Current Developments: October 2026 Review

In the past month, we have seen significant developments in estate planning, business law, elder law, and special needs planning. We have highlighted the most noteworthy developments to ensure you and your firm stay informed of any changes. From cases addressing whether a residence should be included in a decedent’s gross estate despite a qualified personal residence trust transfer, vacating the integration mandate provisions of a federal regulation, and ruling on the limited partner exception to self-employment tax, to a new California law imposing requirements on attorneys’ use of artificial intelligence (AI), read on to learn how these developments may impact your practice. 

Estate Planning

Trump Accounts Are IRAs; 60 Million Children Have Been Auto-Enrolled

 Guidance on Eligible Investments for Trump Accounts, Prop. Treas. Reg. § 1.530A-3, 91 Fed. Reg. 54280 (Aug. 21, 2026) 

On August 21, 2026, the Internal Revenue Service (IRS) and the US Department of the Treasury published a notice of proposed rulemaking on the investments permitted in Trump accounts, which were created under Internal Revenue Code (I.R.C.) § 530A by the One Big Beautiful Bill Act. The proposed rule notes that a Trump account (also called a 530A account) is a non-Roth individual retirement account (IRA) established for the exclusive benefit of an eligible individual and is subject to special rules until the end of the growth period, i.e., when the individual reaches age 18. (The growth period is technically defined as lasting until December 31 of the calendar year in which the beneficiary turns 17; however, the age of 18 is also referenced as a significant marker.) At that point, most of the special rules no longer apply, and the rules under I.R.C. § 408 governing traditional IRAs generally apply.

On October 1, 2026, the Department of the Treasury announced that over 60 million US children under the age of 18 had been automatically enrolled in Trump accounts. Parents or guardians must claim a child’s account by downloading an app to manage it and to allow family, friends, and employers to contribute to it. US children born between January 1, 2025, and December 31, 2028, can receive a one-time $1,000 seed contribution from the Department of the Treasury.

Takeaways: Estate planning practitioners should remind parents and guardians to claim their children’s Trump accounts, particularly those families whose children are eligible for seed contributions. In addition, they should encourage parents and guardians, as custodians of children’s Trump accounts, to plan for them as they would for traditional IRAs, keeping in mind that beneficiary designations must be made, earnings grow tax-deferred, and withdrawals from the accounts (permitted once the growth period ends) will be taxed as ordinary income and may be subject to withdrawal penalties.

The IRS and the Department of the Treasury recently issued a safe harbor clarifying that individual donors’ contributions to Trump accounts will be treated as completed gifts, not as gifts of future interests, and will not need to be reported on a gift tax return, provided specified conditions are met. See WealthCounsel’s August 2026 monthly recap for additional discussion of the safe harbor and other Trump account guidance.

Estate Tax Closing Letter Fee Increased

Estate Tax Closing Letter User Fee Update, 91 Fed. Reg. 60801 (Sept. 25, 2026) (to be codified at 26 C.F.R. pt. 300)

On September 25, 2026, the IRS published a final rule increasing the user fee from $56 to $76 for authorized persons—a decedent’s estate or other person properly authorized under I.R.C. § 6103—who request an estate tax closing letter, i.e., IRS Letter 627. The final rule adopted the text of the proposed rule published on June 2, 2026, without change. It takes effect October 26, 2026.

Takeaways: An estate tax closing letter informs the authorized person of the acceptance of the estate tax return and other important information, such as the amount of the net estate tax, the state death-tax credit or deduction, and any generation-skipping transfer tax for which the estate is liable. It aids the executor in dividing and distributing the estate’s assets without incurring personal liability for unpaid estate taxes when making the distributions. The IRS will continue to offer account transcripts for free as an alternative to an estate tax closing letter.

Court Recommends Trial on Whether Residence Is Includible in Gross Estate After QPRT Term Where Grantor Paid Below-Market Rent

Palermo v. United States, No. 24-22514-Civ, 2026 WL 2475168 (S.D. Fla. Aug. 17, 2026) (report and recommendation)

In February 2002, Peter R. Palermo created a qualified personal residence trust (QPRT). In July 2002, Peter conveyed his residence to the trust. The trust was irrevocable and had a fixed five-year term that expired on July 2, 2007, and Peter was alive when the term ended. After the term expired, Peter’s son, as trustee, leased the property to Peter for one year at $2,900 per month. A second one-year lease followed in July 2008 at the same rent.

In February 2009, the trustee and Peter signed a third instrument that purported to supersede the first two leases and grant a 99-year term retroactive to July 2, 2007. The lease would end on the earliest of the tenant’s death, the tenant’s permanent incapacity, or mutual agreement. The apparent motivation was to preserve Florida homestead protection for property tax purposes.

