Tax Court limits Form 872-T, IRS targets ETF tax strategies, and California changes collection and historic rehabilitation credit rules.
Week ending October 2, 2026
This week produced two noteworthy published U.S. Tax Court opinions, a significant IRS attack on certain investment-fund tax strategies, new federal regulatory proposals, and two California enactments with practical consequences for tax controversy and real-estate planning. The distinctions in legal status matter: the Tax Court opinions are published regular opinions; the California bills have been enacted; Revenue Ruling 2026-20 states the IRS's current administrative position; and the new farmland and education-credit regulations remain proposed.
Tax Court: Form 872-T Cannot Cut Short a Fixed-Date Assessment Extension
In Fine v. Commissioner, 167 T.C. No. 13 (Sept. 30, 2026), the Tax Court addressed a deceptively important limitations issue. The taxpayers had signed Forms 872 agreeing to fixed dates through which the IRS could assess tax for 2015 and 2016. When Appeals negotiations later stalled, they submitted Forms 872-T in an attempt to terminate those extensions early.
The Court held that this does not work. Form 872-T is designed to terminate the open-ended extension created by Form 872-A, not a fixed-date Form 872. A taxpayer who has agreed to a date certain on Form 872 cannot unilaterally replace that date by sending a termination notice. Because the IRS mailed its notices of deficiency before the dates specified in the Forms 872, the notices were timely. Fine is a regular Tax Court opinion, not a memorandum opinion. Leagle
Why It Matters. Statute-extension requests are often treated as routine during examinations, but Fine underscores that the choice of consent form has substantive consequences. A taxpayer who wants the ability eventually to force the limitations period toward closure should understand the difference between Forms 872 and 872-A before signing. Once a fixed-date Form 872 is executed, dissatisfaction with the pace or direction of Appeals does not create a unilateral exit mechanism.
Facebook Returns to the Tax Court in a Major Transfer-Pricing Case
One day earlier, the Court issued another regular opinion in Facebook, Inc. & Subsidiaries v. Commissioner, 167 T.C. No. 12 (Sept. 29, 2026). The decision is a supplemental opinion following the Court's 2025 merits ruling concerning Facebook's 2010 cost-sharing arrangement with its Irish affiliates.
The remaining dispute involved how to implement the earlier decision under the temporary §482 cost-sharing regulations. The Commissioner advocated an aggregate 6.29-year flat-rate royalty. The Court concluded that the regulations did not require that structure and generally respected the multiple-royalty structure reflected in Facebook's contemporaneous platform-contribution documentation. It also adopted a 17% worldwide discount rate after treating Facebook's position at the computational hearing—and its own transfer-pricing documentation—as effectively accepting that rate. Leagle
Why It Matters. The case is highly fact-specific, but it reinforces two broader transfer-pricing points. Winning the argument over the appropriate valuation methodology does not necessarily decide the resulting tax liability; payment structure, discount rates, and other economic inputs can remain enormously consequential. It also illustrates the continuing importance of contemporaneous cost-sharing and transfer-pricing documentation when a transaction is litigated years later.
IRS Targets Planned ETF Transactions Used to Diversify Appreciated Portfolios
The most important administrative guidance of the week may be Revenue Ruling 2026-20, issued September 28. The ruling addresses a planned transaction in which an investor contributes appreciated securities to a newly formed ETF in a transaction intended to qualify for §351 nonrecognition, after which the ETF shortly distributes some or all of those contributed securities to an authorized participant under §852(b)(6).
Applying substance-over-form and step-transaction principles, the IRS concluded that the ETF functioned as a conduit and that the contributing investor should instead be treated as engaging in a taxable exchange under §1001 with the authorized participant.
