Monthly Archives: April 2026

Hyatt’s long‑running battle with the IRS over the tax treatment of its hotel rewards program fund just took a major turn at the U.S. Court of Appeals for the Seventh Circuit. In Hyatt Hotels Corp. & Subsidiaries v. Commissioner, No. 24‑3239, the court vacated a Tax Court decision that had largely sided with the IRS and sent the case back for a do‑over on some key legal theories. For tax professionals advising brands with loyalty or rewards programs, this is a case to watch.

The core issue: who owns the loyalty fund?

Hyatt operates a centralized loyalty program funded by payments from Hyatt‑owned and franchisee hotels. These payments go into a dedicated rewards fund used to provide free or discounted hotel stays and other benefits to members. The fund also earns investment income.

Hyatt’s position has been that it does not have a beneficial interest in this fund. According to Hyatt, the money is effectively held and used for the benefit of the participating hotels and loyalty members, and it can only be used for program purposes. The IRS saw it very differently, asserting that roughly $300 million of fund balances and income should be treated as Hyatt’s taxable income, generating about $71 million in additional tax for the years at issue.

At the Tax Court, Hyatt lost that argument: the court agreed with the IRS that the fund income belonged to Hyatt and allowed the Service to pull a large cumulative amount into income via an “accounting method” adjustment. The Tax Court also rejected Hyatt’s alternative method‑of‑accounting arguments, including an attempt to use rules analogous to the trading stamp (premium) method.

What the Seventh Circuit said

The Seventh Circuit did not simply affirm or reverse on the same grounds. Instead, it took issue with how the Tax Court framed and analyzed the case.

Two aspects of the opinion deserve particular attention:

·         The claim of right doctrine

·         The trading stamp / premium method and “other property”

Claim of right: more than a failed trust

Hyatt did not rely solely on a formal trust theory. It also argued that, under the claim of right doctrine, the amounts in the fund were not currently taxable to Hyatt because its control was significantly constrained and the funds were burdened by obligations to provide future rewards.

The Tax Court focused heavily on whether Hyatt had established something like a trust or similar arrangement, concluded that Hyatt had not, and largely treated that as the end of the matter. The Seventh Circuit held that was legal error. The presence or absence of a formal trust does not substitute for a thorough claim‑of‑right analysis.

In other words, even if Hyatt technically “owns” the fund for some purposes, the Tax Court still needed to address whether, given the restrictions and obligations attached, Hyatt had income under the claim of right doctrine in the years in question. The Seventh Circuit declined to perform that fact‑intensive analysis itself and instead vacated and remanded for the Tax Court to do it properly.

Trading stamp method: are points “other property”?

Hyatt also argued that its rewards program should be accounted for using a trading stamp / premium‑type method, which essentially allows a taxpayer to recognize income currently but deduct a reasonable estimate of the future cost of redeeming points, premiums, or similar obligations.

The Tax Court rejected this on the categorical ground that the statute and regulations apply only where the stamp or premium is redeemable for “merchandise, cash, or other property,” and it read “other property” to mean tangible property. Because Hyatt’s points are redeemable for hotel stays and services, the court concluded they fell outside the regime.

The Seventh Circuit disagreed. It held that nothing in the text required “other property” to be tangible and that the Tax Court erred as a matter of law by reading in a tangibility requirement. That does not automatically hand Hyatt a win on the method question—Hyatt still must satisfy all the statutory and regulatory criteria—but it removes a key legal barrier that would have excluded many modern loyalty programs from trading stamp‑style treatment simply because they provide stays, miles, or services rather than physical goods.

Why this matters beyond Hyatt

The implications of this case extend well beyond one hotel chain. Many industries now run large‑scale loyalty programs—hotels, airlines, retailers, financial institutions—and many centralize contributions from affiliates or franchisees into a common fund.

Several themes emerging from Hyatt are likely to be important for those programs:

·         Form vs. substance of the fund
The Seventh Circuit’s criticism of the Tax Court’s “no trust, taxpayer loses” approach signals that the analysis cannot end with labels. Restrictions on use of funds, contractual obligations to affiliates, and program documents may all be relevant in deciding when and to whom income is recognized.

·         Claim of right in the loyalty context
Loyalty funds often sit on substantial “breakage” and accumulated balances that are not immediately needed to pay redemptions. Hyatt suggests that courts must confront how the claim of right doctrine applies to those amounts when they are subject to real limitations and future obligations. That could affect both inclusion timing and whether some amounts are ever income to the program operator at all.

·         Method‑of‑accounting options
By rejecting a bright‑line tangibility requirement for “other property,” the Seventh Circuit opens the door for loyalty programs that provide services (like travel or lodging) to argue for a trading stamp‑style method where the statutory conditions can be met. That could provide better matching between program revenues and redemption costs and reduce large one‑time inclusion adjustments.

