Current developments in taxation of individuals: Part 2

This second part of a semiannual update surveys recent federal tax developments involving individuals. It summarizes notable cases, rulings, and guidance on a variety of topics issued during the six months ending April 2025. The update was written by members of the AICPA Individual and Self–Employed Tax Technical Resource Panel. The items are arranged in Code section order. The first part, in the September 2025 issue of The Tax Adviser, covered Secs. 25C through 170.¹

Sec. 172: Net operating loss deduction

In at least two cases during the review period, courts disallowed net operating loss (NOL) carryover claims for lack of proper substantiation. In Kinney,² the Ninth Circuit upheld the Tax Court’s disallowance of an NOL carryover deduction. The taxpayer, Charles Kinney, provided only a handwritten table of NOLs, which he claimed matched tax returns from tax year 2003 through 2016, the year at issue, along with his own assertions in testimony.

In Mosley,³ the Tax Court upheld the disallowance of a taxpayer’s 2018 NOL carryforward. The loss purportedly stemmed from a 2009 foreclosure on two pieces of real property and their sale or exchange in 2014 and 2015 but was first claimed on the taxpayer’s 2016 and 2017 returns, the court noted. The taxpayer failed to provide proper documentation to support the calculation of the 2009 loss, with only self–prepared, undated, and limited schedules provided, which differed from the IRS’s calculations. Additionally, the taxpayer failed to timely elect to relinquish the NOL carryback period on her original 2009 tax return, resulting in the disallowance of the NOL carryforward.

Sec. 183: Activities not engaged in for profit

Sec. 183 generally bars any deduction of expenses of an activity not engaged in for profit that exceed the gross income derived from the activity. Thus, losses from an activity classified as a hobby instead of a business may not offset other income.

In two cases during the period, the Tax Court applied the Regs. Sec. 1.183–2(b) nonexhaustive list of nine factors to find that the taxpayers’ activity was not engaged in for profit.

In Bucci,⁴ the Second Circuit, affirming a 2023 Tax Court bench opinion, held that married taxpayers’ horse–racing and farming activities were not engaged in for profit. Joseph Bucci operated a profitable salt mine in western New York, but he also engaged in purchasing, training, and racing thoroughbred horses as well as farming hay, which he used to feed those horses. The horse–racing and hay farming activities produced thousands of dollars in net losses every year. Bucci claimed deductions for both activities on his 2016 and 2017 tax returns, the years in question. The IRS disallowed the deductions, asserting that the activities were not engaged in for profit.

In the farming activity, Bucci produced one crop, hay, and he had an agreement with neighboring dairy farmers for them to come onto his property, bale it, and divide it equally. He used his half of the hay to feed his horses during the winter months. The Tax Court noted that there were no sales of any goods associated with this activity, virtually guaranteeing that it would produce losses. For 2016 and 2017, the farming activity produced no gross income and reported losses of over $250,000 and nearly $200,000 in those years respectively. In fact, the court noted that the activity consistently produced losses in the years prior to and after the ones under examination.

The Tax Court applied the nine–factor test prescribed by the regulations to evaluate whether the farming activity demonstrated a genuine profit motive. Of note was that Bucci did not operate the activity in a businesslike manner (he kept no separate books and records and had no separate business name); had no expertise in farming; and did not consult experts in the field. He did not put significant time or effort into the baling operation for the years in question, instead utilizing neighboring farmers to do the work. He had no prior success in farming and no history of profits and losses.

In the horse–racing activity, Bucci had slightly less than $200,000 of gross income per year, mostly from winning purses with his horses. Total expenses greatly exceeded income and resulted in net losses of over $600,000 for 2016 and over $400,000 for 2017. As with the farming activity, the horse–racing activity also generated losses in the years prior to and after the ones under examination. The court found that it was not a moneymaking operation but still considered the nine factors.

