Category: News

After 11 years, the litigation between Jack Daniel’s Properties, Inc. and VIP Products LLC regarding a dog toy’s resemblance to liquor ended in VIP Products LLC’s favor. VIP Products LLC sells dog toys parodying Jack Daniel’s beverage. The toys are similarly shaped (but of different materials) and are called “Bad Spaniels,” with a descriptive label of “The Old No. 2 On Your Tennessee Carpet” instead of “Old No. 7 Brand Tennessee Sour Mash Whiskey.” “The small print at the bottom substitutes ‘43% poo by vol.’ and ‘100% smelly’ for ‘40% alc. by vol. (80 proof).’”[1]

 The Lanham Act protects trademarks from confusion and dilution. This case already reached the Supreme Court in 2023, which instructed the 9th Circuit on the proper standard.[2] In turn, the 9th Circuit remanded the case to the district court. The district court ruled that the liquor cannot likely be confused with the dog toy, so the dog toy does not infringe on the liquor’s trademark. However, VIP Products LLC was held liable for dilution by tarnishment. VIP Products LLC appealed the dilution by tarnishment judgment, but Jack Daniel’s Properties, Inc. (JDPI) did not appeal the infringement ruling.

“Dilution by tarnishment means an association arising from the similarity between a mark or trade name and a famous mark that harms the reputation of the famous mark.”[3] Consumer confusion is irrelevant. However, this action “protects only famous marks from dilution and only where a similar junior mark is likely to tarnish its reputation because of the marks’ association.”[4] Here, the Jack Daniel’s liquor was compared with canine feces. Yet, “[t]he only marks JDPI proved famous are ‘Jack Daniel’s’ and its registered trade dress.”[5] “[A] mark is famous if it is widely recognized by the general consuming public of the United States as a designation of source of the goods or services of the mark’s owner.”[6] To qualify, “the mark must be a ‘household name.’”[7] The most objectionable detail, “43% poo by vol.” simply “does not mimic or reproduce any famous, similar mark. The equivalent language on JDPI’s product, ‘40% ALC. BY VOL. (80 PROOF),’ is not a mark.”[8] Therefore, “the only similar junior marks for our review are ‘Bad Spaniels’ and the dog toy’s trade dress.”[9] The “trade dress” is “the overall appearance of a product and its packaging.”[10] Neither the trade dress nor the name is facially tarnishing. “If a junior mark is not facially tarnishing, the context in which it is used may become relevant to the tarnishment analysis, depending on the facts of the case. For example, using a famous mark or a closely related depiction on a product that is of poor quality or pornographic or illegal may be tarnishing if the other requisites are met.”[11]

Here, the district court and JDPI relied on an expert witness to conclude that there is tarnishment. The 9th Circuit rejected that testimony as “generic.”[12] Although Dr. Simonson stated that aversion usually occurs when excrement is associated with a beverage, he did “not show that any association between either ‘Bad Spaniels’ and ‘Jack Daniel’s’ or between the products’ similar trade dress is likely to damage the reputation of JDPI’s famous marks.”[13] The studies he cited were not specific to this case, and “Bad Spaniels is a parodic dog toy not intended for human consumption.”[14] Finally, “Bad Spaniels is an obvious parody.”[15] Although not dispositive per se, “clarity of VIP’s parodic intent impacts the likelihood that JDPI’s famous marks are harmed by association with VIP’s product.”[16] This is so because “no matter how similar to its famous counterpart, a parodic junior mark ultimately relies upon a difference from the original mark, presumably a humorous difference, in order to produce its desired effect.”[17] Therefore, the 9th Circuit ordered the district court to vacate its permanent injunction and enter judgment in favor of VIP.

If you are considering registering a trademark or if you have any trademark questions, please call 916-822-8700 or email info@lawburton.com.

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[1] Jack Daniel’s Props. v. VIP Prods. LLC, 599 U.S. 140, 150 (2023).

[2] Specifically, the Rogers test does not apply when “the use is at least in part for source identification—when the defendant may be trading on the good will of the trademark owner to market its own goods.” Jack Daniel’s Props. v. VIP Prods. LLC, 599 U.S. 140, 156 (2023)(omitting internal quotation marks). The “Rogers test requires dismissal of an infringement claim at the outset unless the complainant can show one of two things: that the challenged use of a mark has no artistic relevance to the underlying work or that it explicitly misleads as to the source or the content of the work.” Id. at 151(omitting internal quotation marks).

[3] VIP Prods., Ltd. Liab. Co. v. United States, No. 25-2027, 2026 U.S. App. LEXIS 23257, at *12 (9th Cir. Aug. 4, 2026)(omitting internal quotation marks).

[4] Id. at *13-14.

[5] Id. at *14.

[6] Id. at *16.

[7] Id.

[8] Id. at *14 fn.3.

[9] Id. at *14.

[10] Id. at *12.

[11] Id. at *20.

[12] Id. at *23.

[13] Id. at *23-24.

[14] Id. at *24(emphasis in original).

[15] Id. at *26.

[16] Id. at *27(omitting internal brackets and quotation marks).

[17] Id. at *28(omitting internal quotation mark).

In 1868, Congress passed a law taxing tobacco and distilled spirits. The same statute “prevented a person from using ‘any still, boiler, or other vessel for purpose of distilling’ when the still was located, among other places, ‘in any dwelling-house’ or ‘in any shed, yard, or enclosure connected with any dwelling-house.’”[1] Doing so is a crime punishable by imprisonment for up to 5 years or a fine of up to $10,000, or both.[2] In April 2026, the 5th Circuit Court struck down this restriction as unconstitutional in McNutt v. U.S.,yet the 6th Circuit upheld the same law in Ream v. U.S soon thereafter.

