Blogs

The Second Circuit has affirmed the Tax Court’s rulings against Soroban Capital Partners LP, holding that the firm’s three principals were not “limited partners” for purposes of the self-employment tax exclusion found in I.R.C. § 1402(a)(13), despite formally holding limited partner status under Delaware law. Under the Internal Revenue Code, a partner’s distributive share of partnership income is generally treated as self-employment income subject to the 15.3 percent self-employment tax on income up to $184,500 in 2026 (2.9 percent rate above that threshold), which funds Social Security and Medicare. Section 1402(a)(13), however, excludes from that tax the distributive share of a “limited partner, as such,” other than guaranteed payments for services rendered. This rule also applies to LLCs taxed as partnerships.

Soroban’s three founding principals received roughly $141.5 million in distributive shares over the 2016 and 2017 tax years, which the firm excluded from self-employment income on the theory that the principals were limited partners. The IRS disagreed, reasoning that the principals exercised full managerial control over the firm and could not be treated as limited partners for tax purposes, and issued adjustments increasing Soroban’s taxable income accordingly.

The Second Circuit first rejected Soroban’s argument that the Tax Court lacked jurisdiction to decide the adjustments, holding that net earnings from self-employment qualifies as a partnership item properly determined at the partnership level under the now repealed TEFRA audit procedures. On the merits, the court conducted an extensive review of the term “limited partner” as understood in 1977, when Congress enacted Section 1402(a)(13). The court examined contemporaneous dictionaries, treatises, state limited partnership statutes, and the legislative history of the Social Security Amendments of 1977. The court concluded that a limited partner, for purposes of the statute, must have both limited liability and a lack of managerial control over the partnership’s business. Because Soroban’s principals ran the firm’s day-to-day operations, sat on its governing committees, and made hiring and firing decisions, the court held they did not qualify for the exclusion, regardless of their formal state law title.

Notably, the Second Circuit’s opinion directly acknowledges a split with the Fifth Circuit. In K Alain L.L.L.P. v. Commissioner, the Fifth Circuit held that a limited partner is one who plays no “significant role” in managing or running the business. The Second Circuit suggested the Fifth Circuit approach may not differ dramatically in substance from the Tax Court’s “passive investor” framework, though the two circuits arrived at their tests through different reasoning and with a notable dissent in the Fifth Circuit questioning whether any functional test is appropriate at all. The Second Circuit also noted that a similar case, Denham Capital Management LP v. Commissioner, is currently pending before the First Circuit following oral argument earlier this year.

Given the growing number of circuits weighing in with varying tests and reasoning, this issue appears likely to require resolution by the United States Supreme Court. Partnerships with similarly structured limited partner arrangements should closely monitor developments in the First Circuit and consider reassessing self-employment tax positions for principals who exercise operational control, regardless of their formal partnership designation. For more information about this update, contact Liskow attorneys Leon Rittenberg III, Caroline Lafourcade, and Kevin Naccari, and visit Liskow’s Tax Practice page.

On September 10, in Monahan v. City of New Orleans, No. 2025-CA-0757, the Louisiana Fourth Circuit Court of Appeal affirmed a district court judgment compelling the City of New Orleans to pay an $8,284,084.51 tax refund judgment through a writ of mandamus, rejecting the City’s argument that payment remained discretionary absent a specific legislative appropriation.

The litigation traces back to a 1998 city ordinance that imposed penalties and collection fees on delinquent ad valorem property taxes. In 2008, the Louisiana Supreme Court held the ordinance unconstitutional to the extent it imposed penalties beyond interest on delinquent property taxes. After further proceedings, including class certification in 2015, the district court entered judgment in April 2023 declaring the ordinance unconstitutional as applied to the certified class. In April 2024, the court fixed the total reimbursement amount owed to the class. The City did not appeal either judgment, and both became final. When the City failed to pay, the class representative sought a writ of mandamus to compel payment, which the district court granted in July 2025.

On appeal, the City argued that no statute specifically authorized mandamus in this context, distinguishing this case from Jazz Casino Co., L.L.C. v. Bridges, where specific refund statutes governing state taxes expressly required payment and authorized mandamus. The City contended that under Louisiana Constitution Article XII, Section 10(C) and La. R.S. 13:5109(B)(2), judgments against political subdivisions are payable only from specifically appropriated funds, and that ordering payment from the general fund would violate separation of powers.

The Fourth Circuit disagreed. Writing for the panel, Judge Joy Cossich Lobrano held that Louisiana Constitution Article VII, Section 3(A), which requires “a complete and adequate remedy for the prompt recovery of an illegal tax,” combined with Article V, Section 35, which extends that remedy to unconstitutional taxes, supplies a specific constitutional exception to the general appropriation requirement. The court reasoned that an unsatisfied judgment does not constitute “recovery” of an illegal tax any more than an unsatisfied inverse condemnation judgment constitutes payment of just compensation, drawing on the Louisiana Supreme Court’s recent decision in Watson Memorial Spiritual Temple of Christ v. Korban. The court distinguished several cases for the City on the ground that none involved a constitutional provision specifically guaranteeing recovery of an illegal or unconstitutional tax.