Bucci did conduct the horse–racing activity in a more businesslike manner than the farming activity. He kept separate books and records, and the activity had a business name. But Bucci admitted that he looked at the financial records only occasionally. He relied on the expertise of trainers to make the horses successful and have them get closer to his dream of entering the Kentucky Derby; however, he did not rely on the trainers for their expertise in making a money–losing activity profitable. Bucci spent more time on horse–racing activities than hay farming, but he did not manage the horses himself. He managed trainers who trained the horses. The court noted that there may have been an expectation that assets used in the activity would appreciate, especially if a horse were to make it into the Kentucky Derby. But there was no history of this, either during the years in question or prior to and immediately after. There was no history of profits, just continual losses. Finally, the court noted that Bucci derived a great deal of personal pleasure from this activity, including buying and selling horses, watching them race, and seeing that they were trained properly. Realizing his dream of getting a horse into the Derby would be fulfilling for him, but it did not make the activity a business.

Bucci accumulated enormous wealth through his work at the salt mine and with other investments. He did not rely on income from either hay farming or horse racing for his livelihood. The court concluded that both activities were hobbies, the losses from which were not deductible under Sec. 183.

Bucci appealed the decision to the Second Circuit. He argued that the Tax Court had erred by applying the wrong legal standard under Sec. 183 and abused its discretion in declining to continue the trial a second time so that he could retain counsel. He also contended that the Tax Court erred in finding no profit motive and in its application of the nine–factor test. The Second Circuit concluded that Bucci’s arguments were without merit and affirmed the Tax Court’s judgment.

In Himmel,⁵ Mark and Deborah Himmel operated Plantation Arabians, a sole proprietorship focused on breeding, boarding, showing, and training Arabian horses. They engaged in the activity year after year, despite decades of losses going back at least to 1993, claiming loss deductions on their joint Forms 1040, U.S. Individual Income Tax Return.

Mark Himmel held a college degree in marketing and a 30% ownership interest in an office supply company. Deborah Himmel held a dental hygiene degree and worked as a dental hygienist. From 2004–2011, she was also the primary caretaker for her father, who had Alzheimer’s disease. Both Himmels had been involved with horses for many years — Mark Himmel since childhood and Deborah Himmel since the late 1970s. They formed Plantation Arabians in 1981, pursuing an informal business plan to breed, buy, train, and show their own horses with the aspiration of improving their sale value. They also operated other income–generating activities, including boarding and training clients’ horses. Over the course of 14 years, Plantation Arabians reported two horse sales, one of which occurred during the years under exam. While the Himmels maintained separate books and records for the activity, they also paid some expenses from personal funds, which they reconciled each year for tax purposes.

The IRS examined their returns for tax years 2004–2009 and disallowed the horse activity loss deductions. The taxpayers petitioned the Tax Court to review the IRS’s determination, arguing that they engaged in the horse activity for profit within the meaning of Sec. 183.

The Tax Court applied the nine–factor test to determine if the Himmels had a bona fide profit objective. Key findings included poor recordkeeping and commingling of personal and business expenses, as well as a lack of meaningful business planning or changes to improve profitability, indicating that the activity was not operated in a businesslike manner. There was a long history of losses with no substantial profits, and there were no successes in carrying on other similar activities. There was no reliable evidence that the primary assets used in the business — the horses — increased in value. Furthermore, the Himmels had other sources of income, such as Mark Himmel’s salary and rental income, and derived substantial tax benefits from the horse activity losses. Finally, the Himmels admitted that their horse activities provided significant personal enjoyment and social benefits. The court noted that the presence of personal motives can indicate the activity is not engaged in for profit, especially if the chance for profit is small relative to the potential for personal gratification.⁶

After considering the factors, the court held that the Himmels did not have an actual and honest objective to operate Plantation Arabians for profit during the years at issue, sustaining the IRS’s disallowance of the loss deductions on the grounds that the taxpayers did not engage in their horse activity for profit within the meaning of Sec. 183.

Sec. 213: Medical, dental, etc., expenses

In Letter Ruling 202518023 (issued Feb. 4, 2025) the IRS determined in this set of facts that a deduction of medical expenses was allowed to married taxpayers filing a joint return, related to in vitro fertilization procedures for the expenses of screenings, fertility medication and treatment, and egg and sperm retrieval. These medical expenses were still subject to the 7.5%-of–adjusted–gross–income limitation. The letter ruling denied a medical expense deduction for any expenses incurred related to gestational surrogacy, since those expenses were not incurred for the taxpayers’ medical care or for that of a dependent, as required under Sec. 213(a).

