Here is the third installment of August developments. I’m still hoping to finish before this September becomes one to remember.
The Limited Partner SE Gambit
K Alain, L.L.L.P v Commissioner came from the Fifth Circuit on August 12, 2026. They open by indicating that they are withdrawing their previous opinion titled Sirius Solutions L.L.L.P. (Apparently K Alain and Sirius are the same company). The holding in the new opinion is:
“This case concerns the meaning of the term “limited partner” in 26 U.S.C. § 1402(1)(13). Today, we hold its original public meaning is a partner who plays no significant role in managing or running a business.”
You and I both know from the “1402” that we are talking about self-employment tax, but you have to consider the other readers. There is a ton of coverage of this opinion and Soroban Capital Partners v Commissioner which came from the Second Circuit on September 17 which held:
“Because the principals exerted managerial control over Soroban, they do not qualify as limited partners under § 1402(a)(13), and their distributive shares are thus subject to the self-employment tax.”
There is quite a bit of coverage on this. I recommend Kelly Erb on K Allain. For both cases together check out BDO. Here are some key takeaways from BDO.
“Partnerships should potentially reassess positions, given the evolving standards. The determinations are highly fact-specific and could require significant analysis. Partnerships that previously did not satisfy the Tax Court’s passive investor standard could explore qualifying under the Fifth and Second Circuit rationales, which allow limited partners to perform some activities.”
“Partnerships that took a favorable position based solely on state-law limited partner status and limited liability should reevaluate whether enough support remains for that position, or if functional analyses and further planning are warranted.
I covered this issue in Think Outside The Tax Box in the May 15 issue and now see the landscape changed somewhat.
The solid way to lessen social security/medicare tax is to run as an S corporation and pay a reasonable salary. If you have no other employees you will optimize 199A at around 30% of pre-salary profit. That might not qualify as reasonable in some circumstances, but at least it is not crazy unreasonable.
Dean Steeves
Dean Steeves is currently my favorite alternative tax thinker. I am eagerly awaiting his explanation of why the income tax is unconstitutional. Last month I wrote about his attempt to quash an IRS summons. He was given a chance to amend. Reading Judge Cynthia Bashant’s August 12 opinion, it appears that ship has sailed and the summons can be enforced.
Dixieland Boondockery
The Eleventh Circuit upheld the Tax Court opinion in the case of Ralph G. Evans. The Tax Court had originally denied the conservation easement entirely, but the elevnses ruled that they had to give them something. Tax Court gave them a million of the $14.175 million that they claimed. This was not a syndicated deal.
The August 17 decision of the Tax Court in Malibu Valley Land LLC is another example of a deal that was not syndicated. Taxpayer claimed $32,075,000 and IRS wanted to allow $4,650,000. The Tax Court called it $19.7 million, which is just over a million more than splitting the difference.
Hale E. Sheppard in a September 11, 2026 Tax Notes article titled “The End of Cookie-Cutter Easement Settlements: A Sign of Reasonable IRS Resolutions?” called Malibu an “Important Tax Court Victory for Taxpayers”.
“About three months after the IRS announced the global settlement offer, the Tax Court issued an opinion whose importance in the conservation area cannot be overstated,”
“…it suffices to underscore that Tax Court, breaking from the pattern over the past few years, largely held in favor of the parnership”
I have a different take. Malibu is something of a return to the good old days. It is not a syndicated financially engineered deal and the highest and best use is a subdivision which was the classic go-to for easements back in the day. In 2020, I wrote about Partnership For Conservation, citing an article that was an empirical study of valuation cases that found that on average the Tax Court allowed around 80% of taxpayer claimed value. This “proved” that there was not a serious valuation problem. The study was actually solid. There was a problem though. The last case was decided in 2018 and they concerned deductions prior to 2012. None of the deals involved were syndicated, because that was being done yet. They were not reflective of what was going on with the industry in 2020.
At any rate, Malibu is a throwback to those good old days. And given the average reflected in the study 61% of the taxpayer claim is not a great result.
On August 20 2026, the Eleventh Circuit sustained the Tax Court decision in Mill Road 36 Henry LLC. I did a deep dive on the original Tax Court decision. The return claimed a $8,935,000 deduction of property with basis of $416,563. Tax Court found easement value of $900,000, but only allowed deduction of $416,563 because of dealer taint. That seemed like rubbing salt in the wound. This was a financial engineering sort of case. The claimed highest and best use was an assisted living facility. One of the owners had filed permit requests for ten other assisted living facilities.
Norcave Properties came from the Fifth Circuit on August 21, 2026. It confirmed a district court not allowing Norcave to get a jury trial to contest penalties.
On August 19, 2026, IRS announced that it is establishing an Office of Conservation easements. IRS also concluded its uniform settlement program, although it indicated that taxpayers could request settlement on the terms outlined in its May 13 2026 announcement. The key terms were a deduction for partner amount out-of-pocket and a 10% penalty.
The new office must mean something, but I don’t know that anybody knows what it means. I have to say I hate syndicated conservation easements even more than I hate crypto.
What Does A 1099-C Mean?
Prasad and Suseela Nannipaneni were in United States District Court for the Eastern District of Michigan suing Ashland Capital Fund 2, LLC. The couple had a HELOC that was owned by Ashland. The senior mortgage was foreclosed and the property sold at sheriff’s auction for $675,000. The couple however redeemed the property by the deadline, December 15 2021, which had the effect of reviving the second mortgage held by Ashland.
Prior to the expiration of the deadline, Ashland decided to close the file and write the loan off and issued the couple a 1099-C for $237,267.90. The couple, in reliance on the 1099-C borrowed $675,000 to redeem the property and reported the 1099-C income on their 2021 return. Ashland figured out what happened in 2023 when the couple’s lawyer requested a lien discharge.
“The 1099-C form, however, did not itself operate to discharge or extinguish the Nannipanenis’ debt. A 1099-C is an instrument of the Internal Revenue Code’s information reporting system. As the Fourth Circuit has explained, a creditor may be required to file a Form 1099-C “even though an actual discharge of indebtedness has not yet occurred or is not contemplated,” because the filing satisfies a reporting obligation under 26 C.F.R. § 1.6050P-1(a) rather than effecting a discharge.”
Judge F. Kay Behm seems to be leaning toward Ashland Capital, but the case is not yet entirely settled.
- “The motion is GRANTED as to discharge; the 1099-C did not operate to discharge the debt as a matter of law.
- GRANTED as to waiver; no reasonable jury could find Ashland waived its right to collect or foreclose by clear and convincing evidence.
- GRANTED as to the statute of limitations; no evidence suggests that any statute of limitations bars enforcement of the accelerated mortgage.
- DENIED as to the requested relief as unripe.”
I don’t know what will happen with the couple with respect to the income pickup on which the statute has run if they end up having to pay the debt. I lean toward claim of right, but I don’t know how solid that is.
There Is More
There is still a lot left to August and I may be introducing a new alternative tax thinker. If we creep into October, so it goes.