Treasury and the IRS simultaneously issued Notice 2026-62, identifying a broader set of investment-fund strategies for scrutiny. The Notice requests comments and contemplates additional guidance, including possible future designation of some transactions as transactions of interest or listed transactions. Importantly, the Notice itself does not make that designation. Treasury also stated that future guidance could, where legally permissible, apply to transactions already completed and that the IRS may challenge transactions under existing law in examination. IRS
Why It Matters. Investors considering highly engineered ETF conversions or related “tax-aware” strategies should not assume that formal compliance with §§351 or 852(b)(6) ends the inquiry. Revenue Ruling 2026-20 gives exam teams a published roadmap for challenging the particular transaction it describes, while Notice 2026-62 signals where enforcement and rulemaking may go next.
Two Federal Regulatory Proposals to Watch
On September 28, Treasury and the IRS proposed regulations implementing new IRC §1062, which permits qualifying taxpayers selling farmland to qualified farmers to pay the federal income tax attributable to the gain in four equal annual installments. Among other requirements, qualifying property generally must have been used for farming, or leased to a qualified farmer, during substantially all of the preceding 10 years and must be subject to an enforceable 10-year restriction preserving agricultural use. The statute is already law; the September 28 regulations are proposed, not final.
On October 1, Treasury and the IRS also issued proposed regulations under §25F for the new Education Freedom Tax Credit beginning in 2027. The credit is generally up to $1,700 per individual taxpayer for qualifying cash contributions to eligible scholarship-granting organizations, with the IRS describing a maximum of $3,400 for qualifying married couples filing jointly. State participation is voluntary. Companion temporary regulations establish administrative procedures for states and scholarship organizations. IRS
Why It Matters. Both packages implement already-enacted federal statutes, but taxpayers should distinguish the statutory benefits from regulatory details that may still change before final regulations are issued.
California Clarifies the FTB's 20-Year Collection Limitation
Governor Newsom signed AB 1519 on September 27. The legislation amends Revenue and Taxation Code §19255, which generally limits the FTB's collection period to 20 years.
The amended statute excludes interest, penalties, costs, and most fees from the statutory definition of “tax liability,” while expressly providing that the collection period for those related amounts expires when the collection period for the underlying tax liability expires. Existing statutory suspensions of the 20-year period—including specified bankruptcy, installment-agreement, disaster, and other suspension periods—remain relevant. LegInfo
Why It Matters. In old FTB collection matters, substantial interest and penalties can dwarf the original tax. AB 1519 provides useful statutory clarity that those ancillary amounts do not acquire an independent collection life extending beyond the underlying tax liability. Practitioners should still carefully reconstruct any events that suspended or extended the underlying 20-year period.
California Extends—but Redesigns—the Historic Rehabilitation Credit
Also signed September 27, AB 1265 creates a successor California historic rehabilitation credit for taxable years beginning in 2027 through 2031. The new credit is generally 20% of qualified rehabilitation expenditures, subject to a $5 million per-taxpayer limit.
The legislation eliminates the prior enhanced 25% credit and the separate qualified-residence credit for the post-2026 program. It also replaces the old fixed annual allocation structure with an amount to be authorized by the Legislature through the annual Budget Act or another measure. Although AB 1265 took effect immediately as a tax levy, the new credit applies beginning in 2027. LegInfo
Why It Matter. Developers should not model a historic-rehabilitation project simply by carrying forward the economics of the existing credit. The rate, eligible projects, allocation process, and—critically—the amount of credits actually made available will operate under a different regime beginning next year.
Bottom Line
The strongest practitioner takeaway this week is procedural: Fine makes the terms of an IRS statute-extension agreement worth scrutinizing before, not after, it is signed. On the planning side, the ETF guidance shows Treasury increasingly willing to apply substance-over-form principles to sophisticated investment structures, while California's newly enacted legislation creates concrete changes in both tax collection and credit planning.
This article is for general informational purposes only and does not constitute legal, tax, accounting, or investment advice. The application of tax law depends on the taxpayer's particular facts and circumstances, and readers should consult qualified advisers before acting on any development discussed above.