Sec. 217: Moving expenses

In Kent,⁷Wendi Kent was a civilian contractor for the Air Force. She and her husband moved in 2020 as part of a permanent change of duty station for her job. Although she received official orders on DD Form 1614, Request/Authorization for DOD Civilian Permanent Duty or Temporary Change of Station (TCS) Travel, and was directed to move, neither she nor her husband was a member of the military in 2020. Relying on Sec. 217(g), the couple deducted the moving expenses they incurred.

Sec. 217(g) specifies that “a member of the Armed Forces of the United States on active duty who moves pursuant to a military order and incident to a permanent change of station” may still claim the moving deduction after amendment of the section by the Tax Cuts and Jobs Act, P.L. 115–97.⁸ The term “Armed Forces of the United States” includes “all regular and reserve components of the uniformed services” including “commissioned officers and personnel below the grade of commissioned officers in such forces.”⁹ The Tax Court has previously held that civilians, including members of the civil service of any military branch, are not entitled to exclusions reserved solely for the military (see Eram¹⁰ and Hildebran¹¹).

Thus, the court held that the Kents could not deduct their moving expenses under Sec. 217(g). It noted in its opinion the fact that the taxpayers’ move occurred both during the COVID–19 pandemic and at the direction of the Air Force did not permit the court to reach a different result.

Sec. 401: Qualified pension, profit-sharing, and stock bonus plans

Proposed regulations for catch-up contributions issued

The IRS issued proposed regulations¹² under Sec. 414(v)(7)(A), which requires applicable employer plans to allow eligible participants (as defined in Sec. 3121(a)) whose wages exceed $145,000 to make catch–up contributions if they are designated as Roth contributions (the Roth catch–up requirement). Prop. Regs. Sec. 1.401(k)-1(f)(5)(iii) would permit a plan to provide, for tax years beginning after Dec. 31, 2023, that a participant who is subject to the Roth catch–up requirement is deemed to have irrevocably designated any catch–up contributions as designated Roth contributions in accordance with the requirements of Regs. Sec. 1.401(k)-1(f)(1)(i). In addition, a plan that provides for such a deemed Roth catch–up election would be required, as is the case for any other designated Roth contribution, to: (1) treat catch–up contributions subject to the deemed Roth catch–up election as not excludable from the participant’s gross income and (2) maintain the catch–up contributions in a designated Roth account. A plan would be permitted to provide for a deemed Roth catch–up election without regard to whether it requires separate elections for elective deferrals that are not catch–up contributions and for additional elective deferrals that are catch–up contributions or uses a “spillover design.”¹³

The regulations would require the plan to provide an opportunity for the participant to elect to cease making the additional deferrals instead of being subject to the deemed election.

Trust can transfer decedent’s account to beneficiaries’ inherited IRAs

Under IRS Letter Ruling 202506004 (issued Nov. 7, 2024), a trust that was the designated beneficiary of a retirement account was able to transfer the received funds from the decedent’s retirement accounts to individual inherited individual retirement accounts (IRAs) for individual beneficiaries of the trust through trustee–to–trustee transfers. The IRS ruled that, based on Rev. Rul. 78–406, the trust’s trustee could initiate the trustee–to–trustee transfer as long as each transferee IRA was set up and maintained in the name of the deceased IRA owner for the benefit of the beneficiary. These transfers were allowed because certain trusts maintained for the benefit of one or more designated beneficiaries shall be treated in the same manner as a designated beneficiary.¹⁴ The final result was that the trustee–to–trustee transfer did not result in taxable income to the trust or the beneficiary, except that the individual beneficiaries were required to include in gross income their inherited amounts of income in respect of a decedent.