“The government defends the statutory prohibition on at-home distillation of spirits as a ‘necessary and proper’ exercise of Congress’s power to ‘tax.’”[3] Specifically, prohibiting at-home distillation would promote the tax since it would be relatively easy to evade the tax if the distillation occurred at home. The 5th Circuit disagreed. “[P]reventing activity lest it give rise to tax evasion places no limit whatsoever on Congress’s power under the taxation clause.”[4] Quoting the Supreme Court, “Congress’s authority under the taxing power is limited to requiring an individual to pay money into the Federal Treasury, no more.”[5] Here, the challenged law prevents revenue by preventing the revenue-generating activity. The 6th Circuit agreed that the Taxing Clause is limited to taxing in a much briefer analysis.

For reasons unknown, the government abandoned its Commerce Clause on appeal in McNutt v. U.S. and apparently did not cite it as justification in Ream v. U.S.[6] Therefore, neither the 5th nor the 6th Circuit considered the Commerce Clause for this issue. The District Court for McNutt rejected the government’s Commerce Clause claim because “where regulating a purely local activity does not serve a broader, overarching statutory scheme, Congress cannot not [sic] reach it.”[7] The wheat restriction upheld in Wickard v. Filburn was part of an elaborate statutory scheme.[8] However, the prohibition litigated here “is not a ‘comprehensive’ regulation of commerce of the kind that allows Congressional intervention in every related local activity. This is because the Act does not directly regulate the supply and demand of alcohol, does not make Congress a production manager over each distillery to inflate prices, and is not part of a federal directive to either promote or eliminate a national marketplace for alcohol.”[9] The relative nakedness of the home distillery ban distinguishes it from the federal ban on controlled substances.

Instead of the Commerce Clause, both Ream and McNutt turned on the Necessary and Proper Clause, the “last, best hope of those who defend ultra vires congressional action.”[10] “In general,” this “gives Congress power to pass laws both ‘vertically’ to implement its own enumerated powers and ‘horizontally’ to implement the constitutionally vested powers of federal executive and judicial officers.”[11] The primary standard dates from 1819 in McCulloch v. Maryland: “Let the end be legitimate, let it be within the scope of the constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consist with the letter and spirit of the constitution, are constitutional.”[12] Nevertheless, “even where a law is necessary, it may still be improper.”[13] “[T]o be necessary, a law must be plainly adapted to an enumerated power.”[14] Here, the law prevents the activity from being taxed rather than assisting in the taxation of the activity. This is similar to a law struck down as unconstitutional in U.S. v. Dewitt, a 1869 Supreme Court case. “There, the challenged statute prohibited the sale of naphtha mixed with illuminating oils. The government attempted unsuccessfully to defend the statute’s constitutionality under the Commerce Clause and taxing power.”[15] The Supreme Court found that it was too attenuated from the taxation to be considered “necessary.”

A law is “proper” under the Necessary and Proper Clause “when it is not prohibited by another enumerated powers [sic] and is consistent with the letter and spirit of the constitution.”[16] Such consistency is absent here, according to the 5th Circuit. Ruling otherwise risks “creating a general federal authority akin to the police power.”[17] Ultimately, the law’s legal defense was a non-sequitur. “Logically, the Necessary and Proper Clause cannot expand the reach of the taxing power to criminalize conduct that could produce taxable revenue under the pretext that generating revenue for the federal government will be enhanced.”[18] Nevertheless, the injunction is limited to the plaintiffs.

The 6th Circuit created a circuit split through Ream v. U.S. The majority of the panel upheld the law as constitutional, while one judge dissented, arguing that the plaintiff lacked standing. The dissenting opinion cited the 5th Circuit’s McNutt v. U.S. to contrast the standing in that case with Ream. However, the majority did not mention McNutt. Ream had a different perspective on the challenged law’s logic. “Even now its rationale is almost self-evident: stills are more easily hidden in homes than in bonded premises dedicated to distilling spirits.”[19] Ream also countered the argument that the law reduces revenue rather than increases it. “As a matter of direct causation, that might be so; but Congress can take account of causal chains longer than that.”[20] Specifically, “Congress had ample reason to conclude that, for every at-home distiller who pays the tax, many others would not. The ban thus shifts consumption from untaxed spirits to taxed spirits—thereby increasing revenue.”[21] Consequently, the law is “necessary” under the Necessary and Proper Clause. As for propriety and concerns of general police power implications, the Necessary and Proper Clause’s application cannot be abstracted and reused with ease. “[W]hether a law is ‘plainly adapted’ to a permissible end depends on an empirical judgment—which is to say the judgment is, by nature, factbound.”[22] There were more than enough pertinent facts here, the court held. “Here, those facts include a history of tax evasion as old as the Republic itself; and Congress concluded—based on that history, and after a month of testimony before a select committee of the House—that the home-distilling ban, along with the 1868 Act’s other provisions, were in fact necessary to collect federal excise taxes on spirits.”[23] Collecting excise taxes on alcohol is a distinctive challenge, permitting flexibility. “Indeed, rules concerning alcohol more generally are unique as to the evasion that often accompanies them—from excise taxes, to Prohibition, to the use of fake IDs to obtain alcohol (itself almost a rite of passage for some generations), to moonshiners even today. The judgment required in this case, again, is an empirical one; and empirically, alcohol is sui generis, or very close to it.”[24]

