SubscribeCheck out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for May 1, 2026 – May 11, 2026.
May 1, 2026: The IRS Office of Chief Counsel issued Chief Counsel Advice 202618011, addressing whether a taxpayer can apply a revised cost allocation method under Treasury Regulation § 1.482-9 as a set-off in a transfer pricing context. The guidance concludes that a taxpayer may use a revised allocation key if it is more reliable in tracing costs to the benefits received by controlled affiliates, even if the original method was reasonable.
The Office of Chief Counsel explained that a more granular, two-step allocation method linking costs to specific business divisions before apportioning among entities better reflects arm’s-length pricing than a broad allocation based solely on overall revenue. Accordingly, the IRS accepted the taxpayer’s revised method as a valid set-off under § 1.482-1(g)(4), emphasizing that cost allocations must reasonably align with the economic benefits conferred.
May 4, 2026: The IRS issued Revenue Procedure 2026-22, providing indexed employer shared responsibility payment amounts under § 4980H for 2027. The guidance adjusts the statutory amounts to $3,780 under § 4980H(c) and $5,670 under § 4980H(b), reflecting the applicable premium adjustment percentage.
May 5, 2026: The IRS issued Revenue Procedure 2026-21, establishing a significant issue ruling program under the jurisdiction of the Associate Chief Counsel (Corporate) that allows taxpayers to request letter rulings on discrete legal issues within larger corporate transactions rather than requiring rulings on the entire transaction. The program applies primarily to transactions under §§ 332, 351, 355, 368, and 1036 and is intended to improve efficiency and timeliness of rulings by focusing on issues that are germane, specific, and not clearly resolved under existing authority.
The IRS also released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums, and Chief Counsel Advice)
Recent court decision
May 4, 2026: In Kadau v. Commissioner, T.C. Memo. 2026-37, the US Tax Court held that a taxpayer’s micro-captive insurance arrangement lacked economic substance under § 7701(o) and sustained 40% accuracy-related penalties under § 6662(i) for nondisclosed noneconomic substance transactions, totaling approximately $174,500 for tax years 2012 to 2015. The Court found that the arrangement failed both prongs of the economic substance test, concluding it did not meaningfully change the taxpayer’s economic position and lacked a substantial non-tax business purpose, finding that the taxpayer engaged in a circular flow of funds and paid excessive, non-arm’s-length premiums.
The court further held that the taxpayer failed to adequately disclose the arrangement, justifying application of the heightened 40% penalty rate.
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