Notably, the court found that the City’s administrative payment practices, including its policy of allocating $2 million annually toward judgments on a chronological basis, could not override the constitutional guarantee. Taxpayers seeking refunds of illegal tax exactions are not similarly situated to ordinary tort and contract judgment creditors. 

Ratified by voters in 2019, this is the second time that Louisiana courts have relied upon Article V, Section 35, to preserve taxpayers’ rights to contest the payment of unlawful taxes or fees.  In Kellogg Brown & Root, LLC v. Lopinto, App. 5 Cir.2022, 354 So.3d 69, 22-204 (La.App. 5 Cir. 11/2/22), writ denied 356 So.3d 341, 2022-01761 (La. 2/24/23), the Louisiana Fifth Circuit Court of Appeal held that Article V, Section 35 supported the Board of Tax Appeals’ conclusion that it had jurisdiction to act as a trial court and conduct a de novo review, rather than act as an appellate court relative to the redetermination of a tax assessment.

For more information about this update, contact Liskow attorneys Bob Angelico, Leon Rittenberg III, Caroline Lafourcade, and Kevin Naccari, and visit Liskow’s Tax Practice page.

The Treasury Department and IRS issued final regulations implementing the new deduction for qualified passenger vehicle loan interest (QPVLI), a temporary benefit created by the One, Big, Beautiful Bill Act (OBBBA) that allows individuals to deduct up to $10,000 of interest paid on certain auto loans, even if they do not itemize deductions. The final rules largely adopt the proposed regulations issued in January 2026 but include clarifications in response to public comments received by the Treasury Department.

The deduction applies to interest paid on indebtedness incurred in taxable years beginning after December 31, 2024  and before January 1, 2029. To qualify, the loan must be secured by a first lien on an “applicable passenger vehicle,” meaning a car, minivan, van, sport utility vehicle, pickup truck, or motorcycle with a gross vehicle weight rating under 14,000 pounds, whose original use commences with the taxpayer, and whose final assembly occurred within the United States. Vehicles assembled outside the United States do not qualify, regardless of the manufacturer’s headquarters location, and taxpayers may verify assembly location using the vehicle’s VIN or the window sticker.

The final regulations clarify several points that generated significant comment activity. On the personal use requirement, the rules confirm that a taxpayer’s expectation of majority personal use is tested only at the time the loan is incurred, not on an ongoing basis, so a later change in how the vehicle is actually used does not disqualify previously accrued interest. On loan structure, the regulations confirm that amounts customarily financed alongside the vehicle purchase, such as extended warranties, service plans, sales tax, and now vehicle-related accessories and GAP insurance, may be included in the qualifying loan balance, while negative equity rolled over from a trade-in remains excluded because it relates to a separate, prior purchase transaction. Interest must be allocated between qualifying and non-qualifying portions of a loan on a pro rata basis, a method the final rules retain despite industry requests for alternative approaches.

The regulations also confirm that the $10,000 annual cap applies per return regardless of filing status, and that taxpayers with multiple qualifying loans may aggregate interest across all of them before applying the cap. The deduction phases out for taxpayers with modified adjusted gross income above $100,000 (or $200,000 for joint filers), reduced by $200 for every $1,000 of income above that threshold, with no exception for head of household filers despite requests for a separate threshold.

A significant portion of the final rules addresses new information reporting obligations under Section 6050AA. Lenders and other interest recipients that receive $600 or more in qualifying interest from an individual in a calendar year must file an information return, soon to be captured on Form 1098-VLI, and furnish a statement to the borrower that includes a legend warning that the reported interest may not be fully deductible. Despite extensive industry pushback arguing that lenders lack the data needed to determine vehicle eligibility, Treasury declined to adopt a safe harbor and confirmed that lenders bear the burden of collecting the necessary information, including VINs and assembly location, to comply.

The regulations take effect 60 days after publication in the Federal Register. Individual taxpayers financing a new vehicle should confirm eligibility criteria before assuming any interest paid will qualify for the deduction. For more information about this update, contact Liskow attorneys Leon Rittenberg III, Caroline Lafourcade, and Kevin Naccari, and visit Liskow’s Tax Practice page.

The Treasury Department formally declined a request from a group of Senate Democrats to change the tax rules governing how employees value personal use of employer-provided aircraft, preserving the Standard Industry Fare Level (SIFL) valuation method.

In a letter dated August 17, 2026, Treasury’s Office of Legislative Affairs responded to an earlier July 24, 2026 letter from Senators Sheldon Whitehouse, Elizabeth Warren, Chris Van Hollen, Ed Markey, and Bernie Sanders, who had urged Treasury and the IRS to close what they characterized as a loophole allowing wealthy executives to substantially undervalue the taxable cost of personal travel on corporate jets. The senators referenced a Joint Committee on Taxation analysis showing that a flight between New York and Washington, D.C., with a fair market chartered value potentially exceeding $5,000, could be reported under the SIFL method at a value of roughly $236, producing a meaningful reduction in the executive’s imputed income and corresponding tax liability.