It remains to be seen whether Ream or McNutt will prevail. Perhaps neither will, and the country will be split between “wet” and “dry” states regarding home distilleries. Indeed, this is the statistically likely outcome given the scarcity of Supreme Court decisions. Defenders of the Ream ruling will need to address U.S. v. Dewitt because Ream did not. Dewitt seems strikingly similar to the facts at hand. Although the 1869 case seemed most concerned with the federal regulation of intrastate commerce, a subject that has since become more nuanced, it also ruled that the Necessary and Proper Clause was insufficient. However, Dewitt does not necessarily support McNutt as McNutt claimed. In Dewitt, the prohibition was on a specific type of oil that is not taxed, supposedly to promote other types of oil that are taxed. Dewitt explicitly distinguished it from the statutory framework for liquor taxation:

And we have been referred to provisions, supposed to be analogous, regulating the business of distilling liquors, and the mode of packing various manufactured articles; but the analogy appears to fail at the essential point, for the regulations referred to are restricted to the very articles which are the subject of taxation, and are plainly adapted to secure the collection of the tax imposed; while, in the case before us, no tax is imposed on the oils the sale of which is prohibited.[25]McNutt nevertheless relied on this discussion to hold that an important restriction on the business of distilling liquors is unconstitutional.

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[1] McNutt v. United States DOJ, No. 24-10760, 2026 U.S. App. LEXIS 10423, at *5 (5th Cir. Apr. 10, 2026).

[2] The district court in McNutt noted: “As a matter of principle, this Court is distressed at an impropriety contained in TTB’s letter. Regardless of the reader’s level of comfort with the federal government receiving purchase data and using that data to ‘forewarn’ ne’er-do-well citizens about potential criminal liability, this Court is highly disturbed that the letter attempts to threaten a ‘$500,000 fine’ when the statutory maximum is $10,000. See 26 U.S.C. § 5601(a).” Hobby Distillers Ass’n v. Alcohol & Tobacco Tax & Trade Bureau, 740 F. Supp. 3d 509, 520 n.1 (N.D. Tex. 2024).

[3] McNutt v. United States DOJ, No. 24-10760, 2026 U.S. App. LEXIS 10423, at *12 (5th Cir. Apr. 10, 2026).

[4] Id. at *16-17.

[5] Id. at *14(quoting with emphasis added, Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 574 (2012)).

[6] The plaintiff argued in the District Court that the Dormant Commerce Clause (a limitation on state law) somehow renders the law unconstitutional. Ream v. United States Dep’t of the Treasury, 771 F. Supp. 3d 998, 1007 (S.D. Ohio 2025).

[7] Hobby Distillers Ass’n v. Alcohol & Tobacco Tax & Trade Bureau, 740 F. Supp. 3d 509, 531 (N.D. Tex. 2024).

[8] Wickard v. Filburn, 317 U.S. 111 (1942).

[9] Hobby Distillers Ass’n v. Alcohol & Tobacco Tax & Trade Bureau, 740 F. Supp. 3d 509, 533 (N.D. Tex. 2024).

[10] McNutt v. United States DOJ, No. 24-10760, 2026 U.S. App. LEXIS 10423, at *17 (5th Cir. Apr. 10, 2026)(quoting Printz v. United States, 521 U.S. 898, 923, 117 S. Ct. 2365, 2378 (1997)).

[11] Id. at *17-18.

[12] Id. at *18(quoting McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 421 (1819)).

[13] Id.(omitting internal quotation marks).

[14] Id.(omitting internal quotation marks).

[15] Id. at *22-23(omitting internal citation).

[16] Id. at *26(omitting internal brackets and quotation marks).

[17] Id. at *27 (5th Cir. Apr. 10, 2026)(quoting Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 536 (2012)). 

[18] Id.

[19] Ream v. U.S. Dep’t of the Treasury, No. 25-3259, 2026 U.S. App. LEXIS 11310, at *13 (6th Cir. Apr. 21, 2026).

[20] Id. at *15.

[21] Id.

[22] Id. at *17.

[23] Id.

[24] Id. at *17-18.

[25] United States v. Dewitt, 76 U.S. (9 Wall.) 41, 44 (1869).

Simens Medical Solutions USA Inc. v. Commissioner is simultaneously broad and narrow in scope. The Tax Court’s judgment addresses a specific and unusual situation. However, its methodology in doing so is applicable to innumerable circumstances.

The Tax Cuts and Jobs Act of 2017 (TCJA) introduced many changes into the international aspects of the Internal Revenue Code. “[I]n general terms, section 965 (MRT) taxes foreign earnings accumulated before the TCJA was enacted while section 951A (GILTI) taxes post-TCJA foreign earnings. Section 245A allows a deduction for certain post-TCJA dividends from foreign corporations, effectively exempting such dividends from U.S. tax.”[1] However, “the section 245A deduction should apply only to the type of earnings that are not subject to subpart F, the GILTI, and the MRT.”[2] Each of these three new components (MRT, GILTI, and § 245A) has different effective dates. This leaves a gap whereby “the foreign income of a CFC may not be subject to any tax and yet still be eligible for the section 245A deduction.”[3] The IRS promulgated regulations to fill that gap by partially denying the § 245A deduction. Effectively, the regulations only regard the 2018 taxable year in rather specific scenarios. Yet, the question of whether the IRS could create such regulations affects nearly everyone.

