allow the refund. The Forum Decision Must Be Made Early The choice between Tax Court and district court should not be postponed until the eve of trial. When the IRS issues a statutory notice of deficiency, the taxpayer ordinarily has 90 days to file a Tax Court petition. Filing that petition generally forecloses a later district-court refund action involving the same tax and period. The taxpayer and its advisers should therefore evaluate the competing forums before the petition is filed. If the taxpayer selects the refund route, the administrative claim and the limitations period for filing suit must also be monitored carefully. Once the IRS mails a formal notice of disallowance, Internal Revenue Code § 6532(a) generally provides two years to file suit. Continuing to negotiate with the IRS or pursuing an administrative appeal does not, by itself, extend that deadline. When CPAs Should Raise the Issue CPAs are often in the best position to recognize cases that may benefit from district-court review. They understand the client’s business, know the quality of the records, and can evaluate whether the taxpayer and other witnesses can credibly explain the disputed transaction. The forum question deserves consideration when: The IRS appears to be applying an industrywide enforcement position rather than focusing on the taxpayer’s individual facts The dispute turns heavily on credibility, intent, valuation, reasonable reliance, or business purpose The client has strong witnesses and contemporaneous documentation The client’s business explanation can be communicated clearly to non-tax specialists Payment is financially possible, or a divisible-tax procedure may reduce the required payment The deadline for filing a Tax Court petition is approaching These factors do not mean district court is necessarily the better forum. A dispute involving a narrow statutory interpretation or an issue driven principally by specialized tax doctrine may be better suited to a Tax Court judge. But a fact-intensive case with a strong record and an unfavorable category-based narrative should prompt a deliberate forum analysis. A CPA does not need to determine the proper forum. The CPA needs to recognize when the choice deserves a conversation with litigation counsel before the available options narrow. Do Not Treat Tax Court as the Automatic Choice Tax Court remains an important and frequently appropriate forum. Its prepayment jurisdiction and specialized judges offer substantial advantages. But when a taxpayer has materially better facts than the cases that preceded it, the ability to present those facts to a local jury may offer meaningful strategic value. The question should be considered before Tax Court becomes the automatic, and potentially irrevocable, choice. As Ankner demonstrates, moving beyond the IRS’s label and focusing the factfinder on the taxpayer’s actual evidence can change the outcome.
September 15, 2026
Commercial Litigation
United States Tax Court Delivers Important R&D Credit Win for Architectural Innovation
The United States Tax Court released its opinion today on Smith v. Commissioner, T.C. Memo. 2026-50, and it is a significant R&D credit win for taxpayers that perform sophisticated technical work for clients. I am particularly satisfied with the outcome, having had the privilege of litigating this case. This matter involved research credits claimed by Adrian Smith + Gordon Gill Architecture, LLP, or AS+GG, for research activities performed in connection with large scale architectural projects during the 2008, 2009, and 2010 tax years. AS+GG is known for ambitious, complex, and highly sustainable architectural design. The projects at issue involved supertall towers, zero carbon and low energy design concepts, wind studies, solar orientation analysis, structural and environmental performance issues, and other technical design challenges. This context matters, as the case was not about routine design work. The opinion describes a firm working at the edge of what architecture, engineering, and sustainable design could accomplish. In that respect, the case is a useful reminder that R&D credits are not limited to laboratories, software companies, or manufacturing floors. Innovation also happens in design studios, engineering meetings, building models, wind studies, and iterative technical problem solving. The IRS Conceded the Four-Part Test One of the most important features of the case is what was not in dispute by the time of trial. The IRS ultimately conceded that AS+GG’s claimed business components satisfied the four-part test for qualified research under section 41(d). That concession mattered, and it did not happen by accident. A significant part of the case was devoted to developing the factual record on the nature of AS+GG’s work. Through extensive discovery, the taxpayers built the record showing that the projects involved real technical uncertainty, a process of experimentation, and design work directed at performance, sustainability, structure, energy usage, wind behavior, solar orientation, and other technical objectives. By the time of trial, the government no longer tried the case on the theory that the work failed the four-part test. Instead, the IRS conceded that issue, and the trial focused on the funded research exclusion under section 41(d)(4)(H). That is a major point. For taxpayers in architecture, engineering, design, and other technical service industries, the concession reinforces something important: sophisticated client work can involve qualified research. The remaining fight was not whether AS+GG’s work was research. It was whether the funded research rules limited the credit. The Funded Research Issue The funded research exclusion is one of the most important limitations on R&D credits for companies that perform technical work under customer contracts. Section 41(d)(4)(H) excludes research “to the extent funded” by another person. The regulations generally ask two questions: First, was payment contingent on the success of the research Second, did the taxpayer retain substantial rights in the research The Court applied that familiar framework. The taxpayers argued that, after Loper Bright, the Court should not simply accept the regulatory test and should instead adopt a narrower reading of “funded.” The Court rejected that argument and held that the funded research regulations remain valid. That part of the opinion is important, but it should not obscure the practical taxpayer win. Even applying the regulatory framework urged by the government, the taxpayers