Blogs

The Louisiana Department of Revenue (“LDR”) has issued Revenue Information Bulletin 26-007, announcing a change to the documentation required for shareholders, partners, and members of entities that elect to pay Louisiana’s Pass-Through Entity (“PTE”) tax beginning with the 2025 taxable year. Owners of electing PTEs will no longer be required to submit a pro forma federal income tax return or nonresident worksheet with their initial Louisiana filing.

Existing regulation LAC 61:I.1001(C)(4)(d) requires each owner to submit Form R-6981, Statement of Owner’s Share of Entity Level Tax Items, together with a pro forma federal return (Form 1040 or 1041 for residents). Each nonresident owner must submit a worksheet from Louisiana Form IT-540B. Revenue Information Bulletin 26-007 provides that, starting in 2025, owners must still submit Form R-6981, but the pro forma federal return or nonresident worksheet will be required only upon request by LDR. The Department intends to amend LAC 61:I.1001 to reflect this revised requirement.

The Bulletin also reiterates that the PTE election does not change the total amount of income subject to Louisiana tax. In no event may Louisiana taxable income be greater or less than it would have been absent the election. Where the deduction reported on Form R-1968 does not accurately reflect Louisiana taxable income, taxpayers are encouraged to submit a pro forma federal return or nonresident worksheet to support the correct computation, even if not initially required.

This update reduces administrative burdens while preserving LDR’s ability to verify reported income through document requests. Taxpayers making the PTE election should adjust their filing procedures for 2025 and beyond and continue to maintain supporting documentation in anticipation of potential review by the Department. For more information, contact Liskow attorneys Bob Angelico, Leon Rittenberg III, Caroline Lafourcade, and Kevin Naccari, and visit Liskow’s Tax Practice page. 

On February 9, 2026, the United States Court of Appeals for the Second Circuit  upheld an individual income-tax deficiency and associated penalties against taxpayer Karen Veeraswamy for the 2014 tax year. The court’s decision reinforces the principle of consistency in taxpayer representations, the presumption of correctness of IRS deficiency notices, and the limited function of Tax Court Rule 155 computations. Veeraswamy v. Commissioner highlights the risks taxpayers face when their representations in one forum are used against them in another forum.

The underlying dispute centered on whether Ms. Veeraswamy was a 50 percent shareholder of Ashand Enterprises who realized capital gains and rental income in 2014. The Commissioner determined that Veeraswamy, was a half-owner of Ashand, and was liable for tax on her pro rata share of the corporation’s income. The taxpayer claimed she was not a stockholder of the company in 2014.

The Second Circuit’s analysis focused on the role of judicial estoppel and consistency of representations across proceedings. Although Veeraswamy argued that Ashand’s bankruptcy proceedings established that her then-husband was the sole owner, the appellate court agreed with the Tax Court that the bankruptcy confirmation order did not resolve the ownership issue on the merits and thus did not preclude the IRS’s contrary position. The court applied federal preclusion law, concluding that neither claim preclusion nor issue preclusion barred the Commissioner from litigating ownership because the bankruptcy court did not enter a final decision adjudicating Veeraswamy’s ownership interest and the issue was not “actually litigated and decided” in that forum.

Moreover, the Second Circuit emphasized that the Commissioner’s tax deficiency assessment had a rational basis, which triggered the statutory presumption of correctness applicable to IRS notices of deficiency. Veeraswamy’s own statements in the bankruptcy proceedings that she was a 50 percent shareholder of Ashand provided a rational connection between the taxpayer and the corporation’s income, supporting the IRS’s determination. The court also noted that Veeraswamy failed to produce contemporaneous documentation substantiating her claimed lack of ownership or contributions to Ashand at trial, and therefore did not rebut the presumption of correctness.

The Second Circuit also upheld the Tax Court’s handling of the Rule 155 computation process. Veeraswamy attempted to use Tax Court Rule 155 to introduce additional deductions for taxes, utilities, and building expenses that she argued should reduce her tax liability, but the court found that these arguments sought to relitigate issues already decided on the merits. Rule 155 is intended solely for mechanical computation of tax liability based on established findings, not as a vehicle to raise new substantive issues or reargue matters already resolved. The appellate court therefore found no abuse of discretion in the Tax Court’s rejection of these post-opinion computations.