In Simens Medical Solutions USA Inc., the taxpayer met all conditions set in § 245A for its deduction. That was enough for the Tax Court. In Varian Medical System v. Commissioner, the Tax Court rejected the IRS’s attempt to change the effective date of another section amended by the TCJA that was originally advantageous because it was mismatched with § 245A.[4] There, the IRS attempted to directly change the effective date rather than impose additional conditions. Here, the regulations “do not specifically change an effective date, but Treasury specifically drafted the Extraordinary Disposition Rules to address a gap created solely by different effective dates.”[5] At least in this instance, the IRS is barred by a congressional delegation version of the substance over form doctrine. “Thus, while the mechanism for addressing the perceived problem is different, the effect is materially the same.”[6]

The IRS claimed that sections 7805(a) and 245A(g) authorize the regulations in question. Section 7805(a) is the general delegation, providing that the IRS “shall prescribe all needful rules and regulations for the enforcement” of the Internal Revenue Code.[7] The more specific § 245A(g) provides that: “The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section, including regulations for the treatment of United States shareholders owning stock of a specified 10 percent owned foreign corporation through a partnership.” The Tax Court explained that “appropriate is a quintessentially context dependent term that often draws its meaning from surrounding provisions.”[8] Yet “the statute contains no hint” of the regulations here.[9] “Treasury is not trying to construe the language of section 245A. Instead, Treasury is trying to correct the mismatch in effective dates by changing the plain meaning of the statute.”[10] The IRS may be able to “fill[] up the details of a statutory scheme.”[11] Nevertheless, “[a]dding entirely new rules at odds with the statute goes beyond filling in the gaps.”[12] The anti-abuse nature of these regulations is irrelevant. “[S]elf-serving regulations never justify departing from the statute’s clear text.”[13] Ultimately, “a regulation that purports to contradict the statute can be neither necessary nor appropriate.”[14]

The Treasury Regulations are filled with provisions not found in the Internal Revenue Code. The line between filling in the gaps left by the Code and rewriting it may be vague at times. However, if the regulations’ substance is not even “hinted” at by the statutes, they may exceed the IRS’s authority.

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[1] Siemens Med. Sols. USA, Inc. v. Commissioner, No. 11432-25, 2026 U.S. Tax Ct. LEXIS 1531, at *10 (T.C. July 15, 2026).

[2] Id. at *13.

[3] Id. at *14.

[4] Varian Med. Sys. v. Commissioner, 163 T.C. 76 (2024).

[5] Siemens Med. Sols. USA, Inc. v. Commissioner, No. 11432-25, 2026 U.S. Tax Ct. LEXIS 1531, at *20 (T.C. July 15, 2026).

[6] Id.

[7] Id. at *22.

[8] Id. at *23(omitting internal quotation marks and brackets).

[9] Id. at *24.

[10] Id.

[11] Id. at *26.

[12] Id.

[13] Id. at *25(omitting internal quotation marks).

[14] Id. at *24.

Dr. Xavier Garcia-Rojas worked as an independent contractor for Stat Radiology Medical Corporation (StadRad) as a radiologist. StatRad provided the radiologist with equipment, which he used from his Texas home to submit reports. Some of the images he studied were from medical facilities in California. The FTB demanded a California tax return in July 2019. “He filed returns for 2018, 2019, and 2020, paid the amounts requested by the Board, and then requested a refund. The Board never responded,” over six years later.[1] Dr. Garcia-Rojas sued in May 2023, and the trial court sided with the FTB’s theory that Dr. Garcia-Rojas operated a unitary business as a sole proprietorship. The Court of Appeal reversed. “[T]he Board did not cite any authority supporting its contention that a sole proprietor that engages in one business activity and receives compensation from one corporation—even when that corporation’s clients are found both in and outside of California—is a unitary business.”[2] There simply has not been a case “apply[ing] the unitary business theory to a single person or sole proprietorship engaging in one business activity.”[3] The Court of Appeal did not start here in Garcia-Rojas v. Franchise Tax Board.

“Unitary business has a long recognized meaning in California—two or more business entities that are commonly owned and integrated in a way that transfers value among the affiliated entities.”[4] Here, the sole proprietorship is solitary and therefore cannot be a unitary business. The court disapproved of Appeal of Bindley, an Office of Tax Appeals (OTA) case.[5] In Bindley a screenplay writer residing in Arizona worked as an independent contractor for two California LLCs, performing all work in Arizona. The OTA held that this was a unitary business, which applies in equal force to sole proprietorships. In considering Appeal of Bindley, the Court of Appeal found that the OTA “ignored that there must be separate business activities to unite.”[6] The Court of Appeal did not mention that the self-employed taxpayer in Bindley worked for two companies.

The Board of Equalization held in 1982 that the taxpayer “bears the burden of proof, i.e., [the taxpayer] must establish by a preponderance of the evidence that the unitary connections present in the case are, in the aggregate, so trivial and insubstantial as to require a holding that a single unitary business did not exist.”[7] This is embedded in the FTB audit manual regarding the unitary business doctrine (at p. 22). Garcia-Rojas did not discuss this burden. Instead, it assumed that the FTB must prove its unitary business theory rather than forcing the taxpayer to disprove it.[8]

Tax treatment of nonresident taxpayers begins with the general rule that “in the case of nonresident taxpayers the gross income includes only the gross income from sources within this state.”[9] But the details are delegated to the FTB. Namely, such income “shall be allocated and apportioned under rules and regulations prescribed by the Franchise Tax Board.”[10] Section 17951-4 functions as a railroad track switch, directing circumstances to more specific statutes or regulations. Situations that are not directed to the Uniform Division of Income for Tax Purposes Act (RTC § 25120 et seq.) are implicitly left behind to be dealt with through the regulations for §§ 17951-17953. These tend to be more favorable to the taxpayer and are more influenced by physical presence. As applicable here, it appears that Dr. Garcia-Rojas would not be taxed by California at all because all of his services were performed outside of California.[11]

The full implications of Garcia-Rojas remain to be seen. Unfortunately, the court disclaimed in its 6-page opinion that “[w]e express no opinion as to whether the Board can tax Garcia-Rojas under a different legal theory.”[12] Nevertheless, the subsequent petition for review filed by the California Justice Department on behalf of the FTB gave some indication of potential changes: “The result could be that the Board would have to instead apply ‘separate’ accounting methods to determine taxable income for all such entities, throwing into question how to account for shared overhead expenses and making it harder to ensure that such taxpayers file tax returns and remit taxes to California.”[13] The filing did not elaborate. However, it appears that the FTB would require businesses within Garcia-Rojas’s scope to track the origin of each dollar they receive if they do not apportion their income.