Sec. 469: Passive activity losses and credits limited

Sec. 469 generally disallows a current–year passive activity credit.¹⁵ The passive activity credit is the amount by which the sum of credits from all passive activities allowable for the tax year under Subpart B (other than Sec. 27) or Subpart D of Part IV of Subchapter A of Chapter 1 of the Code exceeds the regular tax liability of the taxpayer for the year allocable to all passive activities.¹⁶ A passive activity is any activity that involves the conduct of a trade or business and in which the taxpayer does not materially participate.¹⁷ The effect of the passive–activity–credit–disallowance rule is that a credit related to a passive activity is only allowed against regular tax liability attributable to passive activities. One recent case centered on the claiming of investment tax credits under Sec. 48 and the limitations imposed by the passive activity credit rules of Sec. 469.

In Strieby,¹⁸ Kelly M. Strieby and Jan E. Sharon–Strieby claimed investment tax credits on their joint 2015 and 2016 federal tax returns, based on their investment in Solar Farm LLC, an Arizona limited liability company (LLC) taxed as a partnership. They claimed the credits under Secs. 38 and 48 for their purported investments in solar energy property. The IRS disallowed these credits and assessed tax deficiencies and accuracy–related penalties.

Kelly Strieby signed membership agreements with Solar Farm for each relevant tax year that guaranteed tax credits and refunds that matched or exceeded the couple’s tax liabilities, with a portion of the refund required to be paid back to Solar Farm. For 2015, Solar Farm did not file a partnership tax return. The entity filed Form 1065, U.S. Return of Partnership Income, for 2016, but it contained notable inconsistencies and omissions. The Schedule K–1, Partner’s Share of Income, Deductions, Credits, etc., attached to the partnership return did not match the data on the Striebys’ 2016 Form 1040. The partnership did not claim any depreciation deductions and failed to include a depreciation schedule. Form 3800, General Business Credit, and Form 3468, Investment Credit, were not attached.

At issue before the Tax Court was whether the taxpayers were entitled to claim Sec. 48 investment tax credits; whether the credits were limited by the passive activity rules under Sec. 469; and whether the Striebys were liable for accuracy–related penalties under Sec. 6662(a).

The Striebys argued that the Sec. 48 credits were not subject to the Sec. 469 limitations because Sec. 48 is not listed as a passive activity credit under Sec. 469(d)(2). The court traced the statutory framework and noted that Sec. 48 in and of itself does not allow any credit; rather, the Sec. 48 investment credit is a component of the investment credit under Sec. 46, which is a component of the Sec. 38 general business credit, which is included as a passive activity credit under Sec. 469(d)(2).

The taxpayers also cited Rev. Rul. 2010–16 in support of their argument. This ruling concludes that Sec. 469 does not apply to the Sec. 45D new markets credit in certain circumstances. The court distinguished the Sec. 48 credit from the Sec. 45D credit, asserting that the Striebys misconstrued the significance of the revenue ruling and noting that unless Kelly Strieby materially participated in Solar Farm, the Sec. 48 credits would be passive activity credits and thus limited by the passive activity rules under Sec. 469.

The Striebys acknowledged that their only involvement with Solar Farm was signing documents and making contribution payments, which the court held did not constitute material participation under Sec. 469(h)(1). Because the taxpayers had no income from passive activities, they had no regular tax liability allocable to passive activities. Consequently, the Sec. 48 credits the taxpayers claimed were passive activity credits, which they were not allowed under the Sec. 469 passive activity rules.

Sec. 1256: Section 1256 contracts marked to market

The Tax Court’s decision in Wright¹⁹ is the latest installment of a case that earlier was appealed to the Sixth Circuit. The dispute concerned the IRS’s disallowance of a short–term capital loss taken by the taxpayers related to their assignment of an over–the–counter foreign currency option entered into by an LLC they wholly owned. Initially, the Tax Court held that the taxpayers could not take the loss because the option was not a foreign currency contract for purposes of Sec. 1256 because the option did not meet Sec. 1256(g)(2)’s delivery and settlement requirements. Thus, Sec. 1256(c) did not apply to cause the taxpayers to recognize a mark–to–market loss on the option’s assignment.²⁰

On appeal, the Sixth Circuit²¹ reversed the Tax Court and held that the option was a foreign currency contract under Sec. 1256. The Sixth Circuit concluded “that the foreign currency option at issue was a foreign currency contract within the meaning of Sec. 1256(g)(2) because its settlement (if it had occurred) would have depended on the value of the euro, a foreign currency in which positions are traded through regulated futures contracts.”