What to watch on remand

The Tax Court now must revisit Hyatt with two clear instructions: actually analyze the claim of right question and reconsider trading stamp eligibility without a tangibility gloss.

On remand, key questions will include:

·         To what extent did Hyatt truly have unrestricted control over the fund versus holding it under meaningful contractual or practical constraints?

·         How do the loyalty program documents allocate rights and obligations between Hyatt and participating hotels?

·         Can Hyatt demonstrate that its rewards points and redemptions fit within the statutory and regulatory framework for trading stamp / premium accounting, now that “other property” is not confined to tangibles?

For tax advisors, this is a good moment to inventory clients’ loyalty and rewards structures, especially where there is a centralized fund, significant breakage, or complex affiliate arrangements. Program documents, funding mechanics, and financial statement treatment will all be relevant if the IRS challenges the income characterization or method of accounting.

 Have an IRS Tax Problem?

   Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

Sources:

1.       https://media.ca7.uscourts.gov/cgi-bin/OpinionsWeb/processWebInputExternal.pl?Submit=Display&Path=Y2026%2FD04-22%2FC%3A24-3239%3AJ%3AKirsch%3Aaut%3AT%3AfnOp%3AN%3A3527915%3AS%3A0             

2.      https://www.currentfederaltaxdevelopments.com/blog/2026/4/22/treatment-of-loyalty-rewards-program-funds-and-the-claim-of-right-doctrine              

3.      https://www.law360.com/tax-authority/articles/2468683/7th-circ-revives-300m-hyatt-rewards-tax-dispute                 

4.      https://news.bloombergtax.com/financial-accounting/hyatts-71-million-tax-assessment-bounced-back-to-tax-court            

5.       https://dockets.justia.com/docket/circuit-courts/ca7/24-3239

6.      https://casetext.com/case/hyatt-hotels-corp-subsidiaries-v-commr-of-internal-revenue

7.       https://www.millercanfield.com/resources-Tax-Court-Rules-on-Hotel-Rewards-Program.html            

8.      https://www.casemine.com/judgement/us/651cea4b579e261d14c73bd3/amp      

9.      https://www.courthousenews.com/hyatt-fights-tax-on-loyalty-program-fund-at-seventh-circuit/

10.   https://www.casemine.com/judgement/us/5914c333add7b049347c4aa4

11.    https://x.com/tax/status/1968072565915546042

12.   https://www.scconline.com/blog/post/2025/07/29/sc-ruling-on-hyatts-liability-to-pay-tax-in-india/

13.   https://news.bloombergtax.com/daily-tax-report/hyatt-meets-friendly-court-in-irs-lawsuit-over-rewards-program

14.   https://www.law360.com/articles/2388455

15.    https://courthousenews.com/wp-content/uploads/2025/09/appellants-irs-v-hyatt.pdf

16.   https://www.law360.com/tax-authority/articles/2468683/7th-circ-revives-300m-hyatt-rewards-tax-dispute                

17.    https://news.bloombergtax.com/financial-accounting/hyatts-71-million-tax-assessment-bounced-back-to-tax-court       

18.   https://media.ca7.uscourts.gov/cgi-bin/OpinionsWeb/processWebInputExternal.pl?Submit=Display&Path=Y2026%2FD04-22%2FC%3A24-3239%3AJ%3AKirsch%3Aaut%3AT%3AfnOp%3AN%3A3527915%3AS%3A0           

19.   https://www.casemine.com/judgement/us/651cea4b579e261d14c73bd3/amp    

20.  https://www.currentfederaltaxdevelopments.com/blog/2026/4/22/treatment-of-loyalty-rewards-program-funds-and-the-claim-of-right-doctrine               

21.   https://www.millercanfield.com/resources-Tax-Court-Rules-on-Hotel-Rewards-Program.html              

22.    

Read more at: Tax Times blog

In Liberty Global Inc. v. United States, the Tenth Circuit didn’t just apply the economic substance doctrine to a sophisticated cross-border structure—it walked straight through a check-the-box election that the taxpayer tried to treat as sacrosanct. The case is a shot across the bow for taxpayers relying on classification elections to manufacture earnings and profits (E&P) and access the section 245A deduction without corresponding economic change or substance.

This post unpacks how the check-the-box regulations featured in “Project Soy,” what Liberty Global argued, how the courts responded, and what that means for planning going forward.

The role of check-the-box in Project Soy

Liberty Global’s “Project Soy” was a multi-step internal restructuring designed to create artificial E&P and a deemed dividend to support a section 245A deduction and an associated refund claim. At the heart of that design was an entity classification change under the check-the-box regulations.