Garcia-Rojas may be an exercise in Orwellian doublethink, but it simply takes the FTB legal landscape to its logical conclusion. The unitary business doctrine requires multiple businesses or business activities. A simple business performing a sole trade without subsidiary entities cannot be “unitary.” Although Garcia-Rojas regarded sole proprietorships, its reasoning is equally applicable to all entity types. If curious whether Garcia-Rojas can be used to save you from being taxed by California, please contact us at (916) 822-8700.

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[1] Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 349 (2026). The refund claims for 2018 and 2019 were filed on April 17, 2020.

[2] Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 351 (2026).

[3] Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 351 (2026).

[4] Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 351 (2026)(omitting internal quotation marks).

[5] Appeal of Bindley, 2019 – OTA – 179P.

[6] Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 352 (2026).

[7] Appeal of Saga Corporation, 82-SBE-102, June 29, 1982.

[8] However, the court commented that “[t]he party moving for summary judgment bears the burden of persuasion that there is no triable issue of material fact and that he is entitled to judgment as a matter of law,” and the matter before the court was a motion for summary judgment. Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 350 (2026)(omitting internal quotation marks). Yet, the dispute here was what the material facts meant for the case, rather than the material facts themselves.

[9] RTC § 17951(a).

[10] RTC § 17954.

[11] “Nonresident attorneys, physicians, accountants, engineers, etc., even though not regularly engaged in carrying on their professions in this State, must include in gross income as income from sources within this State the entire amount of fees or compensation for services performed in this State on behalf of their clients.” 18 CCR § 17951-5(a)(3).

[12] Garcia-Rojas v. Franchise Tax Bd., 120 Cal. App. 5th 347, 349 (2026).

[13] FTB Petition for Review at p. 16 (Not freely available online, but available on request).

As with many facets of tax law, the question of the statute of limitations has a relatively straightforward answer that generally applies with a dozen exceptions. Fraud is one of the 12 exceptions to the 3-year rule. Specifically: “In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time.”[1] Whose intent?

            When Ms. Murrin received a notice of deficiency for tax years 1993-1999 in 2019, the decades of delay were justified because their tax preparer committed fraud for these tax years, according to the IRS. For reasons unknown, the parties stipulated that the tax preparer did indeed commit fraud, resulting in underpayment of taxes and associated accuracy penalties. The total amount was $78,382, but interest added another $250,000.

The Third Circuit in Murrin v. Commissioner upheld the Tax Court’s ruling that the tax preparer’s intent qualifies for these purposes. “First, the plain and ordinary meaning of the phrase ‘intent to evade tax’ reveals no taxpayer-only limitation.”[2] Although the tax liability is specific to a person, that specificity is not necessarily transmuted to the intent. The taxpayers are further defeated by the grammatical passive voice. This indicates that “Congress drafted § 6501(c)(1) by focusing on an event that occurs without respect to a specific actor, and therefore without respect to any specific actor’s intent or culpability.”[3] Murrin was particularly influenced by Bartenwerfer v. Buckley,where the Supreme Court explained in the context of bankruptcy law that “[p]assive voice pulls the actor off the stage.”[4] However, the 3rd Circuit refused to “determine the outer bounds of how an ‘intent to evade tax’ applies in every context.”[5]

The taxpayer argued that the most natural reading assigns the intent to the taxpayer whose tax is being evaded and whose return is false. This “argument is a fair one,” the 3rd Circuit conceded. “But the plainest and most straightforward reading of § 6501(c)(1) is that it simply requires an ‘intent to evade tax’ attached to a ‘false or fraudulent return,’ and whether a taxpayer, accountant, lawyer, or tax preparer evinced such intent is beside the point.”[6] The court did not explain why its reading is plainer than the taxpayer’s interpretation. However, the court bolstered its argument by observing that “Congress expressly used the term ‘taxpayer’ in § 6501(a) to define what return is at issue but declined to use the same qualifier in § 6501(c)(1).”[7] The difference in language yields a difference in meaning. The taxpayer’s appeals to other statutory provisions that create individualized responsibility backfired because they only served to prove that Congress is capable of limiting its language to the taxpayer. Contrary to another argument, “our interpretation of § 6501(c)(1) renders nothing superfluous in this statute.”[8]

            Together with the Supreme Court’s command that statutes of limitations must be strictly construed in favor of the IRS, the 3rd Circuit easily found in favor of the IRS despite expressions of sympathy for the taxpayer.[9] Nevertheless, the 3rd Circuit recognized that it created a circuit split with the Federal Circuit, noting that the Federal Circuit’s decision came before the Supreme Court’s grammar lesson in Bartenwerfer. As the 3rd Circuit implied, BASR Partnership v. United States did not discuss the passive voice.[10] However, the 3rd Circuit did not point out that BASR Partnership is weakened by three opinions in a three-judge panel. As the Tax Court explained when it considered Murrin v. Commissioner:

Laying out the scorecard: (1) the author of the majority opinion concluded that section 6501(c)(1) ‘suspends the three-year limitations period only when the IRS establishes that the taxpayer acted with the intent to evade tax,’ (2) the author of the concurring opinion reasoned that “it is the taxpayer (or possibly his authorized agent) who must have the requisite ‘intent to evade tax,’ and (3) the author of the dissenting opinion agreed with our holding in Allen.[11]

In any event, the IRS agreed with both sides in its history. In January 2001, it issued FSA 200104006, which limited the intent to that of the taxpayer. Like the taxpayer in Murrin,the IRS argued that the emphasis on fraud connotes the personal responsibility of the taxpayer. The IRS published FSA 200126019 six months later, completely changing its position. This becomes even more curious because both field service advisories were in response to the same fact pattern and were written by the same individual.