On remand, the Tax Court held that even if the assignment claimed by the taxpayers occurred and caused them a loss under Sec. 1256(a), they were prevented from deducting it by the limitation on individual losses in Sec. 165(c). The Tax Court found that the loss was not deductible under Sec. 165(c) because the foreign currency option transaction was not entered into with the primary motive of making a profit. The Tax Court also found without merit the taxpayers’ alternate argument that Secs. 165(f), 1211(b), and 1256(a) override Sec. 165(c) to allow a capital loss that Sec. 165(c) or those other provisions would disallow.

Sec. 1401: Rate of tax

In Clark,²² the Tax Court held the taxpayer was liable for self–employment tax on income he had mischaracterized on his tax return, even though the IRS had previously reversed an assessment for self–employment tax on the same income.

The taxpayer had a long history of self–employment income, including from freelance movie review writing since 1995 and the sale of movie memorabilia since at least 2019. In 2019, the taxpayer received $8,250 from freelance movie review writing and $41,972 from selling movie memorabilia on eBay using a PayPal account. The taxpayer reported both the freelance writing income and sales of movie memorabilia as other income not subject to self–employment tax. The IRS disagreed and issued a notice of deficiency indicating the full $50,222 was subject to self–employment tax.

The taxpayer timely filed a petition with the Tax Court, but the IRS did not place a litigation hold on his account. Consequently, it prematurely assessed the self–employment tax. Before the taxpayer’s trial in Tax Court, the Social Security Administration (SSA) sent a notice indicating that it was reducing the self–employment income on his Social Security earnings record to zero. The IRS, realizing its error in assessing the self–employment tax while litigation was pending, reversed the premature assessment and issued the taxpayer a refund for 2019.

In Tax Court, the taxpayer contended that he should not be liable for self–employment tax on the income he received because the IRS had conceded that he was not liable. The taxpayer pointed to the letter from the SSA and the refund that the IRS issued to him for 2019 as support.

The taxpayer did not dispute that in 2019 he received the income reported on his return from his activities. Thus, the Tax Court held that his argument claiming an IRS concession as to the taxability of these income amounts was contrary to the evidence and without merit.

According to the court, the letter from the SSA was not a concession and “simply” represented a moment in time regarding the taxpayer’s earnings record for Social Security purposes, not his income tax record with the IRS. The refund was not a concession by the IRS but rather reflected the Service’s action to bring the taxpayer’s IRS account into the proper status, given his pending Tax Court case.

Sec. 1402: Definitions

In Denham Capital Management,²³ the Tax Court held the distributive shares of ordinary income of five partners in a private–equity firm that was a state–law limited partnership were includible in net earnings from self–employment because the individuals did not qualify for the limited–partner exception to self–employment tax under Sec. 1042(a)(13). To determine whether the exception applied, the court, relying on its decision in Soroban,²⁴ performed a functional analysis inquiry of the roles and responsibilities of partners, similar to the one the court employed in Renkemeyer.²⁵In Renkemeyer, the court focused the inquiry on the efforts and responsibilities borne by the partner and whether his business arrangement with the partnership was more akin to that of an employee or a passive investor.

Denham, a Delaware limited partnership, consisted of five limited partners and a general partner and was subject to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), P.L. 97–248. Denham made guaranteed payments and distributions of ordinary business income to its limited partners and general partner. In tax years 2016 and 2017, Denham reported only the guaranteed payments made to its limited partners as net earnings from self–employment and not their distributive share of ordinary income. For the general partner, Denham reported the distributive share of ordinary business income as net earnings from self–employment.

Denham’s limited partnership agreement required the limited partners to devote substantially all of their time and attention to the partnership’s business. The limited partners acted similarly to and were subject to the same employee policies as traditional Denham employees. They were paid guaranteed payments for their services that were to represent their salaries, including the value of a package of typical employee benefits. However, the guaranteed payments were modest in comparison to their distributive share of income from the limited partnership, which was often multiple times larger than the guaranteed payments. In addition, the guaranteed payments to the limited partners were less than the salaries of many of Denham’s traditional employees. Of the five limited partners, only one had contributed capital in order to acquire their interest.