• One of the key steps in Project Soy was a check-the-box election that changed the tax classification of a foreign affiliate.
• That election triggered deemed transactions that, as modeled, generated the E&P needed to support a large section 245A dividends received deduction.
• In effect, the classification change was the mechanism used to turn internal group movements and latent attributes into the “dividend” Liberty Global wanted to treat as eligible for the 100% DRD.

Liberty Global tried to isolate this step and characterize it as a pure tax classification election that, by design, has no non-tax legal effect and therefore should be analyzed differently—or not at all—under the economic substance doctrine.

Liberty Global’s theory: check-the-box as a safe zone

Liberty Global and supporting amici advanced a theory that will sound familiar to anyone who has used check-the-box in planning:

1. Check-the-box is “all form and no substance.”
   The regulations allow taxpayers to elect how eligible entities are classified for federal tax purposes, with the election often having no collateral legal or commercial consequence. From the taxpayer’s perspective, that means the election is pure tax “form,” yet it has always been respected when properly made.
2. Classification choices are “basic business transactions.”
   The legislative history to section 7701(o) suggests that the economic substance doctrine is not meant to police “basic business transactions” where Congress clearly allows taxpayers to choose among alternatives (debt vs. equity, corporate vs. partnership, etc.) based on tax considerations. Liberty Global tried to place check-the-box in that protected category.
3. Relevance and the “unit of analysis.”
   Liberty Global pushed a narrow view of what counts as the “transaction” for economic substance purposes. The idea was:
• The relevant “transaction” is the check-the-box election itself.
• Because that election is a permissible regulatory choice that Congress and Treasury intended to be tax-driven, section 7701(o) is not “relevant” to it.
• If the court adopts that framing, the deemed steps and resulting E&P sit behind a sort of shield: the election is respected, and the government cannot invoke economic substance to disregard the tax consequences.

In other words, the taxpayer wanted the court to treat check-the-box as a quasi–safe harbor: if the regulations authorize the election and you follow the rules, the resulting attributes should not be second-guessed under section 7701(o).

How the courts actually treated the check-the-box step

Both the district court in Colorado and the Tenth Circuit refused to treat the check-the-box election as immune from economic substance review.

No threshold carve-out for classification elections

The district court rejected the idea of a special “relevance” gate that would pre-screen certain categories of transactions—like entity classification choices—out of the doctrine. Instead, it effectively treated the statutory relevance requirement as bound up with the two-prong test:

• If a step is part of a transaction designed to generate a tax benefit, and that overall transaction fails the objective/subjective tests of section 7701(o), the doctrine is “relevant.”
• There is no separate, front-end inquiry that says, “check-the-box elections (or similar steps) are off limits to economic substance.”

That framing matters, because it prevents taxpayers from using labels like “election” or “classification” to avoid scrutiny.

The “transaction” is the integrated project, not one step

The court also rejected Liberty Global’s attempt to define the “transaction” narrowly as the check-the-box step that produced the E&P:

• It treated Project Soy as a single, integrated transaction, analyzing the steps in the aggregate rather than isolating the election.
• The fact that the check-the-box step was the one that technically generated E&P did not make it the only relevant transaction; it was one link in a deliberately designed chain.

This approach is consistent with longstanding economic substance case law: when the taxpayer orchestrates a multi-step structure to achieve a specific tax result, courts look at the plan as a whole rather than elevating one formalistic step.

No “basic business transaction” shelter for Project Soy

On the legislative history point, the courts drew a line between:

• Routine, economically grounded classification choices (e.g., choosing to operate as a corporation vs a partnership because of liability, investor expectations, or regulatory constraints, even if tax is a major factor); and
• Highly engineered, year-end structures designed primarily to manufacture tax attributes (E&P, dividends, basis, etc.) without changing real-world operations or risk.

Project Soy landed firmly in the second category. The courts were comfortable treating it as a tax shelter rather than “basic tax planning,” even though it used familiar tools like check-the-box and section 245A.

What Liberty Global signals about check-the-box going forward

Liberty Global does not say that check-the-box elections are always subject to economic substance or that entity classification elections are inherently suspect. But it sends several clear messages about how courts may view these elections in complex planning:

1. Classification is respected; manufactured attributes are not necessarily

Courts will still respect a valid election as a matter of entity status—if you elect to treat a foreign subsidiary as disregarded, the classification itself holds. The question is what happens next:

• The deemed transactions and tax attributes (E&P, basis, gain, loss) that follow from the election can be brought within the economic substance analysis if they are part of an overall scheme that lacks real economic change and non-tax purpose.
• In Project Soy, Liberty Global’s own concessions about the lack of economic substance in key steps made that an easy conclusion for the court once it looked at the transaction as a whole.