The Supreme Court rejected the taxpayer’s appeal of Murrin’s ruling, leaving the circuit split intact. However, the 9th Circuit has yet to opine in this matter, so Murrin is not necessarily binding on Californians. If you suffered from your tax preparer’s fraud, please contact (916) 822-8700 for assistance.

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[1] § 6501(c)(1)(emphasis added).

[2] Murrin v. Commissioner, No. 24-2037, 2025 U.S. App. LEXIS 20972, at *5 (3d Cir. Aug. 18, 2025).

[3] Id. at *6(omitting internal quotation mark and brackets).

[4] Bartenwerfer v. Buckley, 598 U.S. 69, 75 (2023).

[5] Murrin v. Commissioner, No. 24-2037, 2025 U.S. App. LEXIS 20972, at *9 n.7 (3d Cir. Aug. 18, 2025).

[6] Id. at *7.

[7] Id. at *8.

[8] Id. at *8-9 (3d Cir. Aug. 18, 2025). The superfluous argument was not well explained, and the court stated that it did not understand it.

[9] “This Court long ago pronounced the standard: ‘Statutes of limitation sought to be applied to bar rights of the Government, must receive a strict construction in favor of the Government.’” Badaracco v. Commissioner, 464 U.S. 386, 391, 104 S. Ct. 756, 761 (1984).

[10] Basr P’ship v. United States, 795 F.3d 1338, 1356 (Fed. Cir. 2015).

[11] Murrin v. Commissioner (T.C. Memo. 2024-10)(omitting internal citations).

Hough Beck & Baird, Inc. timely filed its Employer’s Quarterly Federal Tax Return (Form 941) and paid $121,003 for the first quarter of 2021. Yet on June 21, 2021, the IRS refunded that amount plus $89 in interest. The taxpayer’s accountant called and was told that the refund was due to “COVID Employee Retention Credits,” which the business apparently did not apply for that period. By May 2023, the IRS demanded that the refund be refunded and made a supplemental assessment of $121,003 plus $12,582 in interest on July 17, 2023.[1]  Hough Beck & Baird, Inc. v. Commissioner ruled that the taxpayer must disgorge the amount because the IRS entered the original assessment as $0 instead of double-posting the payment.

“A tax, once correctly assessed and paid, is extinguished.”[2] Yet, the IRS may “make a supplemental assessment within three years after the return was filed,” and “then collect the tax by levy within ten years after a timely reassessment,” if “the original assessment is ‘imperfect or incomplete in any material respect.’”[3] Neither the Internal Revenue Code nor the Treasury Regulations defines “imperfect or incomplete” for these purposes. However, the Tax Court easily found that negating the entire tax liability made “the original assessment imperfect in a material respect.”[4] Although unusual, this fact pattern is not unique. Both the 7th Circuit and the 9th Circuit addressed substantially the same scenario and concluded that the IRS Commissioner could retract the erroneous refund.[5] The Tax Court found these cases “to be almost directly on point and highly persuasive,” and ruled against the taxpayer.[6] Nevertheless, an erroneous refund is a curious case of form prevailing against function with more nuance than this straightforward application implies.

Receiving a refund in error triggers a race against time.[7] The recipient is not entitled to the refund, but the IRS’s time to recover that refund is limited. The IRS has three tools to do so.[8] The first is a refund suit under § 7405 in a district court. That option’s statute of limitations is 2 years unless “it appears that any part of the refund was induced by fraud or misrepresentation of a material fact,” in which case the statute of limitations is 5 years.[9] The second is an administrative offset, withholding amounts otherwise due to the taxpayer from the federal government, such as payments relating to Social Security and tax credits.[10] This is bound by the same statute of limitations applicable to § 7405 lawsuits, except for refunds for both the same tax year and the same tax.[11] The third option is to treat the errant refund as a tax, a “deficiency,” ultimately allowing for extrajudicial levying to collect it (such as garnishing wages). “Section 6211(a) defines a deficiency with the formula: Deficiency = Tax Imposed – (Tax Reported + Prior Deficiency Assessments – Rebates).”[12] The IRS certainly prefers to treat erroneous refunds as deficiencies, both because it does not need to file suit in court and because it generally enjoys a longer statute of limitations, but such treatment is possible only with erroneous rebate refunds. “[S]ince nonrebate refunds do not fit within the definition of a deficiency provided by section 6211, the Commissioner is limited to a refund suit under section 7405 to recover those refunds.”[13] Therefore, the characterization of a refund as a rebate or a non-rebate can effectively determine whether the IRS can recover an erroneous refund through the operation of the statute of limitations.