Peter died on November 13, 2015. The trustee recorded a notice of termination and sold the property in February 2016 for $1,875,000. The trust reported the sale and claimed a basis stepped up to the fair market value of the property on Peter’s date of death under I.R.C. § 1014. The IRS disallowed the step up in basis, recomputed the gain, and assessed a 40 percent gross valuation misstatement penalty under I.R.C. § 6662. The trust paid the recomputed tax and penalty but sued for a refund in federal district court.

The trustee argued that the property was includable in Peter’s gross estate despite the QPRT transfer, and the United States argued that it was not. The parties filed cross-motions for summary judgment.

The court noted that a QPRT, a planning tool permitted by I.R.C. § 2702(a)(3)(A)(ii) and Treasury Regulation section 25.2702-5(c), allows a homeowner to transfer a residence to their beneficiaries at a reduced gift tax value but retain the right to live rent-free in the home for a fixed term of years. Because the grantor relinquishes all possession and enjoyment of the residence at the time of the transfer, they must either pay rent at fair market value or move out of the residence at the end of the term. If the grantor survives the term, the property passes to the beneficiaries free of estate taxes. However, if the grantor dies during the term, the property is drawn back into the grantor’s gross estate and subject to estate tax.

The United States asserted that the trustee sought inclusion of the property in Peter’s gross estate because the estate tax benefit that the QPRT represented in 2002 (when estate tax thresholds were lower and removal of the asset from Peter’s estate was financially beneficial) had been eliminated by subsequent changes in the law—namely. that the estate tax thresholds were much higher at the time of Peter’s death. Because of this change, the trustee wished to have the property included in the decedent’s estate to take advantage of a stepped-up basis to avoid capital gains tax (rather than estate exclusion).

In support of his argument, the trustee pointed to I.R.C. § 2033, which states “the value of all property to the extent of the interest therein of the decedent at the time of his death” is included in a decedent’s gross estate. The trustee asserted that the residence should be included in Peter’s gross estate because Florida had approved a homestead application for him, and that, as a life tenant, Peter held all essential incidents of outright ownership of the residence. The trustee relied on Treasury Regulation section 20.2033-1(b), which provides that property subject to homestead or other exemptions under local law is included in the gross estate. The court rejected the trustee’s theory as a matter of law, holding that once Peter transferred the property to the QPRT in 2002, any retained ownership interest in the property was extinguished at the end of the 5-year term. The transfer triggered federal tax rules that determine which legal interests and rights are taxed (rather than determining ownership). The court ruled that although Florida’s state law deems a long-term lessee of a property to be its equitable owner for homestead purposes, Treasury Regulation section 20.2033-1(b) does not create, but instead assumes, beneficial ownership.

The court noted that Florida law also supported its conclusion. Section 196.041(1) of the Florida Statutes treats a long-term lessee as holding title only for purposes of homestead exemptions from ad valorem taxes and for no other purpose. The court determined that a leasehold that began in 2009 and ended at Peter’s death in 2015 was, at most, a terminable estate that expired with him. It was not an interest he held at the time of his death. The court ruled that under the QPRT, Peter held no ownership interest in the residence at his death under I.R.C. § 2033. Therefore, the court found that summary judgment should be granted in favor of the United States on the issue.

The trustee further relied on I.R.C. § 2036(a)(1), which provides that a gross estate includes property a decedent transferred during life, other than by a bona fide sale for full consideration, if the decedent retained possession or enjoyment of the property for a period that did not end before death.

The court noted that the inquiry looks to substance rather than labels, and the retained interest may rest on an implied agreement or understanding. The court described the case law as marking two poles: At one end, a grantor who transfers a home but continues to live in it rent-free has retained enjoyment, and the purported lease is a fiction. At the other end, a grantor who genuinely surrenders the home and pays fair market rent has not retained enjoyment.

The court found that the present case fell between the two poles because the rent that Peter had paid was below market rent. The trustee offered an appraisal showing that rent of $2,900 to $3,013 per month was well below an appraised rental value of $4,400 to $5,800, arguing that the father-son arrangement was not at arm’s length.

The court concluded that a reasonable factfinder could find this case similar to case law at either pole, but that the determination depended on facts that the parties genuinely disputed: (1) whether the rent was so far below market as to reflect retained enjoyment rather than a real but imperfect bargain; (2) whether the parties’ dealings were at arm’s length in substance; (3) whether the parties understood from the outset that Peter would keep the home for life; and (4) whether the QPRT’s five-year term reflected a genuine surrender of the residence or merely a temporary stopping place in a lifetime plan.