prevailed on the central issue that mattered most for four of the six sample projects: substantial rights. The Taxpayer Win: Substantial Rights The heart of the opinion is the Court’s substantial rights analysis. The Court held that AS+GG retained substantial rights in the research performed on four of the six sample projects: Atrium City Tower, Masdar HQ, Atrium City Masterplan, and Plot R2. That holding matters because a taxpayer that retains substantial rights in the research may still claim R&D credits on a reduced basis, even if the Court concludes that payments were not contingent on success. The practical result is that AS+GG was not treated as having simply performed fully funded research for a customer on those projects with no credit available. Instead, the Court recognized that AS+GG retained meaningful rights to use the results of its research in its business. That is a significant result in a funded research case. It is also a lesson in contract drafting. The Court did not treat intellectual property provisions, copyright language, licenses, confidentiality clauses, settlement agreements, and use restrictions as boilerplate. It parsed the language project by project. On some projects, the language preserved enough rights for the taxpayer. On others, it did not. That project-by-project analysis is one of the most useful aspects of the opinion. It shows that small differences in contract language can produce very different R&D credit outcomes. Why this Matters for R&D Credit Taxpayers Smith is especially useful for architecture, engineering, construction, consulting, design, and other technical service businesses. Many of these companies assume that R&D credits are unavailable because they perform work for clients. That assumption is too broad. A customer contract does not automatically eliminate the credit. The funded research rules are more nuanced. The key questions are who bears the relevant risk and whether the taxpayer retains meaningful rights in the research. The opinion reinforces several important points. First, design and architecture can involve qualified research. The Court’s factual findings describe technical work involving sustainability, wind, energy, structure, geometry, performance, and environmental constraints. Those are exactly the kinds of uncertainties that can support R&D credit claims when properly documented. Second, substantial rights matter. A taxpayer does not necessarily lose the credit merely because the customer receives project rights, licenses, or deliverables. The question is whether the taxpayer retained meaningful rights to use the research results in its own business. Third, contracts matter. The funded research analysis is driven heavily by the agreement between the taxpayer and the customer. Taxpayers who wait until audit to think about substantial rights are often too late. Fourth, documentation still matters. The Court left the precise credit amounts to be determined through computation. That is a reminder that winning the legal issue is not enough. Taxpayers also need project level documentation and expense substantiation that allow the allowable credit to be calculated. A Strong, Reasonable Compensation Win The opinion also includes an important win on reasonable compensation, an issue I personally handled at trial, and one of the most satisfying parts of the case. AS+GG’s R&D credit included wage related qualified research expenditures attributable to the partners. The government challenged the partners’ 2008 compensation under section 174(e), arguing for a much lower reasonable compensation amount. At trial, a central part of the taxpayers’ case revealed that the government’s reasonable compensation theory did not fit the economics of the business. That point came through clearly in the expert testimony. The IRS expert advanced a much lower compensation number under a multifactor analysis, but his own independent investor analysis showed that, even after his adjustments, AS+GG generated a 939% return on equity. On that math, he concluded that the partners’ total compensation was not unreasonable. That was a powerful trial point. The government’s expert opinion, when tested against the controlling Seventh Circuit standard, supported the taxpayers. The Court agreed that the independent investor test applied because the case was appealable to the Seventh Circuit. Once that standard governed, the result followed: the partners’ 2008 compensation was reasonable under section 174(e). That holding is meaningful for owner-operated businesses where the people driving the research are also principals of the business. In those cases, the R&D credit often depends not only on whether the work qualifies, but also on whether compensation paid to key technical leaders can be included in wage QREs. Here, the Court accepted the taxpayers’ position and preserved an important component of the credit. Practical Takeaways The biggest takeaway from Smith is that R&D credit planning should begin before the contract is signed. Taxpayers performing technical work for customers should review their agreements for at least three things: First, what happens if the research fails Second, who owns the work product, technical information, drawings, designs, models, methods, and other research results Third, does the taxpayer retain the right to use what it learned and developed in future work Those questions should be addressed in the contract itself. They should not be left to implication, course of dealing, or after-the-fact argument. This case also highlights the importance of project-level documentation. Taxpayers should identify the business components, the technical uncertainties, the process of experimentation, the employees or principals performing qualified services, and the expenses tied to the research. Conclusion Smith v. Commissioner is a significant R&D credit decision and a gratifying taxpayer win. The IRS conceded that the work satisfied the four-part test. The Court held that AS+GG retained substantial rights in four of the six sample projects and allowed the taxpayers to claim research credits to the extent permitted by the funded research rules. The Court also accepted the taxpayers’ position on reasonable compensation, preserving an important wage QRE issue. For taxpayers in architecture, engineering, design, consulting, and other technical service businesses, the message is encouraging: customer contract work does not automatically defeat the R&D credit. But the contract language matters, the retained rights matter, and the record matters.