The court determined that the time, expertise, and judgment of the limited partners were critical to generating approximately $130 million in fees for services during 2016 and 2017. A large portion of those fees was paid to the limited partners as distributions. The court found that all the limited partners were involved in Denham’s management and personnel decisions. The court disagreed with Denham that the distributions were returns on investments since only one limited partner contributed capital, the size of the distributions were so substantial, and the limited partners played a critical role in generating the fees. The court determined the limited partners were not passive investors but rather more similar in nature to employees and therefore were “limited in name only.”

Accordingly, the Tax Court found that the Sec. 1402(a)(13) limited partner exception did not apply to the five Denham limited partners, and thus it upheld the IRS’s determination that the ordinary income allocated to them was net earnings from self–employment and therefore subject to self–employment tax.

Sec. 6015: Relief from joint-and-several liability on joint return

Court agrees that spouse qualifies for innocent-spouse relief

In Stewart,²⁶ the Tax Court agreed with the IRS’s determination that a taxpayer qualified for innocent–spouse relief, rejecting her ex–spouse’s objections.

The taxpayer was married to her husband from 2016 until 2020. During the marriage, the couple maintained separate finances and did not own any property or investments jointly with each other. Although they were separated as of August 2019, they were not legally divorced and decided to file a joint 2019 income tax return using TurboTax. After the taxpayer entered her wages and student loan interest into the software, her husband proceeded to input his comparatively “more complicated” tax information (related to his consulting business) into the program before filing the return electronically. The record indicated that the taxpayer “was not a part of” her husband’s consulting business and “had no insight into his business affairs.” The couple’s marriage was legally dissolved in June 2020.

In January 2022, the IRS issued a notice of deficiency for $33,028 related to the couple’s jointly filed 2019 tax return; the deficiency was driven by unreported wage income and nonemployee compensation attributable solely to the husband’s consulting business. The taxpayer asked the IRS for innocent–spouse relief, arguing that she was unaware of the unreported income and had no reason to know how much her husband earned from his consulting business.

The IRS granted her petition pursuant to Sec. 6015(c), which enables a taxpayer to elect to limit their liability to the portion of any underpayment that is “properly allocable” to the taxpayer. Disputing the taxpayer’s eligibility for innocent–spouse relief, the husband argued that she had made the request for innocent–spouse relief purely to “stick” him with the entirety of the deficiency and penalty.

The taxpayer also filed a petition in Tax Court in response to the notice of deficiency, raising the affirmative defense of her request for relief from the joint–and–several liability determined in the notice. Her husband intervened in the case. Noting that the taxpayer and her husband were living apart when the 2019 return was filed, and she had no reason to know how much he earned from his consulting business, the Tax Court ultimately agreed with the IRS that the taxpayer was entitled to relief from joint–and–several liability under Sec. 6015(c), despite her husband’s objection.

Petitions for innocent-spouse relief denied

In several unrelated decisions, the Tax Court denied the taxpayers’ requests for innocent–spouse relief.

First, in Gomez,²⁷ the Tax Court determined that the taxpayer was not entitled to innocent–spouse relief from the joint tax liability stemming from her husband’s taxable retirement plan distributions.

The taxpayer and her husband filed joint income tax returns during the years at issue, although they had been living apart since June 2012. In 2014, the taxpayer prepared a joint income tax return using commercial tax software, and both she and her husband reviewed it. The return reported gross distributions of $6,000 and $103,174 from her husband’s retirement plans but indicated that the taxable amount of these distributions was only $555.

In July 2017, the IRS examined the 2014 joint tax return and assessed $24,414 of additional tax and penalties related to the husband’s retirement plan distributions. To cover the unpaid tax liability, the IRS withheld income tax refunds from the couple’s jointly filed 2017, 2019, and 2020 income tax returns. Following her husband’s bankruptcy filing in 2022, the taxpayer filed Form 8857, Request for Innocent Spouse Relief, to request relief from joint–and–several tax liability for the 2014 tax year under Sec. 6015(b), Sec. 6015(c), and/or Sec. 6015(f).