The court found that the backdated 99-year lease could be read either way: as proof of an intent to maintain unbroken occupancy or as an unskillful drafting move with no substantive significance. Although the taxpayer (here, the trustee) bears the burden of proof in a refund suit, the government must still show the absence of a genuine dispute to obtain a judgment of exclusion from the gross estate. Therefore, the court held that neither side was entitled to summary judgment on that issue.

The court held that two theories the trustee raised for the first time were barred because the court lacked jurisdiction over theories that substantially varied the legal or factual bases the taxpayer presented to the IRS.

The magistrate judge recommended that the case proceed to trial to consider whether the residence was included in Peter’s gross estate under I.R.C. § 2036(a)(1), noting that whether there is a step-up in basis under I.R.C. § 1014 and grounds for the penalty under I.R.C. § 6662(h) must wait until the outcome of the trial. If the trustee proves that the property is includible in Peter’s gross estate, the step up in basis will defeat the penalty. If not, the basis reported by the trustee was overstated, and the penalty will apply.

The decision is a report and recommendation and remains subject to review by the district court judge.

Takeaways: The Palermo decision provides a reminder that a QPRT’s estate tax benefit depends not only on the grantor surviving the term but also on their genuine surrender of the residence afterward. If the grantor survives the term, upon its end, the grantor must either vacate the property or pay fair market rent under a written lease to avoid inclusion in their gross estate at death. The amount of rent should be supported by an appraisal or other evidence of fair market rent and should actually be paid, with the trust acting as the true owner of the property. WealthCounsel recently added a residential lease agreement to the Advanced Planning Techniques module in Wealth Docx^® that provides multiple options for determining fair market rent. The lease agreement is available to Trusts & Estates Professional and Elite subscribers. 

As noted by the Palermo court, because the federal estate tax exemption amount has increased since many QPRTs were created, inclusion of a residence in the decedent’s gross estate may now be a more favorable result for some families because of the resulting step up in basis and the elimination of taxable gain.

North Carolina Amends Statute to Tax Trust Income Derived from NC Sources Instead of Income that Benefits Resident Beneficiaries

2026 N.C. Sess. Laws 31

On July 2, 2026, North Carolina Governor Josh Stein signed Session Law 2026-31, amending section 105-160.2 of the General Statutes of North Carolina, which applies to the taxable income of estates and trusts. The amended statute provides: “The tax is computed on the amount of the taxable income of the estate or trust that (i) is derived from North Carolina sources and is attributable to the ownership of any interest in real or tangible personal property in this State or (ii) is derived from business, trade, profession, or occupation carried on in this State.” The previous version of the statute imposed tax on “[t]he taxable income of the estate or trust that is for the benefit of a resident of this State.”

As a result of the amendment, North Carolina will tax trust income derived from North Carolina sources rather than taxing accumulated trust income that may benefit a North Carolina resident beneficiary of the trust, for taxable years beginning January 1, 2026.

Takeaways: In North Carolina Department of Revenue v. Kaestner 1992 Family Trust, 588 U.S. 262 (2019), the US Supreme Court unanimously held that the former version of the General Statutes of North Carolina section 105-160.2, which imposed an income tax on trust income that is “for the benefit of” a North Carolina resident, violated the Due Process Clause of the US Constitution when applied to tax the undistributed income of a trust solely based on the in-state residence of the trust’s beneficiaries where, under the trust’s terms, the beneficiaries had no right to demand a distribution of income and there was no guarantee that they would ever receive any distribution of income from the trust. In Kaestner, the Supreme Court limited its holding to the specific facts of that case and did not “imply approval or disapproval of trust taxes that are premised on the residence of beneficiaries whose relationship to trust assets differs from that of the beneficiaries here.” Id. at 270. As a result, in the ensuing years, former section 105-160.2 created uncertainties for estate planning attorneys regarding which types of beneficiary interests could be subject to income tax under that statute. The amended statute, which focuses on whether the trust’s income is derived from North Carolina sources, eliminates that ambiguity.

Elder Law and Special Needs Planning Law

Federal District Court Vacates Integration Mandate Provisions of HHS’s Section 504 Regulations

Texas v. Kennedy, No. 5:24-cv-00225 (N.D. Tex. Sept. 23, 2026)

On September 23, 2026, the US District Court for the Northern District of Texas issued an order and final judgment vacating provisions of the US Department of Health and Human Services (HHS) final rule, Nondiscrimination on the Basis of Disability in Programs or Activities Receiving Federal Financial Assistance, 45 C.F.R. part 84 (2024), requiring that programs and activities receiving financial assistance from the federal government be administered in the most integrated setting appropriate for the needs of qualified individuals with disabilities and addressing practices that could cause the unnecessary segregation of those individuals or put them at serious risk of institutionalization. The final rule implements section 504 of the Rehabilitation Act of 1973, 29 U.S.C. § 794, which prohibits discrimination based on disability in programs and activities that receive federal financial assistance or are conducted by a federal agency.