June 16, 2026
Tax
Cannabis Tax Relief Is Here — But IRS Risk Is Just Beginning
For years, cannabis operators have functioned under a fundamentally distorted tax regime. Section 280E denied deductions that every other business takes for granted, forcing companies to pay tax on something closer to gross income than net profit. That framework has now changed, at least for a significant portion of the industry. The federal government’s decision to reschedule state-licensed medical cannabis to Schedule III removes the § 280E limitation and allows qualifying businesses to deduct ordinary and necessary expenses under § 162. The headline is clear: tax relief is here. But the more important reality is this: the industry is transitioning from a regime of disallowance to a regime of interpretation, and that is where risk lives. A Structural Shift, Not Just a Tax Cut The removal of § 280E does more than reduce tax liability. It fundamentally changes how cannabis businesses are analyzed for tax purposes. For the first time, medical operators must think like every other taxpayer. They must evaluate what constitutes an ordinary and necessary expense, how costs are allocated across lines of business, and whether those positions are sustainable under IRS examination. This normalization introduces flexibility but also subjectivity. And subjectivity is where disputes begin. For operators with both medical and recreational activities, the issue is even more pronounced. Because recreational cannabis remains a Schedule I substance, § 280E still applies to that portion of the business. That creates an immediate need to develop defensible allocation methodologies between revenue streams, personnel, facilities, and shared overhead. These are not merely accounting questions, they are positions that will ultimately be tested. Timing, Transition, and Retroactivity Another layer of complexity lies in how the change is implemented. Treasury and the IRS have signaled that § 280E relief may apply to the entire taxable year that includes the effective date of rescheduling. If that approach holds, it creates a significant opportunity, but also risk. Businesses may take positions that maximize deductions across the full year, while the IRS may later challenge how those positions were calculated or documented. There is also the open question of retroactive relief. The possibility that prior years could be revisited raises strategic considerations around amended returns, refund claims, and statute of limitations issues. These decisions are not purely mechanical. They require a view of how the IRS is likely to respond. R&D Credits: A New Frontier for Cannabis Tax Strategy Perhaps the most underappreciated implication of rescheduling is access to the research and development credit under § 41. Cannabis businesses, particularly those engaged in cultivation, extraction, and product development, often perform activities that meet the technical requirements for qualified research. These include developing new strains, improving yield and consistency, refining extraction processes, and designing new delivery methods. Historically, many operators either avoided claiming the credit or took a conservative approach due to the overlay of § 280E and the lack of clear precedent in the industry. That restraint is likely to disappear quickly. The financial upside is real. Properly documented R&D credits can offset a meaningful portion of federal tax liability, and in some cases provide payroll tax offsets for earlier-stage businesses. But this is not low-risk territory. R&D credits are already an area of heightened IRS scrutiny, and the agency has become increasingly aggressive in challenging claims that lack contemporaneous documentation or rely on overly broad characterizations of qualifying activities. Cannabis businesses entering this space will be doing so under two compounding factors: new eligibility, and a tendency toward aggressive positioning. That combination is precisely what draws enforcement attention. The Inevitable Second Phase: IRS Scrutiny Tax law changes of this magnitude do not settle quietly. They move in phases. The first phase is what we are seeing now: rapid adoption of favorable positions. The second phase is where the IRS responds, often several years later, once patterns emerge and guidance is issued. That is when the real issues surface. The IRS will examine whether allocation methodologies between medical and recreational operations are reasonable, whether deductions claimed under § 162 are adequately substantiated, whether R&D credits meet the technical and documentation requirements, and whether positions taken during the transition period were overly aggressive. By the time these questions are asked, the financial stakes are often significant, and the factual record is already fixed. Why This Requires a Different Approach Most tax planning focuses on maximizing current benefit. In this environment, that is only part of the equation. The more important question is whether the positions being taken today will hold up under examination, appeals, or litigation. That requires thinking not just like an advisor, but like the IRS and, when necessary, like a litigator. Having spent nearly a decade inside the IRS Office of Chief Counsel and now representing clients in complex tax disputes, I have seen how these cases are developed from the government’s side. That perspective informs of a different approach. It means building allocation methodologies that are not just reasonable but defensible, structuring R&D credit claims with audit in mind from the outset, identifying positions that are likely to become enforcement targets, and preparing for disputes before they arise rather than reacting after the fact. In a transition like this, the strongest position is not the most aggressive one. It is the one that can survive scrutiny. The Bottom Line The rescheduling of medical cannabis is a turning point. It brings long-awaited tax relief and opens the door to planning opportunities that were previously unavailable. But it also moves the industry into a more complex and contested tax environment, one where interpretation, documentation, and defensibility matter as much as the underlying benefit. The businesses that come out ahead will not simply be the ones that claim the most. They will be the ones who approach this moment with a clear understanding of how those claims will be evaluated when it matters most. If you are navigating these issues, the question is not just whether you are taking advantage of the opportunity. It is whether you are positioned to defend it.
