Current developments in taxation of individuals: Part 3

This 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 October 2025. The update was written by members of the AICPA Individual and Self–Employed Tax Technical Resource Panel. It is arranged in Code section order.

Part 1 of this article, which appeared in the March issue of The Tax Adviser, covered a wide range of material, while Part 2, in the April issue, dealt solely with charitable contributions under Sec. 170, including donations of conservation easements. This third and final installment covers Secs. 280A through 6015.

Sec. 280A: Disallowance of certain expenses in connection with business use of home, rental of vacation homes, etc.

In Zajac,¹ the taxpayer, Joseph Zajac III, in 2007 and 2008, claimed deductions for the business use of his home on Form 8829, Expenses for Business Use of Your Home. The deductions on the form were for Zajac’s business–related rent and utilities expenses. In a stipulation of settled issues, Zajac and the IRS agreed that Zajac was entitled to business–use–of–home deductions for all the years in issue.

Zajac, however, also separately deducted his cost of rent for 2007 and utilities for 2007–2009 on Schedule C, Profit or Loss From Business (Sole Proprietorship). Since it was uncontested that Zajac accounted for rent and utilities expenses from only his personal residence and no other place, the Tax Court held that he was not allowed to deduct the same expenses in two places. Therefore, the court sustained the IRS’s determination to deny the rent and utilities expense deductions Zajac separately claimed on Schedule C.

In Witasick,² the taxpayer, Kevin Witasick, was an attorney licensed in Arizona and Virginia. Witasick purchased Stoneleigh Manor, a historic property in Virginia, and used a portion for his law practice, although most of the clients were in Arizona. During the years under audit, Witasick undertook a complete rehabilitation of the property. A significant portion of the costs were reported as relating to the business use of the home, but he disguised them as outside services and unreimbursed expenses from his law partnership. Witasick was convicted of tax evasion and filing false tax returns.

The IRS agreed that Witasick was entitled to deduct expenses properly allocable to the home office for his law practice. However, a threshold question was whether some of the costs incurred to renovate Stoneleigh Manor must be capitalized rather than expensed. As the Tax Court has held, expenses incurred incident to an overall plan of rehabilitation must be capitalized, even though the same expenses might be deductible if incurred separately.³ At trial, Witasick provided no documentary or testimonial evidence to establish the detailed nature of the work performed by certain contractors.

By stipulation, the parties agreed to treat a portion of the expenses for the renovation as deductible business expenses. Of the remaining renovation expenses, the Tax Court held that a portion must be capitalized. The parties, however, disagreed on the “business use of the home percentage” for Stoneleigh Manor. Witasick contended 40% of Stoneleigh Manor was devoted exclusively to his law practice, while the IRS contended that the correct percentage was 25%. Ultimately, after undertaking a detailed review of the facts regarding Stoneleigh and Witasick’s use of it in his law practice for the years in issue, the Tax Court sided with the IRS, stating that its figure of 25% was “quite generous.”

Sec. 469: Passive-activity losses and credits limited

IRS letter ruling addresses application of Secs. 469 and 1411 to mineral royalties

In IRS Letter Ruling 202535011, the Service ruled that mineral royalties earned by a partnership are income derived in the ordinary course of a trade or business under Temp. Regs. Sec. 1.469–2T(c)(3)(ii)(G) and do not constitute portfolio income for passive–activity–loss purposes under Sec. 469(e)(1)(A)(i)(I). It also ruled that the mineral royalties are derived in the ordinary course of a trade or business for net investment income tax purposes under Sec. 1411(c)(1)(A)(i).

The letter ruling addresses a partnership that owns, operates, and maintains oil and gas mineral interests that generate royalty income. The partnership represented that it holds these interests in the ordinary course of its trade or business within the meaning of Sec. 162 (but not the trade or business of trading or dealing in such property).

The partnership first requested the IRS rule that its royalty income is not “portfolio income” under Sec. 469 and is derived in the ordinary course of a trade or business. Under Sec. 469(e)(1)(A)(i)(I), passive–activity gross income does not include portfolio income, such as interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. However, Temp. Regs. Sec. 1.469–2T(c)(3)(ii) provides that such income may be considered to be derived in the ordinary course of a trade or business in specific circumstances, including when income is “identified by the Commissioner” as such.⁴ For this exception to apply to mineral royalties, the taxpayer must request a private letter ruling. Based on the representations made by the partnership, the IRS concluded in the letter ruling that the partnership’s royalty income is derived in the ordinary course of its trade or business and is not “portfolio income” within the meaning of Sec. 469(e)(1)(A)(i)(I).