Texas, Florida, Alaska, Louisiana, and Montana brought the lawsuit against Robert F. Kennedy, Jr., as the Secretary of the Department of HHS. The court-approved order was proposed by the US Department of Justice (DOJ) on behalf of the parties. The court vacated the following provisions of the final rule: the definition of most integrated setting in section 84.10; the final sentence of section 84.22(b); section 84.43(d); section 84.68(d); section 84.76; and the final sentence of section 84.93(b).

Takeaways: The order, applicable nationwide, removes the mentioned sections from the regulations implementing section 504 of the Rehabilitation Act but leaves the remaining provisions intact. It does not address or impact the validity of section 504, the Americans with Disabilities Act, or the US Supreme Court’s decision in Olmstead v. L.C. ex rel. Zimring, 527 U.S. 581 (1999) and subsequent cases interpreting that decision. The order is consistent with the June 18, 2026, slip opinion of the DOJ’s Office of Legal Counsel that neither section 504 nor Title II of the Americans with Disabilities Act (ADA) requires services in the most integrated setting appropriate, and that Olmstead, a Title II decision, held only that unjustified institutional isolation of persons with disabilities is a form of discrimination. On July 20, 2026, the DOJ also issued a notice that it will no longer rely on the Civil Rights Division’s Olmstead guidance in enforcing Title II of the ADA and will revisit the guidance. See WealthCounsel’s August 2026 monthly recap for additional discussion of those DOJ actions. Elder law and special needs planning attorneys who advise clients with disabilities about home- and community-based services, residential placement, and other federally funded programs should review how the vacated provisions affect the options and protections available to their clients and monitor further HHS rulemaking or guidance.

Supreme Judicial Court of Maine Rejects Pro-Rata Allocation Formula for Medicaid Lien; Must Be Factual Basis Showing It Reflects Medical-Expense Component of Settlement

Lynne v. Dep’t of Health and Hum. Servs., No. and-25-479, 2026 WL 2582173 (Me. Sept. 1, 2026)

L.W., a minor covered by MaineCare, Maine’s Medicaid program, suffered an injury to her arm and elbow in April 2021. Providers billed MaineCare $207,591.04 for her treatment, and MaineCare paid them $34,078.70. L.W.’s mother, Ashley Lynne, sued two third-party tortfeasors on L.W.’s behalf. The claim was valued at $375,000, including $204,183.78 in medical bills. The parties settled the claim for $160,000, an amount equal to 42.67 percent of $375,000, and did not allocate the settlement between medical expenses and other damages.

The Maine Department of Health and Human Services (DHHS) asserted a statutory lien against the settlement for the full $34,078.70 it had paid for L.W.’s treatment. Ashley filed an action under title 22, section 14(2-F) of the Maine Revised Statutes, asking the court to apply the pro rata allocation formula used in Arkansas Department of Health and Human Services v. Ahlborn, 547 U.S. 268 (2006), to reduce the DHHS’s lien based on the ratio of the settlement to the total claimed damages. The DHHS moved for summary judgment, arguing that, under the Ahlborn formula, it was the portion of the total claim attributable to medical bills ($204,183.78), rather than the amount the DHHS paid ($34,078.70), that should be reduced pro rata. Using the amount paid as the amount that should be reduced pro rata, the superior court entered summary judgment for Ashley, capping the DHHS’s recovery at $14,540.25. The DHHS appealed.

The Supreme Judicial Court of Maine noted that, under Maine law, when the DHHS pays medical costs on behalf of a Medicaid recipient for which a third party is responsible, it is entitled to recover the costs of the benefits paid from a settlement between the recipient and the third party; moreover, this right constitutes a statutory lien on the proceeds of the settlement. However, the DHHS’s right to recover from a recipient’s settlement is subject to limitations under federal Medicaid law: The US Supreme Court harmonized the applicable federal Medicaid statutes in Wos v. E.M.A., 568 U.S. 627 (2013), holding that, under 42 U.S.C. § 1396k(a)(1)(A) and other relevant statutes, a state is permitted to recover its costs only from the portion of the settlement that represents payments for medical care, but the anti-lien provision, 42 U.S.C. § 1396p(a)(1), bars the state from any lien on the remainder.