As the court explained, married taxpayers are jointly and severally liable for the tax liability reported on a joint income tax return, regardless of which item of income gave rise to the liability. One spouse may seek relief from any underpayment of tax attributable to the other spouse if he or she files a claim for relief within two years after the IRS has begun collection activities. In the present case, the IRS commenced its collection efforts sometime in April 2018 after the couple filed their 2017 joint income tax return; however, the taxpayer did not submit her request for relief until November 2022, which was over four years later. Accordingly, the Tax Court determined that she was not entitled to innocent–spouse protection under either Sec. 6015(b) or Sec. 6015(c).

Next, the court addressed whether the taxpayer was entitled to “equitable” relief under Sec. 6015(f). Unlike innocent–spouse relief requests under Sec. 6015(b) or Sec. 6015(c), requests for equitable relief do not need to be submitted within two years of the IRS’s initiating collection activity. Whether a taxpayer is entitled to equitable relief depends on several factors, including marital status, economic hardship, knowledge of or reason to know of the erroneous item, legal obligation to pay the tax liability, receipt of a significant benefit from the unpaid tax liability, compliance with tax laws, and mental or physical health.

In its analysis, the court found that some of these factors (such as marital status and compliance with tax laws) weighed in the taxpayer’s favor, whereas other factors (such as economic hardship and knowledge of the erroneous item) weighed against her. Ultimately, the court determined that the taxpayer’s knowledge and awareness of her husband’s retirement plan distributions outweighed all factors in her favor; therefore, she did not qualify for equitable relief.

The court reached a similar conclusion about equitable relief in Franco,²⁸ which involved quite different facts. According to the Tax Court, the taxpayer and her husband had a volatile relationship, primarily due to the husband’s mental health issues and infidelity. The husband was responsible for preparing the couple’s jointly filed income tax returns, which he would present to the taxpayer for her signature. The taxpayer testified that she felt compelled to sign the tax returns due to threats of physical violence from her husband. The IRS selected the couple’s 2018 income tax return for examination and issued a notice of deficiency after the return failed to report $97,714 of income. In response to the deficiency notice, the taxpayer petitioned the IRS for innocent–spouse relief under the equitable relief provisions of Sec. 6015(f).

Similar to the court’s analysis in Gomez, the Tax Courtreviewed the taxpayer’s eligibility for relief by focusing on several factors, including economic hardship, compliance with tax laws, and her “knowledge or reason to know of the items giving rise to the deficiency.” Because the taxpayer was unable to substantiate her monthly living expenses, she could not demonstrate to the court’s satisfaction that she would suffer an economic hardship if her requested relief was denied. The court also observed that she had a “long history of filing inaccurate tax returns,” which weighed against her request for relief. Finally, the court determined that the taxpayer was, at the very least, “on notice” that there could have been issues with the 2018 tax return prior to signing it. Although the taxpayer argued that she was unable to challenge the return due to threats of abuse, the court could not substantiate these claims based on the evidence presented. Therefore, her request for relief was denied.

Unlike the previous two cases, the Tax Court’s analysis of eligibility for innocent–spouse relief was much simpler in Lucas.²⁹ Both the taxpayer and her husband in this case held two jobs; the husband was employed by Defense Finance and Accounting Service (DFAS) and Cybraics Defense Corp. (Cybraics), whereas the taxpayer received wages from the District of Columbia government and Friends of Guest House. The taxpayer and her husband separated in 2019 but filed their 2018 income tax return jointly. Because it was the taxpayer’s responsibility to prepare and file the couple’s return, the husband provided her his Forms W–2, Wage and Tax Statement, from DFAS and Cybraics. However, the taxpayer only reported the husband’s wage income from DFAS and neglected to report his wages from Cybraics. She also neglected to report her own wage income from the District of Columbia government and Friends of Guest House on their jointly filed return. As a result, the 2018 return only reported wages of $76,445 (from DFAS), whereas the couple’s total wages from all four jobs aggregated to $206,609.