Next, the IRS addressed whether the partnership is able to group its royalty and mineral interest activities together for passive–activity purposes. Because taxpayers are only eligible to group trade or business activities together under Regs. Sec. 1.469–4, the partnership was not eligible to group its activities together prior to the issuance of the ruling (because royalty income is considered portfolio income by default). However, after having concluded that the partnership’s royalty income is derived in the ordinary course of its trade or business, the IRS determined that the partnership is also eligible to group all of its activities together, provided that it discloses the grouping on a statement attached to its Form 1065, U.S. Return of Partnership Income, that includes a copy of the letter ruling.

Finally, the IRS addressed the net investment income tax implications of its ruling. Under Sec. 1411(c)(1)(A)(i), gross income from royalties (other than royalties derived in the ordinary course of a trade or business that is neither a passive activity nor a trade or business of trading in financial instruments) is included in net investment income. Similar rules apply to net gain from the disposition of property under Sec. 1411(c)(1)(A)(iii). Because the IRS had ruled that the partnership’s royalty income is derived in the ordinary course of its trade or business for passive–activity–loss purposes, it further ruled that this income is also derived from a trade or business for net investment income tax purposes under Sec. 1411(c)(1)(A)(i).

Sec. 1402: Definitions

Net earnings from self-employment

In Soroban Capital Partners LP (Soroban II),⁵ the Tax Court held that three limited partners’ distributive shares of partnership income could not be excluded from net earnings from self–employment under the Sec. 1402(a)(13) exception from self–employment tax because they were not acting as limited partners but played a crucial and active role in the business.

The taxpayer was a New York hedge fund organized as a Delaware state–law limited partnership, with a general partner and the three limited partners. The taxpayer calculated net earnings from self–employment in 2016 and 2017 by including the guaranteed payments made to the limited partners but excluding their shares of partnership income. During these years, the limited partners performed an essential role in generating income and exercised managerial control over the taxpayer. They worked full time for the taxpayer and contributed very little or no capital. They were held out to the public as essential to the business.

Under Sec. 1402(a)(13), net earnings from self–employment excludes “income or loss of a limited partner, as such.” The Tax Court previously held in prior proceedings (Soroban I)⁶ that a functional analysis of a partner’s roles and activities must be applied to determine if a partner is acting as a “limited partner, as such.”

In Soroban II, the Tax Court undertook a functional analysis of whether the partners in question were acting as limited partners. The court examined several factors, including the degree to which the partner’s time, skills, and judgment were critical to the partnership’s income; the amount of capital they contributed; the amount of time they worked in the business; and how the partnership advertised itself and the expertise of the partners to the public. After applying its analysis to the three limited partners, the court held the limited partners were not acting as limited partners and were limited partners in name only.

This is consistent with the Tax Court’s earlier decision in Denham Capital Management, LP,⁷ where it performed a functional analysis of five limited partners in a firm that provides investment advisory and management services to affiliated private–equity funds and concluded that they were not acting as limited partners. Thus, they did not qualify for the limited–partner exception to self–employment tax under Sec. 1402(a)(13).

However, in Sirius Solutions, L.L.L.P.,⁸ the Fifth Circuit rejected the Tax Court’s passive–investor interpretation of “limited partner” from Soroban I. The Fifth Circuit held that for purposes of the Sec. 1402(a)(13) limited–partner exception to the self–employment tax, a limited partner is a partner in a limited partnership that has limited liability.

Sec. 6015: Relief from joint-and-several liability on joint return (innocent-spouse relief)

Innocent-spouse relief not available for taxpayer’s own deficiency

In Wright,⁹ the Eleventh Circuit affirmed a decision of the Tax Court holding that the taxpayer was not entitled to innocent–spouse relief for tax deficiencies attributable to her own Social Security income.

The taxpayer, Fannie Wright, was married to her spouse from 1973 until his death in 2016. Since 2006 or 2007, Wright and her husband filed separate income tax returns. Due to a workplace accident in 2012, Wright stopped working and began to collect Social Security income. Wright claimed that both her attorney and her accountant informed her that she would not be required to file income tax returns once she stopped working. For this reason, she did not file a separate return for 2013 and 2014.