The court noted that in Wos, the US Supreme Court ruled that although states have considerable latitude to design procedures to ensure a prompt and fair allocation of damages, they must employ in each case processes to determine the portion of a beneficiary’s tort recovery attributable to medical expenses and cannot adopt an irrebuttable, one-size-fits-all presumption. However, Maine’s legislature has not enacted a rebuttable statutory formula like one the Wos court suggested would be more accurate for determining the portion of the settlement attributable to medical expenses when the parties to the settlement have not stipulated that portion. The court noted that, if the DHHS and the Medicaid recipient disagree, section 14(2-F) of the Maine Revised Statutes permits them to apply to the court to determine a “reasonable amount” that is consistent with federal law to satisfy the statutory lien. The court held that, to determine that “reasonable amount,” there must be an individualized evidentiary hearing that evaluates all factors relevant to identifying the amount of the settlement that the parties reasonably attributed to medical expenses. The court rejected Ashley’s contention that it may forgo assessing those factors and instead simply use a formula enabling it not only to determine the amount of the settlement attributed to medical expenses but also to order that the DHHS be reimbursed at an amount lower than its payments, even if that amount is lower than the amount of the settlement allocated to medical expenses.

Rather, the court must apply the law enacted by Maine’s legislature. In doing so, the court held that it must read section 14(2-F) in concert with other relevant subsections. The court held that, under section 14 as a whole, the DHHS may recover the full amount it paid for medical care, provided that amount does not exceed the settlement amount allocated to medical expenses. Section 14(2-F) requires that the court’s determination of the settlement amount allocated to medical expenses be consistent with federal law, i.e., with the US Supreme Court’s decision in Wos, which requires an individualized review of the relevant factors; thus the use of the word “reasonable” cannot be understood to mean that a court can engage in any analysis it chooses to reduce the amount to which the DHHS would otherwise be entitled. Rather, in section 14(2-F), the use of the word “reasonable” simply reflects that the court cannot determine the precise amount but instead provides a reasonable calculation based on the facts of a particular case. Further, the court found no basis to read section 14(2-F) as granting courts unfettered power to preclude the DHHS from obtaining a full recovery of the portion of the settlement representing medical expenses when the amount it paid does not exceed that portion.

The court found that, in the present case, the superior court erred in applying the Ahlborn proportional formula without a factual basis demonstrating that the formula accurately reflected the medical-expense component of the settlement. In the absence of a rebuttable statutory formula or a stipulation by the parties, the relevant question is not what a court views as equitable, but rather the amount the DHHS paid, capped by a reasonable computation of the portion of the settlement attributable to medical expenses. Thus, the superior court must hold a hearing to identify a reasonable calculation of that cap, in which it examines all relevant evidence offered by the DHHS and Ashley.

The parties’ competing positions before the superior court illustrated the factual disputes at issue, so summary judgment in favor of either party was improper. The court vacated the judgment and remanded the case to the superior court for an evidentiary hearing consistent with its opinion.

Takeaways: When a Medicaid recipient’s settlement is unallocated, the state agency may recover only from the portion attributable to medical expenses, and absent a stipulation with the agency or a rebuttable statutory formula, that portion may be determined at an individualized evidentiary hearing. Attorneys funding a special needs trust from a personal injury settlement should consider negotiating a stipulation with the agency before funds are disbursed, because the alternative may result in a higher recovery for the agency.

Illinois Enacts Statute Providing Protections Against Financial Exploitation for the Elderly and Individuals with Disabilities

Ill. Pub. Act 104-0660 (H.B. 4649) (amending 320 Ill. Comp. Stat. 20/13 and 20/13.5, and adding 735 Ill. Comp. Stat. 5/2-203.3)

On July 30, 2026, Illinois Governor J.B. Pritzker signed House Bill 4649 into law as Illinois Public Act 104-0660. It amends the Adult Protective Services Act to strengthen protections for eligible adults (adults with disabilities or age 60 or older) facing financial exploitation. Among the additional protections, the new law provides courts with the ability to issue ex parte restraining orders for up to 15 days (extendable once for up to 30 more days) when petitioned by the Office of the Attorney General, the Illinois Department on Aging, or a designated provider agency within the Adult Protective Services program. Before issuing such an order, the court must make several findings, including that the eligible adult faces an immediate and present danger of exploitation, that irreparable harm is likely and no adequate legal remedy exists, that the petitioner is substantially likely to succeed on the merits, and that the threatened injury to the eligible adult outweighs any potential harm to the respondent.

Relief may include freezing the eligible adult’s assets and lines of credit; giving the eligible adult temporary, exclusive use and possession of a dwelling shared with the respondent; barring the respondent from contact with the eligible adult; ordering that living expenses continue to be paid, with special limits for assets held by guardians, trusts, or solely by the respondent; and directives to law enforcement. Trustees are entitled to service and reasonable notice before a trust’s assets may be frozen, and assets held solely in a respondent’s name may be frozen ex parte only on a showing of probable cause that they are traceable to the exploitation. Orders may last up to two years, and no filing or sheriff’s fees apply.