May 8, 2026
Commercial Litigation
Developments in IEEPA Refund Litigation
Through multiple court filings, the U.S. Customs and Border Protection (CBP) and the U.S. Court of International Trade (CIT) have identified significant updates affecting importers seeking refunds of additional ad valorem duties imposed under the International Emergency Economic Powers Act (IEEPA). These developments signal meaningful progress toward a structured refund process, while also highlighting critical compliance steps importers must take now to preserve potential recovery. CBP Update: CAPE Refund Functionality Progress CBP continues to develop a new refund-processing capability within the Automated Commercial Environment (ACE) collections framework, officially named the Consolidated Administration and Processing of Entries (CAPE). This system is designed to automate and streamline the administration of IEEPA-related duty refunds. As of March 19, 2026, CBP reported the following progress: Claim portal: 73% complete Mass processing: 45% completeOngoing development includes ACE validations and event history tracking Review and liquidation/reliquidation: 80% complete Refund processing: 63% complete Once implemented, CAPE is expected to significantly improve efficiency, with CBP estimating a reduction of over 4 million labor hours compared to manual processing. The system is intended to facilitate more timely and accurate refunds for importers. CIT Update: Continued Stay and Guidance on Entry Status On March 20, 2026, the CIT issued an order continuing its prior stay (initially imposed March 4, 2026) and provided further clarification regarding treatment of entries. CBP is directed to reliquidate: Unliquidated entries; and Entries liquidated but not yet final (i.e., within 90 days of liquidation) For entries approaching or within the 180-day protest window:The CIT emphasized that importers "should be aware" of available protest remedies (under 19 U.S.C. § 1514(a)) Scope Expansion:The court amended its prior orders to encompass all IEEPA duties imposed, including those on imports from Brazil and India Notably, the CIT did not resolve whether refunds will be available for entries that are already liquidated and beyond the 180-day protest deadline, where a protest was not filed. It is important to note that the implication before this order indicated that liquidation dates were no longer relevant, however the court’s specific reference to 19 U.S.C. § 1514(a) seems to signal that failure to file a protest COULD result in forfeiting your claim. Therefore, get documents early, and file the protest if you are within the 180-day window to avoid uncertainty. Ultimately, it is a “belt and suspenders” remedy that is worth the extra time. Key Takeaways for Importers Categorize Entries Immediately The availability of refunds may depend on the liquidation status of entries. Importers should promptly identify and classify entries into the following categories: Unliquidated entries Entries liquidated within the 180-day protest period Entries liquidated beyond 180 days:With a filed protest Without a properly filed protest Current law generally provides: CBP may reliquidate within 90 days of liquidation Importers may file protests within 180 days After 180 days, liquidation is typically considered “final and conclusive” Accordingly, entries beyond the protest period may face significant barriers to recovery. Prepare for CAPE by Confirming Electronic Refund Capabilities on the ACE Portal CBP’s Interim Final Rule on Electronic Refunds (effective February 6, 2026) requires that all refunds be issued electronically. Despite approximately 330,000+ importers having paid IEEPA duties or deposits, only about 21,400 entities had completed electronic refund setup as of early March. CBP has already been unable to process 7,700 refunds for nearly 2,900 importers due to incomplete or improper setup. Important to Note Refund claims will be rejected if the importer has not enabled electronic refund capability in ACE. Importers should immediately confirm: ACE portal access Banking and payment configurations Coordination with customs brokers, where applicable Access the Electronic Refund Enrollment in CBP's ACE Portal here. Looking Ahead CBP’s CAPE system represents a major step toward modernizing the refund process for IEEPA duties, but key legal and procedural uncertainties remain, particularly regarding entries that may already be final under U.S. customs law. In the near term, importers should prioritize entry review and classification, preservation of protest rights where applicable, and completion of ACE electronic refund setup.