2. Check-the-box is not a per se “basic business transaction”

The case undercuts the idea that classification elections are automatically protected by the “basic business transaction” language in section 7701(o)’s legislative history:

• When a check-the-box election is used in a straightforward way to align tax treatment with business reality (for example, ignoring an entity to match a single, integrated operating business), it is more likely to fit comfortably within that carve-out.
• When the election is used as part of a layered, advisor-driven project whose main purpose is to create tax-favorable attributes (like “manufactured” E&P) and extract value without corresponding economic income, it is more likely to be swept into an economic substance challenge.

Liberty Global sits at the aggressive end of that spectrum, and that’s exactly why the court was willing to disregard the tax benefit.

3. The “unit of analysis” question just got more important

For planners, the key practical question is: what is the transaction a court will analyze under section 7701(o)?

Liberty Global suggests that:

• Courts will favor an integrated view of multi-step planning, particularly when the taxpayer has treated the steps as part of a named internal “project” with a modeled tax outcome.
• Taxpayers will have an uphill climb if they try to isolate a single check-the-box election, or similar election, and argue it should be analyzed independent of the broader structure.

This makes it more important to think about how a series of steps will look as a cohesive transaction, not just whether each element technically meets regulatory requirements in isolation.

Practical takeaways for tax planning and controversies

For practitioners using check-the-box elections in cross-border planning, Liberty Global offers several practical lessons:

1. Document real non-tax purpose where it exists.
   If a classification election is part of a genuine business restructuring—consolidating operations, streamlining regulatory footprints, integrating cash management—build that record contemporaneously. It will be critical if the structure is later framed as “Project X” in a controversy.
2. Be wary of structures that exist almost entirely on paper.
   The more the structure’s effects are confined to the tax balance sheet (E&P, basis, DRDs, timing) without operational change, the more it will look like Project Soy to a court.
3. Assume sophisticated planning can be viewed as a single “transaction.”
   If the design involves multiple affiliated entities, rapid or year-end changes in classification, circular flows, and a model focused on tax outcomes, expect a court to treat it as an integrated transaction for economic substance purposes.
4. Don’t rely on “it’s in the regs” as a shield.
   That a result technically follows from the check-the-box regulations, section 245A, or similar rules is necessary but no longer sufficient comfort in high-stakes planning. Courts are increasingly willing to apply section 7701(o) to override formal compliance where they view the result as inconsistent with anti–base erosion policy.
5. In controversy, think carefully about how you define the “transaction.”
   How you frame the transaction in protests, briefs, and expert reports matters. Liberty Global shows that trying to define the transaction too narrowly (e.g., “only the election”) risks losing credibility with courts inclined to see the bigger picture.

 Have an IRS Tax Problem?

Or

Need Experienced International Tax Planning
That Will Hold Up on Audit?

   Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

1.       https://www.currentfederaltaxdevelopments.com/blog/2026/4/21/the-tenth-circuit-codifies-the-reach-of-the-economic-substance-doctrine-over-mechanical-statutory-compliance                  

2.      https://lawcenter.nam.org/results.aspx?idGroup=6998            

3.      https://www.law360.com/articles/2468310/-liberty-global-loses-2-4b-tax-substance-fight-in-10th-circ-            

4.      https://kpmg.com/us/en/taxnewsflash/news/2026/04/tenth-circuit-taxpayer-refund-claim-denied-economic-substance-doctrine.html                     

5.       https://www.ca10.uscourts.gov/sites/ca10/files/opinions/010111421660.pdf                 

6.      https://dockets.justia.com/docket/circuit-courts/ca10/23-1410

7.       https://www.uschamber.com/cases/tax/liberty-global-v-united-states  

8.      https://www.law360.com/articles/2262696/liberty-global-tax-break-based-on-void-moves-10th-circ-told

9.      https://www.ntu.org/library/doclib/2024/05/NTUF-Amicus-Liberty-Global-Inc-v-United-States-AS-FILED.pdf       

10.   https://www.uschamber.com/assets/documents/U.S.-Chamber-Coalition-Amicus-Brief-Liberty-Global-v.-United-States-Tenth-Circuit.pdf        

11.    https://www.ntu.org/foundation/detail/taxpayer-defense-center-urges-narrow-application-of-economic-substance-doctrine-in-liberty-global-inc-v-united-states    