In addition, where an alleged perpetrator of financial exploitation is unknown or unascertainable, the new law allows service upon the alleged perpetrator to be made on the platform or with the third party through which the alleged financial exploitation occurred. The law takes effect January 1, 2027.

Takeaways: The amendments provide a broader, faster set of remedies for financial exploitation cases. Attorneys representing family members, caregivers, agents under a power of attorney, and trustees should note that a substantiated exploitation finding can now lead to a temporary ex parte freeze of accounts and lines of credit, even those held jointly or in a trust (subject to notice to the trustees), with a hearing required before the order expires. Victims of online scams, whose perpetrators are often anonymous, will have an easier path to a hearing under the new law.

In March 2026, New Jersey Assembly Bill 4541 was introduced to address the financial exploitation of vulnerable bank customers. If enacted, it would enable financial institutions to delay financial transactions of seniors and vulnerable customers to review and refer the transactions to appropriate authorities if they suspect illegal activity.

It is important to note that although these and similar laws are intended to protect elderly clients or those with disabilities, they could make it more difficult for those clients to access their own funds and meet deadlines in Medicaid planning if financial institutions or others suspect that they are being exploited when, in fact, they are not.

Business Law

Second Circuit Holds That Partners Who Managed Business Were Not Limited Partners Exempt from Self-Employment Tax

Soroban Cap. Partners LP v. Comm’r of Internal Revenue, Nos. 25-2079(L), 25-2250(CON), 2026 WL 2751819 (2d Cir. Sept. 17, 2026)

Soroban Capital Partners LP (Soroban) is a Delaware limited partnership that serves as investment manager to a group of hedge funds. Its three founders, Eric Mandelblatt, Gaurav Kapadia, and Scott Friedman (the Principals), were limited partners of Soroban and members of its general partner, Soroban Capital Partners GP LLC (the GP). In 2016 and 2017, the Principals worked full-time in the business, held senior management titles, sat on all or all but one of Soroban’s governing committees, and participated in decisions to hire, fire, promote, and evaluate employees. They contributed little capital; Mandelblatt contributed about $4.3 million, and Kapadia and Friedman contributed nothing.

The Principals received guaranteed payments of approximately $2.5 million for their services, and Soroban allocated 99 percent of its ordinary income to them as limited partners, resulting in distributive shares of approximately $141.5 million. Relying on I.R.C. § 1402(a)(13), which excludes the distributive share of “a limited partner, as such” from self-employment income subject to self-employment tax, Soroban excluded their distributive shares from net earnings from self-employment (NESE). After an audit, the IRS issued notices of Final Partnership Administrative Adjustment under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) (now repealed but applicable to the tax years at issue), recharacterizing the $141.5 million in distributive shares as NESE subject to self-employment tax. Soroban petitioned the Tax Court, arguing that the distributive shares were not subject to self-employment tax because the Principals were limited partners with limited liability under state law and the IRS had used the wrong procedures, depriving the court of jurisdiction. The court rejected both arguments. Applying a functional analysis, the court concluded that the Principals were limited partners in name only. Soroban appealed.

The Second Circuit Court of Appeals first held that the tax court had jurisdiction. Under TEFRA, the tax court could review only “partnership items” (see former I.R.C. § 6231(a)(3) and Treasury Regulation § 301.6231(a)(3)-1)). The Second Circuit reasoned that NESE is a partnership item because partnerships and partners are required take it into account as taxable income under subtitle A of the Internal Revenue Code (which covers income taxes), it is made up of items the Treasury Regulations treat as partnership items (income, distributive shares, and guaranteed payments), and determining it at the partnership level furthers TEFRA’s goal of adjusting partnership items once rather than multiple times at the partner level.

On the merits, the court held that a “limited partner” under I.R.C. § 1402(a)(13) is a partner who, in addition to having limited liability, does not run, manage, or otherwise exert control over the partnership’s business. The court looked at the text of the statute and its ordinary meaning in 1977 (when the provision was enacted), the statute’s surrounding text and structure, and the legislative history and historical context. Contemporaneous dictionaries, treatises, and relevant uniform laws enacted in most states described limited partners as having both limited liability and no role in managing the business.

The court rejected Soroban’s argument that a limited partner is defined only by limited liability, noting that tax law deals in economic realities. The court found additional support in (1) the phrase “as such,” which it viewed as limiting the tax exclusion to income attributable to the partners’ investment in the partnership and not to income attributable to their management of the business; (2) the statute’s carve-out of guaranteed payments from the limited partner exception and other exclusions from self-employment income that cover passive investment income; and (3) the historical context and legislative history, which showed that Congress sought to stop passive investors from earning Social Security credits through small limited partnership interests.