April 15, 2026
Commercial Litigation
Defeating the IRS at Trial: Lessons from the Taxpayer Victory in Ankner v. United States
After successfully trying Ankner v. United States and defeating a multi-million-dollar promoter-penalty assessment, Matthew S. Reddington analyzes what the verdict means for the government’s burden of proof under IRC § 6700—and for taxpayers and advisors facing promoter investigations. In Ankner v. United States, a federal jury rejected the Internal Revenue Service’s attempt to impose approximately $4 million in promoter penalties under IRC § 6700 against a captive insurance manager. Janine Campanaro and I served as trial counsel for the taxpayer and successfully tried the case to verdict in the United States District Court for the Middle District of Florida. The decision offers an important reminder for businesses, advisors, and professionals facing promoter-penalty investigations: even in industries the IRS has publicly targeted, the government must still prove each statutory element of § 6700 at trial. When the government cannot meet that burden, the penalties cannot stand. As the trial record and jury verdict in Ankner illustrate, promoter-penalty disputes frequently turn not on sweeping policy debates about the legitimacy of an industry, but on far more specific evidentiary questions. The government must prove that materially false statements were made regarding the tax benefits of the transaction and that the alleged promoter knew or had reason to know those statements were false. When those elements are carefully examined through witness testimony, documentary evidence, and expert analysis, the government’s theory does not always hold. § 6700 Promoter Penalties Require the Government to Prove Specific Elements Internal Revenue Code 6700 authorizes the IRS to impose substantial penalties on individuals or businesses that promote abusive tax shelters. The statute permits penalties equal to 50% of the gross income derived from the promotional activity, which can quickly result in multi-million-dollar assessments. Despite the severity of the penalty, the government must still establish specific statutory elements when the penalty is challenged in court. In particular, the government must prove: A False or Fraudulent Statement The promoter made false or fraudulent statements regarding the tax benefits of a transaction. Knowledge or Reason to Know The promoter knew, or had reason to know, that the statements were false. In practice, the knowledge requirement frequently becomes the most contested issue in promoter-penalty litigation. A Federal Jury Found the Government Failed to Meet That Burden in Ankner Ankner v. United States arose from the government’s investigation of a captive insurance manager who assisted small businesses in forming insurance companies intended to qualify under IRC § 831(b). Rather than focusing exclusively on promotional statements regarding tax benefits, the government argued that the underlying captive insurance arrangements did not constitute legitimate insurance companies. Based on that premise, the government asserted that the captive manager and related entities made false statements regarding the tax consequences of participating in the arrangements. After paying a portion of the assessed penalties permitted in promoter-penalty disputes, the taxpayer filed suit challenging approximately $4 million in penalties related to tax years 2010 through 2016. Following the trial, the jury concluded that the government failed to carry its burden of proof, and the taxpayer was not liable for the penalties. Although jury verdicts are necessarily fact-specific, the case underscores an important point: even in areas the IRS has identified as enforcement priorities, the government must still prove each element of § 6700. Traditional Promoter-Penalty Cases Often Involved Clear Tax-Avoidance Schemes Historically, many litigated § 6700 cases involved blatantly abusive tax-avoidance schemes, where the government’s evidentiary burden was comparatively straightforward. For example, in United States v. Schulz, the defendants promoted materials instructing taxpayers how to stop withholding and paying federal income taxes. The court concluded that the promoters knowingly advanced positions repeatedly rejected by the courts. Similarly, in United States v. RaPower-3 LLC, the government successfully pursued promoter penalties against a company marketing solar-energy technology that was incapable of producing electricity. Participants were promised tax benefits tied to equipment that never functioned as represented. In Tarpey v. United States, the Ninth Circuit affirmed an $8.5 million promoter penalty related to a timeshare-donation scheme, emphasizing the broad scope of § 6700 when determining the gross income derived from the promotional activity. These cases involved clear factual records demonstrating knowingly false representations. By contrast, more recent promoter-penalty investigations increasingly involve legitimate industries and complex transactions, where the relevant facts and legal standards are far more nuanced. The IRS Is Expanding the Use of Promoter Penalties Across Multiple Industries The significance of Ankner must also be viewed against the backdrop of expanding IRS enforcement initiatives. In recent years, the IRS has increasingly relied on promoter penalties as a mechanism to deter activity in industries it believes involve aggressive tax planning. Current enforcement efforts have focused on areas such as: Micro-captive insurance arrangements Syndicated conservation easements Employee Retention Credit (“ERC”) promotions Certain partnership basis-adjustment transactions The IRS’s Office of Promoter Investigations has become particularly active in these matters, and promoter-penalty assessments are frequently pursued alongside broader civil or criminal investigations. Given the scale of potential penalties, these disputes can carry significant financial and reputational consequences for businesses and advisors. For Taxpayers and Advisors Facing § 6700 Investigations, Litigation Strategy Matters For taxpayers, captive managers, tax advisors, and other professionals facing promoter-penalty investigations, Ankner highlights an important strategic point: § 6700 cases ultimately turn on proof of statutory elements—not simply the IRS’s view of the underlying transaction. Promoter-penalty disputes often begin with extensive government investigations that focus heavily on the perceived legitimacy of the transaction itself. While those issues may form part of the broader context, the government must ultimately prove far more specific facts at trial—namely, that false statements were made and that the alleged promoter knew, or had reason to know, those statements were false. In practice, those evidentiary requirements can present meaningful challenges for the government. Because promoter-penalty cases frequently involve complex industries, expert testimony, and extensive factual records, early strategic guidance is critical. Decisions made during the investigative stage—often long before litigation begins—can substantially influence how the case develops if it proceeds to court. For that reason, businesses and advisors confronting potential § 6700 exposure should consider engaging counsel with significant experience litigating complex tax disputes through trial. Promoter-penalty cases are not merely technical tax controversies; they are fact-intensive litigation matters that require careful development of the evidentiary record and a disciplined focus on the government’s burden of proof.
