Four Federal Cases Tax Practitioners Must Watch in 2024

This year, the US Supreme Court will weigh several prominent cases affecting tax administration, including a challenge to a foreign earnings provision estimated to generate hundreds of billions of dollars, and a fishing business’ challenge to a decades-old doctrine that gives deference to regulatory agencies when interpreting ambiguous statutes.

Other questions facing the federal courts include how to potentially resolve a circuit split on estates’ treatment of life insurance proceeds and the IRS’s ability to recover certain penalties.

Here are four cases tax practitioners should track in 2024:

Moore v. United States

In Moore v. United States, the Supreme Court will decide whether to uphold a tax on income held offshore between 1987 and 2017—not only deciding the fate of vast sums of US revenue, but also giving a possible preview of how the high court might consider more aggressive forms of taxation proposed by Congress.

Moore captured the attention of tax professionals on the chance that it could severely limit what kinds of money may be targeted as income for federal tax purposes by restricting the definition of income to only money that has been realized by the taxpayer. Though the case now appears less likely to having cascading effects across the tax code, the final opinion may still offer insight into where the conservative majority believes the limits of federal tax powers lie.

“I think you’re going to see an opinion that’s written in a way that tries to preserve some arguments for down the road for more extreme taxes that don’t exist yet,” said Hamish P.M. Hume, a Boies Schiller Flexner LLP partner in Washington.

During oral arguments, for instance, Justice Samuel A. Alito Jr. questioned the US about a hypothetical tax on the appreciation of holdings in securities. The US would “likely defend it as an income tax,” US Solicitor General Elizabeth Prelogar said in response.

In Moore, a Washington couple challenged a tax on undistributed earnings from their minority stake in an Indian farming equipment company. They called the tax unconstitutional for targeting unrealized gain, which they say falls outside the scope of what is considered income under the Sixteenth Amendment.

The government defended its victory on appeal, saying the high court has already recognized Congress’ power to tax all economic gains. The US Court of Appeals for the Ninth Circuit affirmed the government’s position, but it’s unclear whether the Supreme Court would do the same without some qualifications.

Based on December’s oral arguments, there are “at most three” justices leaning in favor of striking down the tax, Hume said. “I don’t expect that to change.”

“What I do expect to see is a decision that is written in a way that will get the votes of the conservatives,” Hume said. “Maybe even a majority opinion that some of the liberals will sign onto, that will explain there is still some life left” in the concept of a realization requirement, he said.

Even if the justices keep their ruling narrow and only strike down the at-issue foreign earnings provision, the effect could still be costly for the US: The Joint Committee on Taxation estimated the transition tax would raise $338 billion from 2018 to 2027.

Loper Bright Enterprises v. Raimondo

Loper Bright Enterprises v. Raimondo is a case about fish, not taxes. But its consequences—the possible end of a decades-old legal doctrine about deferring to government agencies—could still make waves in some tax circles by making it more difficult for the IRS to defend certain regulations.

The Supreme Court in January will hear arguments about whether the National Marine Fisheries Service can demand that domestic fishing vessels pay salaries to federal observers who oversee their operations. A split appellate panel previously sided with the government under the Chevron doctrine, where courts grant agencies deference to interpret ambiguity in statutes they’re responsible for enforcing.

Loper Bright is being heard simultaneously with another case, Relentless Inc. v. Department of Commerce. Conservative advocacy groups have used each case as a vehicle for presenting the justices with an opportunity to overturn Chevron.

Should they do so, US regulatory bodies beyond the NMFS—like the IRS—would feel the impact.

“I think the IRS would view it as a really big deal,” said Mary A. McNulty, co-leader of Holland & Knight LLP’s tax controversy team in Dallas. “The IRS and Treasury believe that their regulations comply with the plain language of the statute. People have different interpretations, and when there’s deference to the IRS, it makes it a lot harder for taxpayers to challenge that.”

Overturning Chevron won’t necessarily entail a rush of taxpayer victories, but it could open the door for regulatory challenges where the IRS’s interpretation of the law differs from the prevailing preferences of the industry being regulated, said Michelle Abroms Levin, a managing partner at Dentons Sirote, based in Huntsville, Ala.

“It’s going to be a question of whether there’s regulations out there that are poorly written, poorly explained, aren’t easily enforced,” Levin said. “What are the tax regulations most susceptible to challenge? It’s going to be the ones that have the most dollars at stake.”

Farhy v. Commissioner

A federal appeals court could make it more cumbersome on the IRS to enforce penalties over a taxpayer’s failure to report ownership interest in foreign corporations, and potentially implicate similar recovery mechanisms for other international informational returns.

The D.C. Circuit in Farhy v. Commissioner will consider whether the IRS may seek to recover the failure-to-report penalty under IRC Section 6038 through its assessment authority, or if it must instead pursue the penalty through a civil lawsuit. The US Tax Court had concluded that a lawsuit is required because the tax code doesn’t specify a mode of recovery or enforcement for that penalty.

The Tax Court’s conclusion “throws another wrench in the IRS just imposing the penalty without going to court,” said Joe Calianno, managing director at Andersen Tax in Washington. That’s because, by requiring the IRS to bring a suit, the court creates a new obstacle between the agency identifying and recovering a penalty.

“Most of these informational returns, if you don’t file them, there can be significant penalties associated with it,” Calianno said. “And here, if the IRS has to go to court to get the penalty, that’s a whole different ballgame for the taxpayer.”

The IRS said the Tax Court’s decision fails to apply the agency’s grant of authority under Section 6201(a). The taxpayer, Alon Farhy, had faced a proposed levy for his failure-to-file penalties.

Farhy’s case could also have “collateral implications as it relates to other international informational forms,” Calianno said, because other international provisions that impose penalties for the failure to file informational returns have statutory language similar to that which was the focus of Farhy.

“It’s not just this one form,” he said.

Connelly v. United States

Supreme Court justices will weigh in this year to resolve a circuit split over how estates should treat life insurance proceeds that affect the value of their sold stock—with big implications for the amount those estates will owe in taxes.

A closely held corporation may enter a buy-sell agreement requiring it to repurchase a deceased shareholder’s stock in order for surviving shareholders to maintain control of the business. To fund such a transaction, the business may purchase life insurance on the shareholder.

The Supreme Court in Connelly v. United States will review whether the proceeds of that life insurance policy should be considered a corporate asset that boosted the value of the deceased shareholder’s sold stake for the purposes of the federal estate tax.

The Eighth Circuit concluded that insurance proceeds in a buy-sell agreement should be considered assets during the company’s fair market valuation, splitting with the Ninth and Eleventh circuits to decide that they weren’t offset by that company’s stock repurchase obligations under the agreement. In the event the majority affirms, anyone with obligations under a buy-sell agreement exercised by a corporation at the time of death could see a steeper amount owed on their estate taxes.

“It’s not just something that’s going to go to effect folks that are very very wealthy, but it basically affects any business owner,” Kevin Matz, partner at ArentFox Schiff LLP in New York, said. “It is essential, absolutely essential, that you think through estate planing, business succession planning as well.”

There’s a “reasonable likelihood” that the Supreme Court will reverse the Eighth Circuit, Matz said. But onlookers should watch for how the petitioner tries to assuage judicial concerns of the government being shortchanged by pointing to his business’ obligation to use its life insurance proceeds for a stock repurchase.

“If they focus on that, they’ll see that there is in fact a mechanism to allow it to completely reconcile,” Matz said.