The Internal Revenue Code “defines a rebate as a refund issued only ‘on the ground’ that the tax imposed should be lower than the tax reported.”[14] The cause of the error is irrelevant for this dichotomy.[15] Instead, a rebate requires “substantive recalculation of the tax imposed that shows the taxpayer owes less tax than the amount shown on the taxpayer’s return.”[16] Thus, simply “writing a refund check to the wrong person” is a non-rebate refund.[17] O’Bryant v. U.S. demonstrates these rules. There, the IRS mistakenly recorded the taxpayer as paying twice, resulting in the refund of the putatively duplicative payment. This was not a supplemental assessment case because the original assessment was correct. Furthermore, it was not a rebate because it did not substantively recalculate the tax liability. “When a taxpayer mails the IRS a check in the full amount of his assessed tax liability, and the IRS cashes it, the taxpayer’s liability is satisfied, and unless a new assessment is made later on, any erroneous, unsolicited refund that the IRS happens to send the taxpayer must be handled on its own terms, not under the rubric of the assessed liability.”[18]

Hough Beck & Baird, Inc. distinguished itself from O’Bryant by observing that in Hough Beck & Baird, Inc.,“the money petitioner received as a result of respondent’s mistaken assessment is the same money petitioner originally owed. Petitioner’s employment tax liability has not been extinguished and remains outstanding.”[19] Nevertheless, the difference is simply a label. Regardless of whether the error occurred because the assessment was entered as zero or the payment was entered twice, the economic result is still the same. However, the label can determine whether the taxpayer can keep the refund. If you received a refund from the IRS in error, please contact us at (916) 822-8700 for assistance.

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[1] Although the IRS can charge interest on the illegitimate refund, it likely cannot charge a penalty for the failure to pay. In Brookhurst, Inc. v. U.S., the IRS did not challenge the district court’s judgment holding that the IRS cannot charge failure-to-pay penalties in these situations. Brookhurst, Inc. v. United States, 931 F.2d 554, 555 n.2 (9th Cir. 1991).

[2] Hough Beck & Baird v. Commissioner, No. 19128-24L, 2026 U.S. Tax Ct. LEXIS 1496, at *7 (T.C. July 8, 2026).

[3] Id.

[4] Id. at *9.

[5] United States v. Frontone, 383 F.3d 656 (7th Cir. 2004); Brookhurst, Inc. v. United States, 931 F.2d 554 (9th Cir. 1991).

[6] Hough Beck & Baird v. Commissioner, No. 19128-24L, 2026 U.S. Tax Ct. LEXIS 1496, at *10 (T.C. July 8, 2026).

[7] If the refund is a check, the statute of limitations begins to run when the check is cleared. United States v. Page, 106 F.4th 834 (9th Cir. 2024).   

[8] “[T]he IRS is not confined to § 7405 to collect erroneous refunds, but may use any method authorized by the Tax Code.” O’Bryant v. United States, 49 F.3d 340, 343 n.4 (7th Cir. 1995).

[9] IRC § 6532(b).

[10] IRM 21.4.5.15.

[11] PG&E v. United States, 417 F.3d 1375, 1380 (Fed. Cir. 2005); IRM 21.4.5.15(5).

[12] El v. Commissioner, No. 15597-23, 2026 Tax Ct. Memo LEXIS 17, at *5 (T.C. Feb. 10, 2026).

[13] El v. Commissioner, No. 15597-23, 2026 Tax Ct. Memo LEXIS 17, at *7-8 (T.C. Feb. 10, 2026).

[14] Id. At *10 n.3.

[15] “[T]he mechanism of the error does not resolve the issue.” Id. at *13(with reference to computer errors).

[16] Id. at *10-11(omitting internal quotation mark).

[17] United States v. Frontone, 383 F.3d 656, 661-62 (7th Cir. 2004).

[18] O’Bryant v. United States, 49 F.3d 340, 347 (7th Cir. 1995).

[19] Hough Beck & Baird v. Commissioner, No. 19128-24L, 2026 U.S. Tax Ct. LEXIS 1496, at *11 (T.C. July 8, 2026)(omitting internal citation).

If you dread calling the IRS, you can meet with them instead at one of their Taxpayer Assistance Centers (TACs) in more than 360 locations. However, the inspector general for the IRS, Treasury Inspector General for Tax Administration (TIGTA), recently warned that TACs may mislead taxpayers with incorrect information. Yet it is an accomplishment to progress that far. Scheduled appointments are recommended, but TACs accommodate visitors without an appointment as resources allow. Standard procedure requires TACs to close an appointment if the taxpayer is 15 minutes late to help taxpayers who walk in without an appointment. This was done only 4% of the time. Instead, TACs routinely kept those appointment times closed to other taxpayers. TIGTA made 91 unannounced visits to 82 TACs. Two visits were preempted due to sudden TAC closure, and 9 were prevented because the security guard refused them entry. For 17 visits, TIGTA was told to make an appointment. For 10 of these incidents, the TACs did not even give a phone number to make an appointment. Two of the 17 visitors were told that an appointment was needed 3 to 5 weeks in advance.

An appointment was available for all 17 visitors within an hour of arrival, but they were still turned away. TACs periodically issue satisfaction survey cards on certain days through statistical sampling, but they failed to do so 86% of the time. Of the visits in which the inspectors received full assistance, the TACs were incorrect nearly half the time (46%). The report did not reveal the full details of this assessment, but TIGTA asked three general commonplace questions.

TACs were particularly deficient in their answers regarding injured spouse relief. Unfortunately, information from a Taxpayer Assistance Center must be verified. To double-check the guidance you received from the IRS, please contact (916) 822-8700 for assistance.

The IRS has administered “First Time Abate” since 2001.[1] This is an administrative waiver of certain penalties if there is at least three years of prior tax compliance. However, the taxpayer (or their representative) needed to request its application. Now, the IRS has made First Time Abate automatic. Effective beginning with the 2025 tax year and the 2026 quarterly returns (so a Form 941 for a quarter in 2025 would not apply), the newly renamed “Automatic Exemption from Penalty” will operate under the same rules as First Time Abate, except that a penalty eligible for automatic exemption would simply not be assessed at all, and without the taxpayer’s intervention.