March 23, 2026
Commercial Litigation
When Hypothetical Liquidations Become “Illogical”: Otay Project LP v. Commissioner
The Tax Court’s recent decision in Otay Project LP v. Commissioner, T.C. Memo. 2026-21, is likely to become one of the most discussed partnership cases of the year — not because it announces a new doctrine, but because it quietly rewrites how § 743(b) is expected to operate in large tiered partnerships. At issue was a familiar structure. A real estate development partnership underwent ownership changes that triggered a technical termination under pre-2018 § 708(b)(1)(B). Because the partnership had a § 754 election in effect, the termination required a basis adjustment under § 743(b). The partnership computed that adjustment using the regulatory hypothetical liquidation framework in Treas. Reg. § 1.743-1(d), which assumes a fully taxable disposition of partnership assets at fair market value. That hypothetical recognition of embedded gain — including large deferred income under long-term contract accounting — produced a substantial negative “previously taxed capital” amount and therefore a large positive § 743(b) adjustment. The IRS disallowed the deduction, and the court ultimately agreed. But the court did not reject the adjustment primarily on economic substance grounds. Instead, it concluded the calculation itself was “illogical,” pointing to the resulting balance sheet, which reflected negative partner capital and a basis adjustment far larger than the partnership’s book of equity. That reasoning deserves scrutiny. The Problem with the Court’s Analytical Frame Section 743(b) is mechanical. When a partnership interest is transferred, and a § 754 election exists, the statute requires the partnership to adjust inside basis so that the transferee partner’s share of inside basis matches its outside basis. Congress did not condition the adjustment on accounting symmetry, economic parity, or a positive capital account. The statute simply compares two numbers. Treasury regulations likewise adopt a mechanical approach. Treas. Reg. § 1.743-1(d) defines a transferee partner’s share of partnership basis using a “hypothetical transaction”; an immediate sale of all partnership assets for cash equal to fair market value. The regulation expressly requires gain recognition in that hypothetical liquidation. In a development partnership using the completed contract method, such a hypothetical sale necessarily accelerates large amounts of deferred income. The resulting negative capital is not anomalous — it is the direct product of the regulatory model. The purpose of § 743(b) is precisely to prevent that phantom gain from being taxed to the transferee partner a second time. The court, however, treated the result as evidence that the computation must be wrong rather than evidence that the regulation is working as intended. Negative Capital Is Not a Defect The opinion implicitly assumes that inside basis cannot produce a negative capital allocation. But neither the statute nor the regulations impose that limitation. To the contrary, § 743(b) adjustments routinely arise when outside basis exceeds a partner’s share of inside basis — especially in partnerships holding appreciated property or deferring income. The regulatory hypothetical liquidation is not a balance-sheet exercise; it is a tax allocation exercise. Its purpose is to determine how much gain would be allocated to the transferee partner if the partnership sold all of its assets immediately after the transfer. If that hypothetical gain exceeds the partner’s liquidation proceeds, negative capital necessarily follows. Calling that result “illogical” effectively replaces the regulation with a net-equity test that does not appear anywhere in subchapter K. The Liability Expansion Issue The government also argued that additional liabilities — including construction obligations — should reduce the § 743(b) adjustment. The court appeared receptive to this position. That approach risks blurring an important doctrinal boundary. Section 752 governs partnership liabilities. It does not treat executory performance obligations as liabilities simply because the partnership must perform under a contract. Real estate developers frequently have future performance obligations, but those obligations do not automatically create recourse liabilities for basis purposes. If performance obligations are treated as § 752 liabilities in order to neutralize § 743(b), the liability rules cease to be administrable. A Practical Consequence The most significant implication of Otay is not confined to pre-2018 technical terminations. The reasoning threatens routine partnership transactions: family succession transfers upper-tier partnership restructurings real estate development partnerships using CCM any partnership with a large built-in gain and a § 754 election Under the decision’s logic, a § 743(b) adjustment may be disregarded whenever the result is large enough to appear economically disproportionate. That converts a mechanical statute into a facts-and-circumstances inquiry — exactly what subchapter K historically sought to avoid. What the Case Really Reflects The opinion appears less concerned with statutory interpretation than with scale. The partnership reported substantial deferred income and an offsetting basis deduction attributable to the prior § 743(b) adjustment. The court viewed the magnitude as incompatible with economic reality. But subchapter K has never limited tax consequences by magnitude. Congress allowed