However, Wright’s husband filed joint returns for 2013 and 2014 but did not report her Social Security benefits as income on either return. The IRS subsequently issued a notice of deficiency for both tax years, adding her Social Security income to the couple’s income in each year.

In 2015, Wright and her husband again filed a joint tax return, but this time it included Wright’s Social Security income. The return showed that the couple owed over $1,000 in tax due to Wright’s Social Security income.

Wright filed a request for innocent–spouse relief with the IRS for 2013, 2014, and 2015. The IRS denied her request because the income tax deficiencies were attributable to her own Social Security income. Wright filed a petition with the Tax Court, challenging the IRS’s determination.¹⁰ The Tax Court affirmed the IRS’s denial of relief. Wright appealed the Tax Court’s decision to the Eleventh Circuit.

Under Sec. 6013(d)(3), spouses who file jointly are each jointly and severally liable for the entire amount of any unpaid tax liability. As the Eleventh Circuit explained, Sec. 6015 is designed to relieve a married joint filer of tax liabilities attributable to his or her spouse’s income, not those attributable to his or her own income. Because Wright’s deficiencies were the result of her failure to report her own Social Security income, the Eleventh Circuit held that the Tax Court had properly determined that she was not entitled to Sec. 6015 innocent–spouse relief.

Wright also argued that the Tax Court could not consider whether she was entitled to Sec. 6015 relief unless it found that, for each applicable year, a valid joint return was filed. Otherwise, according to Wright, there could be no liability at issue. She claimed that the joint income tax returns filed by her husband were invalid because she had not consented to their filing. In response, the Eleventh Circuit explained that Wright was liable for income tax on her Social Security income regardless of whether a joint income tax return was filed. Therefore, the court concluded that it was not necessary for the Tax Court to determine whether the joint tax returns her husband filed were valid in order to deny Wright Sec. 6015 innocent–spouse relief.

Duty of consistency applied to innocent-spouse relief claim

In Stacey,¹¹ a district court determined that an individual’s application for innocent–spouse relief prevented her from sharing in proceeds from the government’s forced sale of property intended to cover her ex–husband’s tax debts, based on the “duty of consistency” doctrine.

The taxpayer, Emma Marie Stanley, married John Stacey in July 2000. The couple filed joint income tax returns throughout the duration of their marriage until they filed for divorce in Florida in 2007; the divorce was finalized in March 2011. Several years after the marriage ended, the IRS issued deficiency notices to the couple for more than $1 million in unpaid income taxes and penalties related to tax years 2000 through 2003. In response to the deficiency notices, Stanley requested innocent–spouse relief from the IRS.

To request innocent–spouse relief, a taxpayer must complete and submit to the IRS Form 8857, Request for Innocent Spouse Relief. This form requires detailed information on the taxpayer’s current financial situation, including a description and the fair market value of any assets owned by the requesting spouse. Stanley’s Form 8857, which was signed under penalties of perjury, did not disclose ownership of any assets. On this basis, the IRS granted her request for innocent–spouse relief under Sec. 6015(c).

After granting Stanley’s request for innocent–spouse relief, the IRS initiated collection efforts against Stacey, filing a suit in district court in 2023. The court authorized the sale of real property located in Grand Prairie, Texas, for $750,000, the proceeds of which were to be applied against Stacey’s outstanding tax debts. The Grand Prairie property was originally acquired by the taxpayers during their marriage in April 2004 through an Arizona limited liability company (LLC). Although the district court in the collection suit concluded that the LLC was Stacey’s “alter ego or nominee,” and that he was the true owner of all assets owned by the LLC, the Florida divorce court determined that Stanley and Stacey each owned 50% of the LLC. Thus, Stanley argued that she should be entitled to half of the proceeds from the sale of the Grand Prairie property, either as a co–owner of the LLC or under Arizona’s community property laws.

In response to Stanley’s claims, the IRS argued that she was barred from asserting any ownership interest in the Grand Prairie property under the duty–of–consistency doctrine, a legal principle that prevents a taxpayer from taking inconsistent positions that could harm the IRS. According to the government, the IRS had previously granted Stanley’s petition for innocent–spouse relief based on the representations she made on Form 8857, which indicated that she had no ownership interest in the Grand Prairie property (or any other assets). The district court agreed with the IRS that, under the duty of consistency, Stanley was not entitled to half of the proceeds from the sale of the Grand Prairie property and applied the proceeds from the sale entirely against Stacey’s unpaid tax debts.

