Latest Tax Updates: Charitable Donation Scrutiny, Regulation Invalidity, And Codified Economic Substance Guidance

IRS guidance

July 14, 2026: The IRS issued Notice 2026-44, providing the June 2026 corporate bond monthly yield curve and spot segment rates under § 417(e)(3), the 24-month average segment rates applicable for July 2026 under § 430, and the 30-year Treasury weighted average used for certain multiemployer plan calculations under § 431. The June 2026 spot segment rates are 4.49%, 5.43%, and 6.18%.

For July 2026, the unadjusted 24-month average segment rates are 4.37%, 5.27%, and 5.93%. The adjusted rates applicable to plan years beginning in 2026 are 4.75%, 5.25%, and 5.93%. For plan years beginning in July 2026, the 30-year Treasury weighted average is 4.56%, with a permissible range of 4.10% to 4.78%.

July 15, 2026: The IRS issued Revenue Ruling 2026-13, providing the AFRs for August 2026, including short-, mid-, and long-term AFRs under § 1274; adjusted AFRs under § 1288; and rates applicable under §§ 382, 42, and 7520. The ruling sets the § 7520 rate at 5.20% and the adjusted federal long-term rate under § 382 at 3.72%, with the long-term tax-exempt rate at 3.77%.

The ruling also provides the low-income housing credit percentages for August 2026, including an 8.08% rate for the 70% present value credit and a 3.46% rate for the 30% present value credit, along with the monthly AFR tables used for federal tax valuation, financing, estate planning, and other tax calculations.

Examination trends

July 20, 2026: Tax controversy practitioners are reporting a renewed wave of IRS examinations targeting noncash charitable contributions, particularly donations involving hard-to-value assets such as art, intellectual property, privately held businesses, medical supplies, and other property susceptible to inflated valuations. The increased audit activity follows the IRS’s recent efforts to combat syndicated conservation easement transactions and suggests that agents with experience challenging valuation-based charitable deductions are now expanding their focus to other types of contribution arrangements. The renewed enforcement comes despite significant workforce reductions and leadership turnover at the agency.

Practitioners report that many of these examinations focus less on disputing an asset’s fair market value and more on identifying technical defects that can invalidate a deduction, such as failures to obtain a qualified appraisal, satisfy substantiation requirements, or comply with filing deadlines. The development also aligns with the Trump administration’s stated enforcement priority of increasing scrutiny of tax-exempt organizations and charitable-contribution abuses. According to IRS data, taxpayers claimed deductions for more than $160 billion in noncash charitable contributions in 2023, with a substantial portion attributable to high-income taxpayers, making charitable valuation issues an increasingly significant area of IRS enforcement.

Case developments

July 15, 2026: In Siemens Medical Solutions USA, Inc. v. Commissioner, 167 T.C. No. 5, the Tax Court held that Siemens was entitled to a full dividends-received deduction under § 245A, concluding that Treasury’s extraordinary disposition rules in Temp. Treas. Reg. § 1.245A-5T are invalid because they conflict with the unambiguous text of the statute. The Court determined that extraordinary disposition rules amounted to an impermissible override of the statute’s effective dates.

The dispute arose because Siemens’ foreign subsidiary realized significant gains from related-party asset sales in 2018, increasing its earnings and profits before distributing a foreign-source dividend to its US parent in 2019. Although the dividend satisfied every statutory requirement for the § 245A deduction, the IRS invoked the extraordinary disposition rules to disallow approximately $315 million of the deduction, asserting that the underlying earnings fell within a transition-period gap between the mandatory repatriation tax (§ 965) and the global intangible low-taxed income (GILTI) regime (§ 951A). Relying heavily on its earlier decision in Varian Medical Systems and the Supreme Court’s decision in Loper Bright, the Tax Court emphasized that courts – not agencies – must determine the best reading of a statute. Because Congress expressly made § 245A applicable to distributions made after December 31, 2017, the Court concluded that Treasury lacked authority to rewrite that rule through regulation, even if it believed Congress had inadvertently created a gap in the Tax Cuts and Jobs Act’s effective dates.

July 20, 2026: In Beveled Edge Insurance Company, Inc. v. Commissioner, Docket No. 19821-16 et al. (T.C. Order July 20, 2026), the Tax Court denied the taxpayers’ motion for partial summary judgment in which it argued that the IRS could not simultaneously assert that a captive insurance arrangement lacked economic substance while also treating purported insurance premiums as taxable income and asserting economic substance penalties. The taxpayer had argued that the IRS’s position constituted an impermissible “whipsaw” because the transaction either had economic substance for all purposes or for none. The Court, however, decided that the economic substance doctrine does not necessarily disregard an entire transaction for all federal tax purposes. Instead, as codified in § 7701(o), the Court held that the doctrine operates to deny tax benefits associated with transactions lacking economic substance while allowing economically substantive aspects of the transaction to retain their normal tax consequences.

The Court also held that, even if the IRS’s theories were viewed as inconsistent, the IRS commissioner is generally permitted to plead inconsistent positions. Finally, the Court declined to strike the § 6662 economic substance penalties, concluding that whether the taxpayers had a substantial non-tax business purpose under § 7701(o) presents a factual issue that must be resolved at trial rather than on summary judgment.

July 20, 2026: In Lewis v. Commissioner, T.C. Memo. 2026-58, the Tax Court determined the value of taxable gifts made by two children who agreed to terminate a QTIP trust and allow their father to receive all of the trust assets. Building on a prior 2024 decision holding that the children had made taxable gifts, the Court held that the value of each gift was $35,141,321. In reaching that result, the Court rejected the IRS’s position that the § 7520 actuarial tables controlled the valuation and instead held that the beneficiaries’ rights under the trust were determined by state law, not by federal valuation tables. The Court also concluded that the value of the gifts should be reduced by the children’s avoided obligation under § 2207A to reimburse their father for gift tax that would have arisen had the trust terminated according to its terms.

The Court also rejected the taxpayers’ arguments that the gifts had only nominal value because their father held a limited testamentary power of appointment and their valuation expert treated him as having a longer-than-average life expectancy due to his high income. The Court held that the father’s limited power of appointment did not diminish the children’s entitlement under the trust instrument when interpreted in accordance with the testator’s intent under Washington law. The Court also found that the expert lacked a sufficient factual basis to depart from standard actuarial life expectancy assumptions based solely on the father’s wealth and income. The decision provides important guidance on valuing transfers involving QTIP trusts, emphasizing that state law determines the underlying property rights while federal tax law governs the resulting gift-tax consequences.