long-term contract deferral. Congress allowed § 754 elections. Congress required § 743(b) adjustments to maintain parity between inside and outside basis. Large numbers are sometimes the inevitable consequence of those interacting provisions. Courts traditionally police abusive transactions through economic substance or anti-abuse doctrines. Here, however, the court did something more consequential, it recast a regulatory computational rule into an equitable limitation. Why the Decision Matters The importance of Otay lies in its methodological shift. Instead of asking whether the statute and regulations were followed, the court asked whether the result looked sensible on a balance sheet. That is not how subchapter K operates. Partnership taxation depends on predictability. Taxpayers make structural decisions — § 754 elections in particular — based on mechanical consequences. If courts can override those consequences whenever hypothetical liquidation math produces large disparities, then § 743(b) becomes unreliable as a planning tool. In short, Otay Project does not merely deny a deduction. It introduces uncertainty into one of the most fundamental coordination rules in partnership taxation: the alignment of inside and outside basis. The case will likely be remembered not for its facts, but for its implication that regulatory mechanics yield to judicial intuition. For partnerships relying on § 754 elections, that is a far more significant development than the adjustment at issue in the case itself.
March 4, 2026
Tax
Tariff Litigation & Section 122 Tariffs
On February 20, 2026 the U.S. Supreme Court issued a landmark decision in Learning Resources, Inc. v. Trump holding that the International Emergency Economic Powers Act (IEEPA) does not authorize the President to impose tariffs. The decision invalidates the reciprocal tariffs and trafficking/immigration tariffs imposed in 2025 under IEEPA and confirms that the power to impose tariffs lies with Congress. The Court did not prescribe a refund mechanism; that responsibility now falls to the U.S. Court of International Trade (CIT) and U.S. Customs and Border Protection (CBP). Within hours of the decision, the Administration imposed a new 10% tariff under Section 122 of the Trade Act of 1974 (now 15%), effective February 24, 2026, and limited to 150 days (absent congressional action). This creates two immediate opportunities: Refund claims for prior IEEPA tariffs (available to domestic and foreign companies) Advisory and planning work related to new Section 122 tariffs and potential replacement regimes (Section 232/301) What Changed: 1. IEEPA Tariffs Invalidated The Supreme Court ruled that IEEPA does not authorize tariff imposition. IEEPA tariffs imposed in 2025 are unlawful ab initio. Refunds are not automatic. Importers must act. 2. Section 122 Tariffs Now in Effect 15% tariff on most imports entered on or after February 24, 2026 Limited to 150 days (approx. expires July 24, 2026 unless extended) USMCA-qualified goods excluded “Goods on the water” exception for certain shipments loaded before Feb 24 and entered before Feb 28 This is a temporary bridge. Section 232 (tariff imposed for national security) and 301 (tariffs imposed on foreign products to counter unfair trade practices) actions may follow. Who May Have a Refund Claim: Those who: Imported goods between February 2025 and February 24, 2026 Paid additional IEEPA ad valorem duties Are the importer of record Have entries that are unliquidated or recently liquidated Did not yet file a protective Court of International Trade (CIT) action Refund claims are available to domestic and foreign companies – the controlling factor: who is the Importer of Record on the customs entry Important: Only IEEPA duties are refundable — not Section 232 or 301duties. Downstream buyers may have contract-based reimbursement claims. Areas Where Offit Kurman Can Assist You: 1. Tax Litigation / Customs Litigation Refund analysis and quantification Protest filings Protective CIT litigation Federal Circuit appeals Strategic coordination of administrative and judicial remedies 2. Transactional Tax Tariff deductibility analysis Accounting method considerations Timing of refund recognition Contingent asset treatment Structuring to mitigate future tariff exposure 3. Corporate & Business Structuring Restructuring importer-of-record status Creating new import entities Evaluating transfer pricing implications Risk allocation between affiliates Supply chain realignment 4. Commercial Contracts Review of tariff pass-through clauses Reimbursement rights for downstream buyers Force majeure and change-in-law provisions Supplier renegotiation strategy Indemnification enforcement 5. Commercial Litigation Claims between buyers and suppliers over tariff allocation Breach of contract actions Indemnity disputes Class or coordinated actions among distributors 6. Restructuring & Insolvency Tariff-driven liquidity pressure Claims valuation in bankruptcy Recovery of tariff refunds as estate assets Documents You Should Be Gathering: Entry summaries (CF 7501) Duty payment records Liquidation dates PSC filings Contracts allocating tariff responsibility ACE and ACH refund account status SKU lists affected by Section 122 Bottom Line: IEEPA refunds are potentially significant. Deadlines are running. Section 122 tariffs create immediate planning needs. If you import goods, manufacture overseas, distribute foreign products, or rely on cross-border supply chains, connect with Offit Kurman for consultation.