12.   https://insightplus.bakermckenzie.com/bm/attachment_dw.action?attkey=i61AZmKfS9NEPCmYrJB%2BqqKGkK4vCBGD105GH%2BmKOOPUy63b0oyseKNxr5G%2FYB3RsJtcW36ifl%2FrJMTQ9Dev7VJJqt1c8PE%3D&nav=MOVTOne7ajY5Vm7jUGXQfKv%2F7eHL7Ou5Ph7y6lsL4f71hxeKcMczt4%2BGpOnmAgrx6HH%2BSO%2FuPtc%3D&attdocparam=J3hlk3I%2Bs4gI2UUWYgHwE6AQHygJqsTA9UPLOE6X7Kdzwm6QzU89XwdFCxXVSU9g9S7vnbmruMD66SU%3D&fromContentView=1 

13.   https://www.ca10.uscourts.gov/sites/ca10/files/opinions/010111286948.pdf

14.   https://law.justia.com/cases/federal/appellate-courts/ca10/23-1410/23-1410-2026-04-21.html

15.    https://www.millerchevalier.com/publication/tenth-circuit-upholds-tax-court-ruling-against-liberty-global-foreign-tax-credit

16.   https://www.taxcontroversy360.com/tag/liberty-global-inc-v-united-states/      

17.    https://www.steptoe.com/en/news-publications/liberty-global-cases-raise-novel-questions-for-appeal.html               

18.   https://www.hklaw.com/en/insights/publications/2024/05/beware-liberty-global-appeal-puts-basic-tax-planning-in-jeopardy         

19.   https://www.uschamber.com/assets/documents/U.S.-Chamber-Coalition-Amicus-Brief-Liberty-Global-v.-United-States-Tenth-Circuit.pdf 

20.  https://www.pwc.com/us/en/services/tax/library/usdc-applies-economic-substance-doctrine-in-liberty-global.html       

21.   https://insightplus.bakermckenzie.com/bm/attachment_dw.action?attkey=i61AZmKfS9NEPCmYrJB%2BqqKGkK4vCBGD105GH%2BmKOOPUy63b0oyseKNxr5G%2FYB3RsJtcW36ifl%2FrJMTQ9Dev7VJJqt1c8PE%3D&nav=MOVTOne7ajY5Vm7jUGXQfKv%2F7eHL7Ou5Ph7y6lsL4f71hxeKcMczt4%2BGpOnmAgrx6HH%2BSO%2FuPtc%3D&attdocparam=J3hlk3I%2Bs4gI2UUWYgHwE6AQHygJqsTA9UPLOE6X7Kdzwm6QzU89XwdFCxXVSU9g9S7vnbmruMD66SU%3D&fromContentView=1 

22.   https://www.currentfederaltaxdevelopments.com/blog/2026/4/21/the-tenth-circuit-codifies-the-reach-of-the-economic-substance-doctrine-over-mechanical-statutory-compliance 

23.   https://kpmg.com/us/en/taxnewsflash/news/2026/04/tenth-circuit-taxpayer-refund-claim-denied-economic-substance-doctrine.html

24.  https://www.ca10.uscourts.gov/sites/ca10/files/opinions/010111421660.pdf

25.   https://rsmus.com/insights/tax-alerts/2026/tax-court-irs-relevance-economic-substance-test.html

26.  https://www.uschamber.com/cases/tax/liberty-global-v-united-states

27.   https://www.ca10.uscourts.gov/sites/ca10/files/opinions/010111286948.pdf

28.   

Read more at: Tax Times blog

A Texas federal judge has just delivered a major win to the microcaptive industry in Drake Plastics Ltd. Co. et al. v. IRS et al., case number 4:25-cv-02570, in the U.S. District Court for the Southern District of Texas, vacating the IRS’s latest attempt to treat a broad swath of 831(b) arrangements as “listed transactions” subject to the harshest reporting regime and penalties in the Code.

What Drake Plastics Is About

Drake Plastics Ltd. Co., its captive Drake Insurance Co., and SRA 831(b) Admin filed suit in the Southern District of Texas in June 2025, challenging an IRS regulation that designated many microcaptive insurance arrangements as listed transactions under the Administrative Procedure Act (APA). The plaintiffs alleged that Treasury and the IRS overstepped their statutory authority and short-circuited required APA procedures in an effort to pressure small and mid‑size businesses out of using 831(b) captives.

The case was filed as an APA challenge, not as a deficiency case: the plaintiffs asked the court to set aside the regulation itself, arguing that the government lacked sufficient evidence that the covered microcaptive transactions are “inherently abusive” or primarily tax‑avoidance devices.

The Court’s Ruling: Microcaptive Listing Vacated

In an April 2026 decision, the Southern District of Texas vacated the regulation that had designated microcaptive insurance transactions as listed transactions, holding that the IRS had not carried its burden to justify such a sweeping rule. The judge faulted the agency for failing to demonstrate that the targeted microcaptive structures are, in the aggregate, more likely than not to be tax‑avoidance schemes rather than legitimate risk‑shifting and risk‑distribution arrangements.

