From Tax Court to SCOTUS: Cases That May Reshape Tax Law in 2026

Of the thousands of tax-related cases decided each year, several hundred result in written opinions. Only a small minority of these involve new or important interpretations of law, however, and fewer still are likely to have broad implications for a wide range of taxpayers. Here are a few of the cases we expect to matter most in 2026.

Economic Substance Doctrine, Relevance

In Liberty Global v. United States, the taxpayer has asked the US Court of Appeals for the Tenth Circuit to overturn a district court’s holding that the economic substance doctrine, as codified at §7701(o) of the Internal Revenue Code, should be applied using the two-part statutory test (objective economic effect and subjective nontax purpose) without a preliminary determination of whether the doctrine is “relevant.” The statute, by its terms, applies the two-pronged test "[i]n the case of any transaction to which the economic substance doctrine is relevant,” but the district court determined that the prefatory clause is subsumed into the two-part test.

Taxpayers are concerned that the district court’s decision, if not reversed in the Tenth Circuit, could allow the government to attack tax-motivated transactions that have historically been permitted and for which Congress intended to provide a benefit despite a lack of economic substance. For example, check-the-box elections, decisions to use a particular type of business entity, or timing property sales to trigger losses, are generally undertaken largely—if not entirely—for tax reasons. The US Chamber of Commerce, the National Association of Manufacturers, and the National Foreign Trade Council are among those who have filed amicus briefs in the Court of Appeals to express their concerns.

The parties presented oral arguments to the Tenth Circuit in Liberty Global over a year ago, but the case remains undecided and therefore on our 2026 watch list, particularly given the US Tax Court’s fully-reviewed and unanimous opinion in Patel v. CIR, issued this past November, which expressly disagreed with the lower court’s view in Liberty Global about the threshold “relevance” inquiry.

The Tax Court’s view that relevance is a necessary threshold test is unlikely to be reviewed by the Fifth Circuit (to which Patel is appealable) because the government ultimately won the case despite the Tax Court’s taxpayer-friendly determination that a preliminary relevance inquiry is required. Several other cases docketed in the Tax Court are poised to follow Patel’s holding, which could ultimately give at least one more appellate court an opportunity to weigh in on the question.

In the meantime, taxpayers lack clear guidance as to how relevance should be determined as a general matter. The district court in Liberty Global viewed the test as unnecessary, and the Tax Court in Patel determined that the economic substance doctrine was relevant in that case based solely on the fact that courts have applied the doctrine in other captive insurance company cases.

In doing so, the Tax Court did not explain whether application in prior cases is necessary, sufficient, or both. If the Tenth Circuit in Liberty Global overturns the district court, its opinion could provide more clarity. Indeed, the judges’ questions during oral argument suggest the court may be seeking to write a more general rule about when the economic substance doctrine applies.

Limited Liability Partners, Self-Employment Tax

Another group of cases we expect to have broad impact this year is a trio of partnership cases involving the interpretation of §1402(a)(13), which excludes “the distributive share of any item of income or loss of a limited partner, as such,” from the earnings upon which self-employment tax is computed. Denham Capital Management LP v. CIR, Soroban Capital Partners LP v. CIR, and Sirius Solutions v. CIR, Nos. 11587-20, 30118-21 (Tax Ct. Feb. 20, 2024), all decided by the Tax Court, have been appealed to the First, Second, and Fifth Circuits, respectively.

The partnership in each case seeks to exclude from self-employment tax the distributive shares of income of all partners who have limited liability under state law, even if they participate actively in the partnership’s business. The Tax Court has instead determined that the exclusion was intended to apply only to passive income, as determined by a “functional analysis” test, regardless of whether a partner has limited liability under state law.

In doing so, the Tax Court has extended the application of self-employment tax well beyond the boundaries taxpayers have previously believed it applies. Although the IRS appears to have primarily targeted investment funds thus far, the appellate courts’ decisions in these cases could impact a wide range of partners who have limited liability under state law but participate actively in their businesses, including professional services businesses (such as in Sirius Solutions), real estate partnerships, or family limited partnerships.

Of the three cases, only Sirius Solutions has been fully briefed and argued, so the Fifth Circuit’s opinion may come before the others. During oral arguments, the judges expressed concern that there are no regulations or other published guidance to help taxpayers determine when their activities would cross the line under the Tax Court’s functional test.

Such questions may suggest a preference for the bright line limited-liability rule urged by taxpayers. In that regard, it is perhaps notable that Treasury’s Priority Guidance Plans for 2023–24 and 2024–25 indicated that guidance under §1402(a)(3) would be forthcoming, but the Priority Guidance Plan for 2025–26 makes no mention of it. Therefore, if the appeals courts agree with the Tax Court’s use of a functional analysis test, taxpayers may need to wait for additional case law development in order to know how that analysis would apply. In the meantime, the passive income rules under §469 could perhaps provide useful guidelines, but, at least in Soroban, the Tax Court found the comparison between §469 and §1402(a)(3) unpersuasive.