March 2, 2026
Commercial Litigation
When the Chicken Does Come Before the Egg: The Taxpayer-Friendly Takeaways from George v. Commissioner, Plus a Few ‘Egg-cellent’ Judicial Puns
Some tax court opinions are dry. Others are dense. And then there are the rare decisions where the court clearly enjoyed the assignment. George v. Commissioner, T.C. Memo. 2026-10 falls squarely in the third category. From its opening pages, the court signals both the seriousness of the R&D credit issues at stake and its willingness to have a little fun along the way. As Judge Greaves famously framed the dispute: “Forget the proverbial chicken or the egg; today we are called to answer which came first, the research or the research credit?” Clever turn of phrase aside, the opinion delivers something far more important for taxpayers, particularly those in agriculture and other operationally complex industries: a roadmap for how real-world innovation can qualify for the R&D credit when done correctly. The Big Win: The Court Acknowledged That Agriculture Innovates. Full Stop. Before we get to the substance, it’s worth pausing on tone. Over the course of 80+ pages, the court peppers the opinion with references to “ruling the roost,” “sunny-side up,” and other poultry-themed flourishes. That levity is notable because it accompanies a very serious acknowledgment: modern agriculture is technologically sophisticated. The opinion’s humor is not accidental. By leaning into chicken metaphors, the court subtly reinforces its understanding of the industry it is judging. From a litigation perspective, that tone is telling. Courts don’t joke about industries they don’t take seriously. The takeaway? The court was engaged, informed, and analytical, not dismissive. That is good news for future taxpayers who bring better-structured R&D claims to the table. This is reinforced by the court repeatedly recognizing that poultry production involves: Complex biological systems Evolving disease pressures Feed chemistry and nutrient optimization Genetic performance tradeoffs Data-driven decision-making at massive scale Indeed, the court emphasizes that even “small changes having dramatic impacts on profitability” are central to the industry, noting that producers may earn “approximately one penny of profit per pound.” That framing matters. The court did not dismiss these activities as routine farming. Instead, it treated them as legitimate candidates for R&D analysis, rejecting the outdated notion that innovation only happens in laboratories. What the Taxpayer Got Right (and the Court Agreed) Despite ultimately limiting the credits claimed, the court credited the taxpayer with confronting real technological uncertainty, a foundational requirement under §41. The opinion details extensive efforts to address: Disease outbreaks with no clear industry solution Antibiotic-free production pressures Feed efficiency and nutrient absorption challenges Vaccine administration methods and dosage questions Genetic line performance under different conditions The court acknowledged that these efforts involved trial-and-error, failed approaches, and iterative refinement, classic hallmarks of experimentation. In fact, the court goes as far as rejecting the IRS’s argument that data collected by George was “routine” and thus excluded from consideration. Instead, the court rejected the ‘routine’ argument the IRS has been fighting hard to revive. Likewise, the court rejected IRS attempts to repurpose the adaptation exclusion, definitively stating that an improved business component is a different business component. That distinction leaves the door wide open for taxpayers who document their experimentation contemporaneously and intentionally, even when data used for testing is collected during standard production. Practical Lessons the Court Practically Hands to Taxpayers If you read the opinion with an eye toward future claims, the lessons are unmistakable: When possible, articulate uncertainty before acting. This helps avoid the IRS assertion that a company reverse-engineered the research narrative. Design experiments with intent, though they don’t have to look like laboratory work. Document while the feathers are flying. Production data is helpful, but technical reasoning is essential. Separate experimentation from execution. Rolling out a solution is not the same as proving it works. Assume IRS scrutiny and prepare accordingly. The IRS will ask whether the “research” existed before the credit study. Courts will too. These lessons don’t clip the wings of the R&D credit. They strengthen it. The Broader Takeaway: Courts Want Better R&D Claims, Not Fewer For all the poultry puns, George v. Commissioner delivers a serious, taxpayer-friendly message: Section 41 remains viable for real-world businesses that innovate intentionally and document rigorously. The court did not narrow the statute. It did not exclude agriculture. And it did not demand laboratory conditions. It simply required that the research come first—and the credit follow honestly. Final Thought If nothing else, George proves that even an R&D case about chickens can be meaty. Matthew Reddington served as counsel in this matter and played a primary role in securing the favorable outcome for the taxpayers.
February 12, 2026