Because Soroban did not challenge the tax court’s factual findings or meaningfully dispute that the Principals ran the business, the court concluded that the Principals were not limited partners and that their distributive shares were subject to self-employment tax. It affirmed the tax court’s decision in full.

Takeaways: The Soroban decision rejects the argument that state-law limited partner status alone is enough to exclude a partner’s distributive share from self-employment tax. Partners who actively run or manage a partnership’s business, particularly those who receive modest, guaranteed payments and large distributive shares, should expect scrutiny of their reporting. The court did not adopt a bright-line test, so the analysis will turn on each partner’s actual role. Advisors to clients who hold limited partner interests in operating businesses should review those roles and the potential exposure to self-employment tax.

The Soroban court addressed K Alain L.L.L.P. v. Commissioner of Internal Revenue, 184 F. 4th 766 (5th Cir. 2026), in which the Fifth Circuit held that, for purposes of section 1402(a)(13), a limited partner is a partner who plays no significant role in managing or running a business. The Second Circuit clarified that, to the extent that K Alain held that a limited partner may provide some services to the partnership without losing that status, it did not disagree, so long as the partner does not control, manage, or run the business. See WealthCounsel’s September 2026 monthly recap for additional discussion of the Fifth Circuit’s decision in K Alain.

A similar case, Denham Capital Management LP v. Commissioner of Internal Revenue, No. 25-1349 (1st Cir. filed Apr. 11, 2025) (appeal from a tax court decision upholding IRS self-employment tax adjustments on limited partners’ distributive shares), is pending before the First Circuit. If the US Supreme Court determines that a circuit split exists, it may grant certiorari to resolve the conflict.

Eleventh Circuit Affirms Injunction Against Non-Signatories Who Helped Seller Violate Non-Compete

Puris, LLC v. CMG Pipelines, Inc., No. 25-14186, 2026 WL 2664378 (11th Cir. Sept. 10, 2026)

Andrew Mayer founded Murphy Pipeline Contractors, LLC (Murphy), a nationwide business that rehabilitates municipal water and sewer lines, largely using a proprietary trenchless process to repair or replace old pipe rather than digging it up. In 2020, Andrew sold Murphy to PURIS, LLC (PURIS) for $55 million and stayed on as president. As part of the sale, Andrew signed a noncompete agreement under which he agreed not to compete with Murphy, solicit its customers, raid its employees, or support a competing business for the term of his employment and 18 months afterward. Under the agreement, the restricted territory extended 50 miles around any and all company locations for which Andrew was responsible, as well as the locations of customer accounts he handled. He was also prohibited from using PURIS’s confidential information.

Within months of the sale, Andrew formulated a written plan to get the company back. He then became a silent partner in CMG Pipelines, Inc. (CMG), a Louisiana excavation contractor owned by Carmelo Gutierrez, who had no experience with the technology Murphy used. CMG was set up to gather experience in the same fields as Murphy, so that Andrew, as Murphy’s president, could subcontract work to CMG. While still serving as Murphy’s president, Andrew directed Murphy subcontracts and project information to CMG, helped it obtain a license to a technology that competed with Murphy’s proprietary process, and facilitated CMG’s $30 million sale to a third party, sending the prospective buyer both his written plan and a project funnel that largely tracked Murphy’s confidential, project development list. CMG also hired at least 27 former Murphy employees and used them to pursue Murphy’s customers, including a Nebraska customer whose anticipated work went to CMG after CMG hired the employees who managed that account.

In 2025, after discovering Andrew’s scheme, PURIS filed suit and moved for injunctive relief against him. Andrew stipulated to a preliminary injunction barring trenchless work within 50 miles of 553 locations that PURIS’s CEO had identified in a sworn declaration as places where PURIS operated or maintained customer accounts. PURIS then amended its complaint to add CMG and Gutierrez (the CMG Parties) and sought a separate injunction against them. Because they had not signed the noncompete, the federal district court required a substantial showing before enjoining them. After a hearing, the court found a substantial likelihood that the CMG Parties had tortiously interfered with Andrew’s noncompete agreement. After weighing each of CMG’s projects, the court entered an injunction virtually identical to Andrew’s, barring CMG from future trenchless work within 50 miles of the 553 locations but exempting projects on which it had already performed substantial work, pending additional evidence about the effect of the injunction on the public. The CMG Parties appealed, challenging only the finding of irreparable harm and the injunction’s geographic scope.