The waiver is available for individual tax returns, partnership tax returns, S corporation tax returns, C corporation tax returns, and payroll tax returns. To qualify, the taxpayer must have timely filed the return for the prior 3 tax years without a penalty. If so, the failure to file, failure to pay, and the failure to deposit penalty will be waived, as applicable, regardless of penalty amounts. Although the waiver should occur automatically, the IRS makes mistakes and might not always do so. As seen, the Automatic Exemption from Penalty (AEP) is limited to one waiver for every three years. In contrast, a waiver for reasonable cause (generally for extenuating circumstances such as illness) can be made any number of times. So, if both the AEP and the reasonable cause waiver apply, it is better to preserve the AEP and use the reasonable cause waiver instead (which is not automatic). Reasonable cause can generally be used as a defense to far more forms than AEP can as well. AEP notably does not include information returns, regardless of their obscurity. If you received a penalty but had reasonable cause, please contact (916) 822-8700 for assistance.

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[1] IRM 20.1.1.3.3.2.1.

The FTB issues its own equivalent of IRS Revenue Rulings, known as Legal Rulings. Unlike Revenue Rulings, Legal Rulings are rare, with only four Legal Rulings since 2022, including the latest one issued on July 7, 2026, Legal Ruling 2026-01.

A trust is taxable by the FTB if it has a resident fiduciary, California-source income, or a resident noncontingent beneficiary. Legal Ruling 2026-01 discusses when a resident is a contingent beneficiary. The regulations provide that “[a] noncontingent beneficiary is one whose interest is not subject to a condition precedent.”[1] The regulations do not define “condition precedent” for these purposes, but the FTB supplied a definition derived from the Bouvier Law Dictionary: “An event or condition that must occur before the ripening of an interest, right, or claim. If the event or condition does not occur, the interest does not vest.” In turn, the FTC defines “vested” from the same dictionary as: “Having become an unconditional and immediate interest or right.”

It would appear that a beneficiary with an interest of less than an unconditional and immediate right to trust income or corpus is a contingent beneficiary. Yet the Legal Ruling attempted to counter that conclusion, asserting that complete trustee discretion results in a contingency and that “[i]n each case, the trust document should be reviewed to determine any limitations on the trustee’s discretion to accumulate income rather than to distribute it to the beneficiary.” This comment was spurred by the Supreme Court’s 2019 narrow ruling in N.C. Dep’t of Revenue v. Kimberley Rice Kaestner 1992 Family Trust that “the presence of in-state beneficiaries alone does not empower a State to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain ever to receive it.” The three situations reviewed in this Legal Ruling all had a trustee with complete discretion. Consequently, the result was the same regardless of whether there was a potential right to either income or corpus. The contingent beneficiary becomes a noncontingent beneficiary, and therefore taxed, only on the amount actually distributed to them and not on the undistributed trust income or corpus.

Legal Ruling 2026-01’s conclusions seem unremarkable in a comparatively settled area of tax law. Both its point that “[w]here a trustee has absolute discretion to allocate net trust income to the beneficiary, the beneficiary has a contingent interest in the distribution,” and its emphasis on the trustee’s limitations are directly from a prior case, Steuer v. Franchise Tax Board.[2] Legal Ruling 2026-01 is substantially similar, if not fully the same, as TAM 2006-0002, which Steuer drew upon in its opinion. The purpose of Legal Ruling 2026-01 appears to be to restate TAM 2006-002 as a Legal Ruling, because a Superior Court accused the FTB of generating “underground” regulations through Technical Advice Memorandums (TAMs).[3] Seemingly in response, the FTB omitted all TAMs from public view on its website.

Regardless of the reasons for Legal Ruling 2026-01’s issuance, the FTB’s ready reliance on secondary sources for definitions in its analysis undermined the ruling’s implicit message. Instead of a contingent beneficiary primarily occurring only when the trustee has unfettered discretion (which was not explicitly stated), the FTB seemingly and unwittingly provided the premises for the syllogism that a beneficiary is a contingent one whenever the beneficiary lacks limits. Legal Ruling 2026-01 instructs the reader to examine the trustee’s powers when the definitions it endorsed shift the analysis from the trustee’s limits to the beneficiary’s limits. A beneficiary is noncontingent because they have an absolute right to receive the distribution, not because the trustee has absolute power to make the distribution.

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[1][1] 18 CCR § 17742(b).

[2] “[W]e review the trust document to determine whether there are any limitations on a trustee’s discretion to distribute income to a beneficiary.” Steuer v. Franchise Tax Bd., 51 Cal. App. 5th 417, 431-32 (2020).

[3] American Catalog Mailers Association v. Franchise Tax Board, San Francisco Superior Court No. CGC-22-601363 (2023).

The IRS normally imposes late filing and late payment penalties. However, the Court of Federal Claims held that tax returns and payments that would ordinarily be due from January 20, 2020, to July 10, 2023, were postponed to July 11, 2023, by operation of 7508A of the Internal Revenue Code. This applies to income taxes, gift taxes, estate taxes, excise taxes, and employment taxes, together with associated returns. According to the National Taxpayer Advocate, this means that the IRS unlawfully imposed penalties on tens of millions of taxpayers during this period. For example, if you paid taxes owed for the 2020 tax year on July 10, 2023, instead of April 15, 2021, the IRS probably assessed a penalty against you. That penalty would be unlawful. However, these penalties will not be automatically refunded. Instead, Form 843 must be filed by July 10, 2026, to claim that amount plus interest compounded daily. This is a new development that most IRS employees are likely unaware of and may dispute. Consequently, a qualified tax practitioner is needed to properly file Form 843 and explain the legal position to the IRS. If you are interested in filing such a refund claim, please contact (916) 822-8700.