Finally, the Second Circuit affirmed the imposition of penalties under Internal Revenue Code § 6651(a) for failure to file and pay. Veeraswamy argued that she had reasonable cause based on accounting consultations, but the court agreed with the Tax Court that mere consultation with an accountant, without specific advice to the effect that she had no obligation to file or pay, did not establish reasonable cause. The court also rejected her arguments concerning estimated tax penalties, finding that speculative concerns about potential criminal liability did not qualify as casualty, disaster, or unusual circumstances warranting penalty relief.

The Veeraswamy decision demonstrates that inconsistent representations across legal proceedings can have significant tax consequences and that taxpayers must be attentive to how assertions made in one forum, including bankruptcy court, may affect tax liability in another forum. It also reinforces the principle that the Tax Court’s Rule 155 process is procedural and not a means to reopen or expand factual and legal determinations already made on the merits. If you have questions about this update, please contact Liskow attorneys Leon Rittenberg III, John Rouchell, Caroline Lafourcade, and Kevin Naccari and visit our Tax practice page. 

A federal district court in Texas recently granted summary judgment in favor of the United States in a case involving penalties assessed against the operator of an art donation program that marketed charitable contribution tax deductions based on inflated appraisals and questionable ownership arrangements. The decision reinforces the Internal Revenue Service’s authority to impose substantial promoter penalties under Internal Revenue Code Section 6700 and provides important guidance on what constitutes false or fraudulent statements regarding tax benefits.

Abbey Art Consultants, Inc., a company founded and controlled by David Ehrlich, engaged in the business of acquiring artwork, storing it, and facilitating its donation to charitable organizations so that customers could claim charitable contribution deductions equal to the artworks’ appraised fair market value. Customers typically paid a small deposit, often only five to ten percent of the quoted purchase price, and were told that ownership of the artwork began when pieces were “set aside” for them in storage. Abbey Art then held the artwork for approximately one year before arranging for donation and providing customers with appraisals and prefilled tax documentation claiming deductions significantly higher than the amounts paid for the art.

In 2021, the IRS assessed penalties against Ehrlich under Section 6700 for promoting an abusive tax shelter through false statements concerning the availability of tax benefits. After Ehrlich paid a portion of the penalty and filed a refund suit, the government counterclaimed for additional penalties exceeding $1 million. Following Ehrlich’s death, his estate was substituted as the plaintiff.

The court first addressed the applicable standard of proof for Section 6700 violations. Although many courts apply a preponderance of the evidence standard, the court adopted a clear and convincing evidence standard based on Fifth Circuit precedent and analogous fraud provisions in the Internal Revenue Code. Applying that heightened standard, the court concluded that the government had met its burden on all required elements.

To establish liability under Section 6700(a)(2)(A), the government was required to show that Ehrlich made or caused others to make false or fraudulent statements about material matters relating to tax benefits and that he knew or had reason to know the statements were false. The court found clear and convincing evidence that Ehrlich made material misrepresentations in two primary areas. First, he represented to clients that they acquired ownership of artwork when it was segregated in storage or when a small deposit was paid. Second, he advised clients that they could claim charitable deductions based on appraised values and rely on those appraisals for tax purposes.

The court concluded that customers did not obtain ownership of the artwork when it was merely set aside because clients had no binding obligation to pay the remaining balance and Abbey Art could not enforce payment. Accordingly, the arrangements amounted to options to purchase rather than completed sales. Without a transfer of ownership, the on-year holding period never commenced.

The court also rejected the estate’s argument that client testimony regarding their subjective belief that they owned the art was sufficient to create a factual dispute. The absence of enforceable contracts, the ability to refund or revise deposits, and the lack of client possession or identification of specific artwork supported the conclusion that Ehrlich’s ownership representations were false as a matter of law.

Further, the court found that Ehrlich knew or should have known that his statements were false. He did not rely on advice from tax professionals, exercised full control over the company’s operations, and was a sophisticated businessperson familiar with tax matters. Importantly, Ehrlich was aware of prior court decisions rejecting similar Abbey Art arrangements, which directly undermined his representations regarding ownership and holding periods. The court also held that statements made by Abbey Art’s employee could be attributed to Ehrlich because he directed and controlled the business and caused the statements to be made within the meaning of Section 6700.