The Eleventh Circuit Court of Appeals, reviewing for abuse of discretion, disagreed with the CMG Parties’ argument that PURIS had failed to show irreparable harm and that its injuries could be remedied by an award of damages. It noted that the injunction itself reflected the district court’s understanding of the harm: The district court had determined that CMG could finish projects that were already underway, where damages could likely suffice, but was barred from conduct that damages could not easily remedy, such as bidding on projects drawn from Murphy’s confidential pipeline and recruiting Murphy’s trained employees to pursue its customers—activities that threatened its customers, goodwill, trained workforce, confidential business opportunities, and competitive position. The court held that the district court did not abuse its discretion because the record supported its finding that PURIS faced irreparable harm.

The court also rejected the CMG Parties’ assertion that the injunction’s geographic scope was too broad, finding that the record supported the district court’s conclusion. The 553-location list was a concrete, record-based measure of the territory: PURIS’s CEO declared that Andrew had nationwide management responsibility, and Andrew had stipulated to an injunction based on the 553-location list. The CMG Parties, by contrast, offered only a competing reading of the contract, with no evidence that Andrew’s responsibilities were confined to 16 offices or that any listed location fell outside his work. The court determined that the district court had not simply enforced Andrew’s contract against the CMG Parties; rather, it had found the CMG Parties had committed tortious interference and then properly exercised its considerable discretion to fashion equitable relief necessary to stop that conduct. Therefore, the court affirmed the district court’s order granting the preliminary injunction against the CMG Parties.

Takeaways: The Eleventh Circuit’s decision in PURIS, though unpublished and nonprecedential, highlights that injunctive relief may be available against nonsignatories to a noncompetition agreement: In the context of a sale of a business, a third party that helps the seller violate the agreement by creating and running a direct competitor using the business’s confidential information may face its own injunction under a tortious interference theory. A similar theory could be used to seek injunctive relief in the employment context if a new employer knowingly assists an employee to violate their noncompete agreement with a former employer.

Colorado Enacts Artist Company Act, Creating New Type of LLC for Artist-Owned Businesses

Colo. S.B. 26-133

On June 2, 2026, Colorado Governor Jared Polis signed Senate Bill 26-133, enacting the Colorado Artist Company Act, Colorado Revised Statutes sections 7-80-1201 through 7-80-1224. The Act authorizes an “artist company,” which is a limited liability company (LLC) that includes a stated artistic mission in its articles of organization or operating agreement and is formed and owned by artists, who are defined broadly to include individuals who create works in any medium. Artists must hold at least 51 percent of the voting securities at all times, which is a statutory mandate that an operating agreement may not alter. This requirement ensures that the artists, rather than outside investors, retain creative and governance control. An existing LLC may elect artist company status by amending its articles to comply with the statute’s requirements, without dissolving or transferring assets. The Act took effect August 12, 2026.

Takeaways: The Act gives creative clients the opportunity to form an LLC that enables them to raise outside capital while keeping ownership, control, and their artistic work. Because an operating agreement may modify most terms, careful drafting is essential.

AI and Legal Tech

California Enacts Legislation Imposing Obligations on Attorneys Related to AI Use

Cal. S.B. 574

On September 30, 2026, California Governor Gavin Newsom signed Senate Bill 574, making California the first state in the nation to enact legislation imposing obligations on attorneys related to their use of generative AI. The law is effective January 1, 2027.

The law prohibits attorneys from delegating the practice of law to generative AI and from entering confidential, personal identifying, and other nonpublic information into a generative AI system not restricted to the attorney and those authorized by the attorney. In addition, the law requires attorneys to take reasonable steps to verify and, if necessary, correct information generated by AI and disclose the use of generative AI to the court for all documents submitted to the court. An attorney who files any document in court must first personally verify any citations it contains, including those provided by generative AI.

The law also imposes new obligations on arbitrators, who are prohibited from delegating any part of their decision-making process to generative AI and relying on information generated by generative AI outside the record without first disclosing their reliance on such information to the parties and allowing them to comment on its use. The law authorizes courts to impose appropriate sanctions for violations.

Takeaways: Many other jurisdictions have issued ethical guidelines for attorneys’ use of generative AI, but California is the first to enact a law imposing requirements on attorneys related to its use. Because an attorney who files a document in court must personally verify any citations it contains rather than relying on an associate or paralegal, the law may be especially burdensome for small firms and could increase the cost of legal services for clients. Some commentators have noted that it is unclear what constitutes “the use of” generative AI that must be disclosed to the court, given its incorporation into commonly used drafting software and legal research tools. Others have asserted that the law does not provide any exceptions, meaning that even minor uses—for example, using generative AI to edit a brief—must be disclosed to the court.