The practical effect of a vacatur—as opposed to a narrower, as‑applied ruling—is that the regulation is removed from the books, at least for now, and cannot be enforced against taxpayers while the decision stands. This eliminates, for the moment, the automatic “listed transaction” reporting obligations and the draconian penalty overlay that had been attached to the category of microcaptive transactions covered by the rule.

Why This Matters for 831(b) Captives

Microcaptives electing under section 831(b) have been a top priority for IRS enforcement for more than a decade, with numerous audits and promoter investigations focused on premium deductibility, risk distribution, and economic substance. By designating a broad class of these arrangements as listed transactions, the IRS dramatically increased disclosure burdens and raised the stakes with potential §6707A penalties for failures to report.

Drake Plastics strikes directly at that strategy. The court is essentially telling the government that it cannot label an entire category of risk‑management structures as presumptively abusive without building a robust evidentiary record and adhering to the APA’s rulemaking requirements. For closely held businesses and advisors who have argued that many 831(b) captives serve genuine risk‑management needs, the decision offers significant breathing room—but not carte blanche to ignore substantive tax rules.

Key Takeaways for Taxpayers and Advisors

For practitioners working with captives and small‑business clients, several practical points emerge from Drake Plastics:

·         The listed transaction rule for microcaptives has been vacated by a federal district court, reducing immediate reporting and penalty exposure tied specifically to that regulation.

·         The decision does not bless any particular microcaptive structure; the IRS still has multiple tools—economic substance, sham transaction doctrine, §482, and standard deductibility rules—to challenge abusive arrangements.

·         APA challenges remain a powerful avenue for pushing back on aggressive IRS regulations and notices, particularly where the agency relies on generalized assertions of abuse across an entire transaction category.

·         Taxpayers currently under examination or considering voluntary compliance around microcaptives should revisit their strategy in light of the vacatur, but only after a careful, fact‑specific review of their captive’s operations, underwriting, and claims history.

For tax advisors, Drake Plastics is a reminder that IRS enforcement initiatives can be vulnerable when they outrun the administrative record and underestimate APA constraints. At the same time, it underscores the importance of designing 831(b) captives that look and operate like real insurance companies—because even without a listed‑transaction label, weak fact patterns are still likely audit targets.

 Have an Micro Captive Tax Problem?

     Contact the Tax Lawyers at

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

Sources:

1.       https://www.law360.com/articles/2466169/texas-judge-vacates-irs-steep-microcaptive-reporting-rule        

2.      https://www.law360.com/tax-authority/federal/articles/2466169/texas-judge-vacates-irs-steep-microcaptive-reporting-rule        

3.      https://dockets.justia.com/docket/texas/txsdce/4:2025cv02570/2011809

4.      https://finance.yahoo.com/news/sra-831-b-admin-drake-194500152.html 

5.       https://www.captiveinsurancetimes.com/citimes/CITimes_issue_286.pdf

6.      https://www.law360.com/cases/684089fdbf409683a474f971

7.       https://captivereview.com/news/drake-plastics-files-second-lawsuit-against-irs/    

8.      https://www.captive.com/news/drake-plastics-sues-irs-over-captive-insurance-premium-dispute    

9.      https://www.insurancebusinessmag.com/us/news/breaking-news/texas-plastic-company-sues-irs-over-new-rules-547153.aspx    

10.   https://captivereview.com/news/us-court-vacates-listed-transaction-designation-for-micro-captives-in-drake-plastics-case/

11.    https://app.midpage.ai/document/drake-plastics-ltd-co-v-1000451536860

12.   https://app.midpage.ai/document/drake-plastics-ltd-co-v-1000459115560

13.   https://law.justia.com/cases/federal/appellate-courts/ca1/06-2507/06-2507-01a-2011-02-25.html

14.   https://comptroller.texas.gov/programs/opioid-council/docs/teva-tx-state-wide-opioid-settlement.pdf

15.    https://casetext.com/case/drake-v-commissioner-3

16.    

Read more at: Tax Times blog

Hundreds of billions of dollars of U.S. corporate profits are now taxed at effective rates that would have been unthinkably low a decade ago, and a new report shows at least 88 very profitable corporations paid exactly zero federal income tax for 2025. That reality understandably frustrates individual taxpayers and closely held business owners who feel like they are the ones funding the system while Fortune 500 balance sheets celebrate.

What the new report actually says

The Institute on Taxation and Economic Policy (ITEP) examined annual reports for some of the largest publicly traded U.S. corporations and identified at least 88 that reported positive U.S. pretax income and no federal corporate income tax for their most recent fiscal year. Collectively, these companies reported more than $105 billion of U.S. pretax income for 2025.

