On February 10, 2026, Judge Jed Rakoff of the Southern District of New York ruled in United States v. Heppner that documents generated through a consumer version of Anthropic’s Claude AI were not protected by the attorney-client privilege or the work-product doctrine under the circumstances presented. The decision appears to be the first to squarely address privilege and work product claims arising from a non-lawyer’s use of a consumer-grade insecure, non-enterprise AI tool for “legal research,” as well as the potential consequences of inputting privileged information (provided to an individual by counsel) into an AI tool. However, putting the novelty of the AI context aside, Judge Rakoff grounded his analysis in traditional privilege principles: that disclosure of privileged communications to a third party in circumstances that undermine confidentiality (here, the corporation operating the AI tool) may result in waiver. And that an AI tool is just that – a tool, not an attorney. Accordingly, this decision reinforces the importance of only using properly secured AI tools with confidential or privileged information and for decisions about using AI in the privileged context to be made by those who best appreciate the risks involved: i.e., lawyers.
Fifth Circuit in Sirius Solutions Reverses Tax Court and Exempts Limited Partners from Self-Employment Tax
On January 16, 2026, in Sirius Solutions, L.L.L.P. v. Commissioner,[1] No. 24-60240 (5th Cir. Jan. 16, 2026), the U.S. Court of Appeals for the Fifth Circuit reversed the Tax Court and held that, for self-employment tax purposes, a “limited partner” means “a partner in a limited partnership that
How Relevant Is It? The Economic Substance Doctrine According to Liberty Global and Patel
I. Introduction
Should courts respect a transaction for tax purposes, when it otherwise complies with the technical requirements of the Internal Revenue Code and regulations? When should a court take the next step and consider the economic substance of a transaction and its motivations?
In two highly-awaited court decisions
New York Tax Court Approves Section 1031 “Drop & Swap” Transactions
Earlier this year, a New York City Administrative Law Judge found that the taxpayers’ sale of a tenancy-in-common (“TIC”) interest in real estate qualified for section 1031 “like-kind exchange” treatment even though the underlying property had been owned that very same day by a partnership, which distributed the
Tax Court Reaffirmed Soroban’s Holding that Active Limited Partners of State Law Limited Partnerships May Be Subject to Self-Employment Tax
On December 23, 2024, in Denham Capital Management LP v. Commissioner (T.C. Memo. 2024-114), the Tax Court reaffirmed its earlier ruling in Soroban Capital Partners LP v. Commissioner (161 T.C. No. 12.) that active limited partners of a state law limited partnership are not entitled to the “limited partner exception”
Supreme Court Rules on Moore v. U.S. – Upholds Mandatory Repatriation Tax
On June 20, 2024, the U.S. Supreme Court ruled 7-2 that the so called mandatory repatriation tax under Internal Revenue Code Section 965 (“MRT”) is constitutional.
Justice Kavanaugh wrote the majority opinion. Justice Thomas (joined by Justice Gorsuch) dissented. Justice Barrett (joined by Justice Alito) and Justice Jackson delivered separate
Tax Court Holds That Active Limited Partners of State Law Limited Partnerships May Be Subject to Self-Employment Tax
Introduction
Section 1402(a)(13) of the Internal Revenue Code provides that the distributive share of “limited partners, as such” from a partnership is not subject to self-employment tax.[1] Managers of private equity and hedge funds are routinely structured as limited partnerships to exclude management and incentive fees from self-employment
State Tax on Trust Income Based Solely on In-State Residence of Beneficiaries Found Unconstitutional
On June 21, 2019, the United States Supreme Court decided North Carolina Dept. of Revenue v. Kimberly Rice Kaestner 1992 Family Trust (hereinafter, “Kaestner”).[1] In a unanimous opinion delivered by Justice Sotomayor, the Court held that under the Fourteenth Amendment’s Due Process Clause,[2] a state may
Tax Court Rules that Extensions of Variable Prepaid Forward Contracts Do Not Result in Taxable Exchanges
Last week, in McKelvey v. Commissioner¸[1] the U.S. Tax Court held that the extension of a typical variable prepaid forward contract (“VPFC”) did not give rise to a taxable exchange to the obligor because a VPFC is solely an obligation, and not property, within the meaning of section 1001 of the Internal Revenue Code. The Tax Court also noted this result is consistent with the usual treatment of a VPFC as an “open transaction”. This decision is very good news for an obligor under a VPFC (that is, the party required under the contract to deliver cash or stock at the end of the term of the VPFC), that wishes to extend a VPFC without tax consequences. If the decision is upheld on appeal under the Tax Court’s reasoning, the case would seem to apply equally an obligor that extends a conventional option, and could even provide a basis for debtors to argue that a modification of their debt does not give rise to an exchange (and thus, does not give rise to cancellation of indebtedness income) notwithstanding Treasury regulations section 1.1001-3. However, the Tax Court’s reasoning in McKelvey is in some tension with other authorities and, if taken at face value, could create opportunities for significant tax deferral on a wide variety of financial products.
IRS Eliminates Requirement to Submit Copy of Section 83(b) Elections with Tax Return
The IRS adopted final regulations that no longer require taxpayers who have made Internal Revenue Code §83(b) elections to attach a copy of the election to their annual federal income tax return.
Under §83, restricted stock granted in connection with the performance of services generally becomes taxable as ordinary income