The IRS selected their return for examination and issued a notice of deficiency related to the unreported wage income (among other items). In response, the taxpayer petitioned the Tax Court for innocent–spouse relief under Sec. 6015(b), which the court denied because she “had actual knowledge that the 2018 Form 1040 did not include all income she and [her husband] received.” The court emphasized that for an individual to qualify for innocent–spouse relief, the requesting spouse must establish that they did not know, and had no reason to know, that there was an understatement when they signed the tax return. In the present case, the taxpayer prepared and filed the couple’s return without including her wage income from the District of Columbia government and Friends of Guest House; she also failed to report her husband’s wages from Cybraics, even though the husband provided her with a copy of his Form W–2 from the company. Therefore, the court concluded the taxpayer was not eligible for innocent–spouse relief because she had knowledge of both the unreported income and the resulting tax deficiency.

Footnotes

¹Brennan et al., “Current Developments in Taxation of Individuals: Part 1,” 56-9 The Tax Adviser 32 (September 2025).

²Kinney, No. 22-70265 (9th Cir. 12/10/24), aff’g T.C. Memo. 2022-81.

³Mosley, T.C. Memo. 2025-7.

⁴Bucci, No. 23-7754-ag (2d Cir. 2/20/25), aff’g T.C. No. 29127-21 (bench opinion 8/7/23).

⁵Himmel, T.C. Memo. 2025-35.

⁶Regs. Sec. 1.183-2(b)(9).

⁷Kent, No. 14884-23 (T.C. bench opinion 3/20/25).

⁸The amendment, originally temporary through 2025, was made permanent by §70113 of the law commonly known as the One Big Beautiful Bill Act, H.R. 1, P.L. 119-21.

⁹Sec. 7701(a)(15).

¹⁰Eram, T.C. Memo. 2014-60, fn. 7.

¹¹Hildebran, T.C. Memo. 2004-42, citing Land, 61 T.C. 675 (1974).

¹²REG-101268-24.

¹³A spillover design allows a participant who reaches age 50 by the end of the tax year to make one election with respect to elective deferrals for a plan year, and after that participant’s elective deferrals reach a statutory or plan limitation on elective deferrals that are not catch-up contributions, additional elective deferrals automaticallybegin counting toward the Sec. 414(v)(2) applicable catch-up limit.

¹⁴Sec. 402(c)(11)(B).

¹⁵Secs. 469(a)(1)(B) and (2)(A).

¹⁶Sec. 469(d)(2).

¹⁷Sec. 469(c)(1).

¹⁸Strieby, T.C. Memo. 2025-28.

¹⁹Wright, T.C. Memo. 2024-100.

²⁰Wright, T.C. Memo. 2011-292.

²¹Wright, 809 F.3d 877 (6th Cir. 2016).

²²Clark, T.C. Memo. 2025-13.

²³Denham Capital Management, LP, T.C. Memo. 2024-114.

²⁴ Soroban Capital Partners LP, 161 T.C. 310 (2023).

²⁵Renkemeyer, Campbell & Weaver, LLP, 136 T.C. 137 (2011).

²⁶Stewart, T.C. Summ. 2025-3.

²⁷Gomez, No. 3339-24S (T.C. bench opinion 1/29/25).

²⁸Franco, T.C. Summ. 2024-21.

²⁹Lucas, T.C. Summ. 2024-22.

Contributors

Elizabeth Brennan, CPA, is a practitioner in New Orleans. Karmen Hoxie, CPA, is a solo practitioner in the Minneapolis area. Amie Kuntz, CPA, is a partner in the national tax group of Rubin Brown LLP. Stephen Mankowski, CPA, CGMA, is owner and founder of Mankowski Associates CPA, LLC, in Hatboro, Pa. Dana McCartney, CPA, is a partner with Maxwell Locke & Ritter LLP in Austin, Texas. Matthew Mullaney, CPA, is a director, Private National Tax, with PwC US Tax LLP in Florham Park, N.J. Patrick Sanford, CPA, is president of Probity Accounting PLLC in Van Buren, Ark. McCartney is the chair, and the other authors are members, of the AICPA Individual and Self-Employed Tax Technical Resource Panel. For more information about this article, contact thetaxadviser@aicpa.org.

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