At a 21 percent statutory corporate rate, that pool of income “should” translate to roughly $22.1 billion in federal corporate tax. Instead, the group not only paid nothing but collectively received $4.7 billion in tax rebates, meaning their net federal tax benefit on 2025 activity was negative. When you measure their outcome against the statutory 21 percent rate, the forgone federal corporate tax is about $26.7 billion; measured against the old 35 percent rate, the gap is about $41 billion for 2025 alone.

ITEP is careful to stress that this is not a full universe of zero‑tax corporations. The analysis excludes large private companies, public companies outside the major indices, and firms whose fiscal years do not yet show up in 2025 financials, so the 88 corporations should be considered a floor, not a ceiling.

Who is paying zero

The tax‑avoiding companies span a wide cross‑section of the U.S. economy, including manufacturing, transportation, entertainment, and technology. ITEP notes, for example, that three digital payments companies—PayPal, Toast, and Block—collectively paid zero federal income tax on $3.2 billion of U.S. income.

Other ITEP work and public discussion around the report highlight that well‑known brands such as Tesla, Palantir, Live Nation Entertainment, Coinbase, United Airlines, Walt Disney, and others have reported very low or zero federal income tax in recent years, often on billions in U.S. profits. These cases illustrate that zero‑tax outcomes are not confined to niche industries or struggling firms.

Selected examples

How do profitable corporations get to zero?

From a tax professional’s perspective, nothing in the report suggests systemic fraud; instead, it reflects deep, sustained use of provisions Congress deliberately put in the Code and then expanded in recent Trump‑era tax packages. Because corporate tax returns are confidential, we only see the broad categories of tax breaks in financial statement footnotes, but that is enough to explain most of the remarkable results.

Here are the primary tools:

·         Accelerated depreciation and expensing. A 2025 law allowed companies to immediately write off capital investments, the most extreme form of accelerated depreciation. ITEP found that more than half of the 88 companies used depreciation incentives to reduce or erase their current federal income tax, collectively cutting tax expense by about $11.4 billion in 2025.

·         Research incentives (credits and expensing). At least 40 of the zero‑tax corporations used the research and experimentation credit, disclosing roughly $1.6 billion of federal R&D credits for 2025. In addition, a new provision enacted in 2025 allows immediate expensing of domestic R&D instead of slower amortization, and more than 30 companies appear to have cut their 2025 income taxes by at least $4.4 billion using this rule.

·         Export‑related deductions. At least 10 companies benefited from the Foreign‑Derived Deduction Eligible Income (FDDEI) deduction, a successor to and expansion of the older FDII regime, which lowers the effective U.S. tax rate on certain export‑related profits by allowing a 33.34 percent deduction for qualifying income. Beneficiaries include companies in technology, defense, and consumer brands with substantial foreign sales.

·         Stock‑based compensation. More than a dozen companies used the stock‑option tax preference, which allows a deduction for the spread between strike price and market value even when the related expense reported to investors is smaller. Well‑known names in tech, energy, and crypto are among those that substantially reduced their tax expense this way.

These tools work together, but they rest on a foundation created by the 2017 Tax Cuts and Jobs Act and then reinforced by the 2025 “One Big Beautiful Bill Act,” both of which substantially lowered the statutory rate and expanded or preserved the most generous corporate preferences. The result is that large enterprises, with sophisticated planning and capital‑intensive footprints, can often drive their current federal income tax to zero in profitable years without breaking a single rule.

Why smaller businesses and individuals can’t replicate this

If you are a high‑earning individual, a professional services firm, or the owner of a closely held pass‑through, you may wonder why you cannot “do what the big guys do.” The answer is structural and highlights how the Code favors certain activities and entity types over others.

·         Different entities, different playbook. Most closely held businesses operate as S corporations, partnerships, or sole proprietorships, where income flows through to owners and is taxed at individual rates. Many of the largest corporate breaks in the ITEP report (FDDEI‑type deductions, large‑scale bonus depreciation on heavy infrastructure, export incentives) are either unavailable or far less valuable to pass‑throughs.

·         Scale of investment. Accelerated depreciation and 100 percent expensing are powerful only if you are making large, ongoing capital investments. A Fortune 500 manufacturer adding billions of dollars in plant and equipment can credibly wipe out its tax base; a local professional practice buying a few computers and a vehicle cannot.

·         Nature of income. The Code is particularly generous to income that looks like returns on capital, intellectual property, and exports, not to labor‑heavy or service‑based income. Many closely held businesses generate exactly the kind of active, domestic, service income that remains fully taxed.

·         Access to capital and advice. Multinationals can afford in‑house tax departments, Big Four planners, and complex cross‑border structures, while smaller businesses may work with one advisor and must balance tax against cash‑flow, banking, and operational constraints. That gap in resources translates directly into an effective‑rate gap.