Under Treasury Regulation § 1.61-21, employees generally must include in gross income the value of personal use of employer-provided aircraft as a fringe benefit, treated as wages for employment tax and information reporting purposes. Employees may value that use either at the amount it would cost to charter a comparable aircraft in an arm’s length transaction, or under the SIFL method, which multiplies published cents-per-mile rates by an aircraft weight-based multiple and adds a terminal charge. The Department of Transportation calculates the underlying SIFL mileage rates and terminal charge, and the IRS publishes updated figures twice a year in a Revenue Ruling. For flights taken in the first half of 2026, for example, the terminal charge was $54.48, with mileage rates ranging from roughly 22 to 30 cents per mile depending on flight distance.

Treasury’s defended the SIFL method largely on administrative grounds, explaining that requiring individualized fair market value appraisals for every personal flight taken on employer-provided aircraft would impose a significant compliance burden on both taxpayers and the IRS. Treasury noted that the standardized method, finalized in 1989, was designed to produce consistent results across taxpayers and that the semi-annual rate updates were intended to keep pace with prevailing market conditions.

The exchange comes against the backdrop of the permanent extension of 100 percent bonus depreciation for aircraft purchases under recent tax legislation, which the senators argue compounds the benefit created by the SIFL valuation gap. Critics of the current rule, including Senator Whitehouse,  argue that the SIFL rates have fallen far behind actual charter costs and that maintaining the status quo effectively shifts tax burden away from high-income executives and toward other taxpayers.

For businesses and executives that provide or use employer aircraft for personal travel, Treasury’s response indicates that the current SIFL valuation framework remains the standard. However, future rulemaking proceedings are worth monitoring given the sustained scrutiny this issue has received. For more information about this update, contact Liskow attorneys Leon Rittenberg III, Caroline Lafourcade, and Kevin Naccari, and visit Liskow’s Tax Practice page.

The United States Tax Court recently issued a reminder that tax sophistication can support a finding of civil fraud. In Janangelo v. Commissioner, T.C. Summary Opinion 2026-8, the court found that a longtime IRS revenue agent, who is also a licensed attorney and CPA, committed civil fraud by claiming a series of fabricated and unsubstantiated deductions across four consecutive tax years.

Peter J. Janangelo, Jr. worked as an IRS revenue agent for nearly two decades while also holding an active law license in New York and CPA licenses in New York and Nevada. He and his wife, Mary Ann Janangelo, jointly filed returns for 2018 through 2021 claiming a range of deductions tied almost entirely to Mr. Janangelo’s activities. The IRS disallowed the deductions in full, and Mr. Janangelo challenged the resulting deficiencies along with proposed fraud and negligence penalties.

The largest issue involved a purported Schedule C business, styled “SSA DCS,” that Mr. Janangelo claimed to have formed in late 2018 to represent his wife in a potential Social Security disability claim. The business reported just $812 in gross receipts against $23,354 in claimed expenses. The court found the arrangement to be a sham created shortly after the Tax Cuts and Jobs Act suspended miscellaneous itemized deductions, allowing Mr. Janangelo to continue deducting the same recurring expenses, such as tax software, continuing education, and professional dues, that he had claimed in prior years. The court noted that the supposed retainer payment from his wife was, in substance, indistinguishable from her ordinary contribution to household expenses, and that the attorney Mr. Janangelo claimed to have paid for related legal work testified he had never heard of the business and performed no such work.

For 2019 through 2021, Mr. Janangelo attempted to deduct tens of thousands of dollars in expenses he attributed to an age discrimination lawsuit against the IRS, including attorney’s fees, travel, and even pet kenneling costs. The court rejected these deductions outright because the lawsuit ended in summary judgment against him, meaning he received no settlement or award against which any legal fees could be deducted under I.R.C. § 62(a)(20). The court also rejected a claimed health savings account related deduction, since the Janangelos were never enrolled in a qualifying high deductible health plan.

Applying the clear and convincing evidence standard, the court found multiple badges of fraud, including overstated deductions across every year at issue, inadequate recordkeeping, implausible explanations, and submission of inaccurate documentation. The court gave particular weight to Mr. Janangelo’s professional background, reasoning that his expertise as a trained tax professional made his conduct especially deliberate rather than mistaken. As a result, the court sustained the 75 percent civil fraud penalty under I.R.C. § 6663 against Mr. Janangelo for each year. Mrs. Janangelo, however, was found to have reasonably relied on her husband, a tax professional, in preparing and signing the couple’s joint returns, and the court declined to impose any accuracy-related penalty against her.

Although issued as a small tax case opinion that carries no precedential value under I.R.C. § 7463(b), the decision underscores the weight the Tax Court gives to a taxpayer’s professional background when evaluating fraudulent intent, and offers a cautionary illustration of how not to structure family tax planning. For more information about this update, contact Liskow attorneys Leon Rittenberg III, Caroline Lafourcade, and Kevin Naccari, and visit Liskow’s Tax Practice page.