Finally, the court upheld the IRS’s penalty calculation methodology. Section 6700 authorizes a penalty equal to 50 percent of the gross income derived from the prohibited activity. The court agreed with the government that the penalty should be based on Abbey Art’s overall gross income from the program rather than requiring proof of false statements for each individual transaction.

This decision highlights the risks faced by promoters of donation-based tax strategies and similar programs that depend on aggressive interpretations of ownership, valuation, or holding period rules. Courts will closely scrutinize whether customers truly acquire property interests sufficient to support charitable contribution deductions and whether promoters’ representations align with established tax law. The ruling also highlights the broad reach of Section 6700, including the IRS’s ability to impose penalties equal to half of the gross income generated by an abusive scheme and to attribute employee statements to the individual controlling the operation. 

As enforcement efforts continue to focus on abusive charitable deduction arrangements and tax shelter promotions, this case serves as a reminder that misstatements about tax benefits can lead to significant penalty exposure and litigation risk. If you have questions about this update, please contact Liskow attorneys Leon Rittenberg III, John Rouchell, Caroline Lafourcade, and Kevin Naccari and visit our Tax practice page. 

The Internal Revenue Service recently released proposed regulations implementing the Section 45Z Clean Fuel Production Credit after statutory changes enacted in last year’s tax legislation expanded and extended the credit through 2029. Although the rules are not yet final, the proposed regulations provide long-awaited clarity after years of uncertainty and are expected to encourage additional investment in low-carbon fuel production.

Section 45Z replaced a collection of prior fuel tax incentives and adopts a technology-neutral approach that rewards transportation fuels produced using low-emission methods. The value of the credit depends on the lifecycle greenhouse gas emissions of the fuel, making emissions modeling central to determining eligibility and benefit amounts. Farmers, fuel producers, fuel sellers, and airlines may all benefit from the credit, which applies to qualifying fuels produced beginning in 2025.

A key change in the proposed regulations revises guidance issued earlier this year that would have significantly limited eligibility by restricting “qualified sales” to fuel users only. That interpretation conflicted with standard industry distribution practices, which frequently involve wholesalers, dealers, and other intermediaries. The revised proposal broadens the definition of qualified sales, allowing sales through customary commercial channels to qualify for the credit. This change removes a major obstacle that had raised concerns among producers and potential credit purchasers and threatened to curtail participation in the program.

The proposed regulations also introduce compliance safe harbors related to substantiating emissions rates and documenting qualified sales. These provisions are intended to reduce administrative burdens and audit risk for taxpayers while providing a more workable framework for calculating and claiming the credit. Collectively, these revisions signal a more practical and commercially aligned regulatory approach.

Despite this progress, important uncertainties remain. Fuel producers continue to await updated guidance from the Department of Energy regarding the emissions modeling framework that taxpayers must use to calculate lifecycle greenhouse gas rates. Because emissions intensity directly determines the amount of the credit, this forthcoming model will play a central role in shaping both eligibility and economic outcomes for producers.

The Section 45Z credit has drawn bipartisan support but also criticism regarding its fiscal impact and effectiveness in reducing consumer fuel prices. The Joint Committee on Taxation estimates that the extension and expansion of the credit will reduce federal revenues by approximately $25.7 billion over the 2025–2034 period. Critics argue that the credit disproportionately benefits fuels derived from corn and soybeans that already receive support under other public policies.

Nevertheless, the IRS’s proposed regulations represent a meaningful step toward regulatory certainty and program viability. By aligning the rules more closely with industry practices and providing substantiation safe harbors, the proposal is expected to increase market confidence and stimulate additional investment in clean fuel production. 

Fuel producers, distributors, and investors should begin evaluating how the proposed rules may affect their operations and consider submitting comments during the rulemaking process to address remaining technical and practical concerns. If you have questions about this update, please contact Liskow attorneys Leon Rittenberg III, John Rouchell, Caroline Lafourcade, and Kevin Naccari and visit our Tax practice page.