Nondelegation Doctrine, Deference

Another case we’re keeping a close eye on this year is Learning Resources v. Trump. The question in the case—whether the International Emergency Economic Powers Act permits the president to impose tariffs—is on its face specific to international trade. At its core, though, Learning Resources is a separation-of-powers case with potentially significant implications for tax cases. In particular, the US Supreme Court’s opinion is likely to include at least some discussion about the nondelegation doctrine, which prevents Congress from ceding its legislative power to the executive branch.

The rulemaking authority granted to Treasury in the Code is often broad, such as in §385, §482, §1502, and—especially—§7805, and no taxpayer has successfully challenged these broad grants on the ground that they violate nondelegation. More than 40 years ago, the Tax Court in Foster v. CIR explicitly rejected a taxpayer’s argument that §482 violated the nondelegation doctrine, opining that the doctrine “has been virtually abandoned by the [Supreme] Court for all practical purposes,” and indicating that briefing of the issue “waste[d] the client’s money and…the courts’ time.”

The US Supreme Court’s June 2025 opinion in FCC v. Consumers’ Research suggests the Tax Court’s harsh words may have been spoken too soon. Although Consumers’ Research involved a delegation to the Federal Communications Commission, not Treasury, the court made clear that its analysis, and the nondelegation doctrine in general, applies to tax delegations in the same manner as other congressional authorizations.

The court ultimately determined that the delegation at issue was constitutional under existing rubric, which requires that Congress set out an “intelligible principle” to guide the discretion it has provided to the relevant agency. In a dissenting opinion, however, Justice Neil Gorsuch, joined by Justices Samuel Alito and Clarence Thomas, stated a desire to replace the existing permissive analysis with something stricter. And even those justices who do not wish to replace the intelligible-principle analysis have indicated it must have at least some teeth. It seems, then, that the nondelegation doctrine is alive and well, with its contours evolving.

From a tax perspective, the nondelegation doctrine may have the most interesting impact on §7805, which gives Treasury the authority to “prescribe all needful rules and regulations for the enforcement of [the Code], including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.” This language is exceptionally broad, and Treasury has relied on it heavily.

This is particularly the case when Treasury issues regulations to implement Code sections that do not, by their terms, grant Treasury any specific regulatory authority. Notable examples include the check-the-box regulations and certain regulations under §482 (transfer pricing), §162 (trade or business expenses), and §861 (sourcing of income), among others.

The expansive language of §7805 has been particularly useful to the IRS as it contends with Loper Bright v. Raimondo, which provides that courts may not defer to an agency interpretation of the law simply because a statute is ambiguous. Instead, deference is proper only if “the best reading of a statute is that it delegates discretionary authority to an agency.”

In the wake of Loper Bright, the IRS has often invoked §7805 to support the validity of regulations, particularly in cases where the statutes at issue contain no direct grants of regulatory authority to Treasury. See, for example, Tribune Media Co. v. CIR, Schwartz v. CIR, and Foothill Packing v. CIR. But the IRS’s argument that §7805 provides expansive regulatory authority is inherently in tension with the bounds that would render Treasury’s authority constitutional under the nondelegation doctrine.

On that note, Foothill Packing is especially notable because it is poised to address the interplay between §7805, Loper Bright deference, and the nondelegation doctrine. Interestingly, in January 2025, when initially responding to the petitioner’s contention that Treasury Regulation §301.6330-1(e)(3) was invalid, the IRS relied on §7805 as a source of authority for its regulatory position but did not discuss the nondelegation doctrine.

The IRS’s supplemental brief, filed in April 2025, argues that §7805(a), read in conjunction with §6330(c)(2)(B), provides Treasury with regulatory authority in that case that does not “run afoul of the nondelegation doctrine.” The shift in argument is subtle but suggests that the IRS is taking the nondelegation doctrine more seriously than it perhaps has in the past. It will be interesting to see whether and to what extent the Tax Court takes the opportunity in Foothill Packing to discuss how §7805 may—or may not—withstand principles of nondelegation.

These cases underscore that 2026 may be a consequential year for federal tax law. From the economic substance doctrine’s threshold “relevance” inquiry, to the scope of self-employment tax for active partners with limited liability, to renewed scrutiny of delegation and deference, these cases ask courts to clarify foundational tax principles and challenge existing frameworks. Taxpayers and practitioners should be mindful of these developments, which will affect the balance between statutory text, administrative authority, and judicial interpretation in tax controversies.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Tamara Shepard is a partner at Morgan Lewis in the Boston office. Hannah Sullivan is an associate in the Chicago office.

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