In Byers, another case involving the proceeds from a forced sale of property, the Eighth Circuit held that because a wife had no property interest in a home owned by her husband that was sold in a judicial sale to satisfy his federal tax debts, she was not entitled to half of the proceeds from the sale.¹²

Tax Court grants Sec. 6015(c) relief

In Smith,¹³ the Tax Court granted a taxpayer’s petition for innocent–spouse relief after concluding that she had no actual knowledge of her ex–husband’s unreported income.

The taxpayer and her ex–husband were married in 2017 but legally separated by October 2021. During 2017, the ex–husband received self–employment income via Form 1099–MISC, Miscellaneous Income, which he deposited into his personal bank account; he also received Form 1099–C, Cancellation of Debt, reporting cancellation–of–debt income. However, both items were omitted from the couple’s jointly filed 2017 federal income tax return. Although the taxpayer was primarily responsible for maintaining the records needed to prepare the joint filing, she did not review or have access to either the Form 1099–MISC or Form 1099–C issued to her ex–husband.

The IRS issued a notice of deficiency for 2017 for the unreported income, prompting the taxpayer to petition the Tax Court for relief from joint–and–several liability under Sec. 6015(c). Her ex–husband intervened in the case, objecting to the taxpayer’s eligibility for relief on the grounds that she had knowledge of the unreported income items on the couple’s 2017 joint return.

Sec. 6015(a) allows a taxpayer to obtain relief from joint–and–several liability in certain circumstances. Although there are three forms of relief under Sec. 6015, the taxpayer sought relief under Sec. 6015(c), which generally allows a separated or divorced spouse to elect to limit liability for any deficiency assessed with respect to a joint return to the portion of the deficiency that is properly allocable to the electing spouse.

However, the electing spouse does not qualify for relief under Sec. 6015(c) if the IRS demonstrates that the electing spouse “had actual knowledge, at the time such individual signed the return, of any item giving rise to a deficiency (or portion thereof) which is not allocable to such individual.”

To have actual knowledge, in the case of omitted income, the electing spouse must have an actual and clear awareness (as opposed to a reason to know) of the omitted income.¹⁴ The applicable standard is the electing spouse’s “actual subjective knowledge.”¹⁵ Actual knowledge is not inferred from evidence that the electing spouse merely had reason to know of the omitted income.¹⁶

Despite the taxpayer’s ex–husband’s assertion that the taxpayer “must have been aware” of the unreported income because she was involved in the preparation of the 2017 return, the Tax Court found no evidence that she had “actual knowledge” of the omitted income items. Notably, both the Forms 1099–MISC and 1099–C were addressed to the former husband, the income was deposited into his personal account, and the couple maintained separate residences. Thus, the court found that the taxpayer did not have actual knowledge of her ex–husband’s unreported income and was entitled to relief for 2017 under Sec. 6015(c).

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Footnotes

¹ Zajac, T.C. Memo. 2025-33.

²Witasick, T.C. Memo. 2024-112.

³See Norwest Corp., 108 T.C. 265, 280 (1997).

⁴Temp. Regs. Sec. 1.469-2T(c)(3)(ii)(G).

⁵Soroban Capital Partners LP, T.C. Memo. 2025-52.

⁶Soroban Capital Partners LP, 161 T.C. 310 (2023).

⁷Denham Capital Management, LP, T.C. Memo. 2024-114.

⁸Sirius Solutions, L.L.L.P., No. 24-60240 (5th Cir. 1/16/26).

⁹Wright, No. 24-10563 (11th Cir. 7/31/25).

¹⁰Wright, T.C. Memo. 2023-153.

¹¹Stacey, No. 3:23-cv-00006 (N.D. Tex. 2/25/25).

¹²Byers, 133 F.4th 824 (8th Cir. 2025).

¹³Smith, T.C. Summ. 2025-6.

¹⁴Cheshire, 115 T.C. 183, 195 (2000), aff’d 282 F.3d 326 (5th Cir. 2002).

¹⁵Culver, 116 T.C. 189, 197 (2001).

¹⁶S. Rep’t No. 105-174, 105th Cong., 2d Sess. (1998), p. 59.

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Contributors

Karmen Hoxie, CPA, is a solo practitioner in the Minneapolis area. Amie Kuntz, CPA, is a partner in the national tax group of RubinBrown 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 managing 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. Kuntz 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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