In other words, the zero‑tax outcomes in the report are lawful but not broadly reproducible for ordinary taxpayers. They reflect policy choices that reward certain behaviors, industries, and scales of operation.

What this means for you as an individual taxpayer

For individual clients, the main implication is not that you are “doing it wrong,” but that the system is not neutral. Large corporations can combine base‑erosion tools and preferential regimes to shrink their effective rate; individuals primarily see complexity, not deep structural discounts.

This has several practical consequences:

·         Pressure on enforcement. As large corporate receipts fall relative to profits, tax administrators have incentives to focus more on easy‑to‑audit income streams: W‑2 wages, 1099s, and small‑business returns. That can translate into more correspondence audits and document‑intensive examinations for ordinary taxpayers, even as headline corporate rates fall.

·         Political volatility. Reports like ITEP’s will continue to fuel debates about “closing loopholes” and raising revenue from “the rich” or from “corporations.” Historically, when Congress tightens high‑end preferences, it often does so through broad rules—caps, phase‑outs, and new information‑reporting—felt across the upper‑middle‑class tax base.

·         Planning against a moving target. High‑income individuals need to assume that today’s favorable regimes (from QBI to various credit structures) are provisional. A prudent strategy is one that works under multiple future tax environments rather than betting everything on a single expiring provision.

What it means for closely held business owners

For owners of S corporations, partnerships, and closely held C corporations, the report is both a cautionary tale and an invitation to plan intentionally.

A few practical takeaways:

·         Use the tools you actually have. While you may not qualify for FDDEI or billion‑dollar bonus depreciation, you can often make disciplined use of cost recovery, retirement plans, R&D credits on a smaller scale, and thoughtful entity choice to manage your effective rate. The same Code that lets a multinational get to zero will usually reward a smaller business that systematically documents and claims what Congress has already offered.

·         Separate tax strategy from imitation. Trying to “be like Tesla” is not a strategy. Your goal is not to hit zero tax in a single year; it is to align your tax posture with your business model, your exit plans, and your risk tolerance over time. That might mean accepting a reasonable current effective rate in exchange for a cleaner profile if you expect financing, sale, or succession in the coming years.

·         Anticipate state‑level effects. ITEP notes that because state corporate income tax systems are often tethered to federal definitions, the same tax breaks that wipe out federal liability also depress state corporate receipts, leaving these 88 companies with an average effective state rate of only about 1.4 percent against a weighted average closer to 6 percent. States may respond by decoupling from federal provisions or increasing enforcement, which can affect how multi‑state closely held businesses structure their operations.

·         Document, don’t improvise. Many of the favorable rules highlighted in the report (R&D credits, executive compensation deductions, export incentives) are extremely documentation‑heavy. Large corporations succeed because they invest in systems; a smaller business can achieve scaled‑down versions of these benefits only if it treats record‑keeping as part of its core operations, not an afterthought.

A closing thought

When you see that 88 major corporations collectively reported $105 billion in U.S. profits and still paid no federal income tax for 2025, it is tempting to treat the system as hopelessly rigged. From a technical standpoint, though, what you are seeing is the logical endpoint of a policy choice to heavily subsidize certain investments, exports, and forms of compensation at the corporate level, combined with two aggressive rounds of corporate tax cuts in 2017 and 2025.

If you are an individual or closely held business owner, you cannot rewrite that policy architecture—but you also do not have to stand still under it. With careful planning, good documentation, and a clear understanding of which incentives actually apply to you, it is possible to reduce your effective rate, improve after‑tax cash flow, and protect yourself against the next round of tax‑law changes without chasing the kind of zero‑tax outcomes that make headlines and invite scrutiny.

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Sources:

   1.       https://itep.org/88-profitable-corporations-paid-zero-income-tax-in-2025/             

2.      https://itep.org/new-report-finds-88-major-u-s-corporations-paid-zero-federal-income-tax-despite-billions-in-profits/   

3.      https://itep.org/corporate-tax-avoidance/    

4.      https://itep.org/category/blog+corporate-taxes/      

5.       https://x.com/iteptweets/status/2044059299215782073

6.      https://www.linkedin.com/posts/ceteri_at-least-88-profitable-us-corporations-activity-7450316940293849088-hM0q

7.       https://www.commondreams.org/news/88-companies-no-income-tax

8.      https://www.facebook.com/instituteontaxation/photos/these-corporations-paid-0-in-federal-income-tax-for-2025/1348880243935472/

9.      https://www.reddit.com/r/thebulwark/comments/1smf8s3/itep_at_least_88_profitable_us_corporations_paid/

10.   https://itep.org

Read more at: Tax Times blog