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PUERTO RICO SUPREME COURT REQUIRES JUDICIAL DETERMINATION OF SUCCESSOR HEIRS BEFORE RECORDING REPUDIATION OF AN ALREADY-...
12/10/2026

PUERTO RICO SUPREME COURT REQUIRES JUDICIAL DETERMINATION OF SUCCESSOR HEIRS BEFORE RECORDING REPUDIATION OF AN ALREADY-REGISTERED HEREDITARY INTEREST

On August 3, 2026, the Supreme Court of Puerto Rico (Court) issued its opinion in Rivera del Valle v. Registrador de la Propiedad (2026 TSPR 83), upholding the Property Registrar's decision to refuse registration of a public deed repudiating an inheritance.

We hereby highlight the Court’s holding.

I. Background

The legal dispute arose following the intestate death of Israel Rivera Rosado in March 2022, who co-owned real property situated in Las Piedras, Puerto Rico. In September 2022, a judicial declaration of heirs designated his surviving spouse and three children (including petitioner Annaise Rivera del Valle) as universal heirs. Consequently, abstract hereditary rights for all named heirs were recorded in the Property Registry.

Thereafter, petitioner executed Deed No. 50 of 2024 to formally repudiate her inheritance share in favor of her co-heirs, subsequently executing Amendatory Act No. 12-2025 to state that her repudiation extended to her descendants. Upon presenting these instruments to the Property Registry of Humacao I, the Property Registrar, Hon. José A. Maymó Azize, issued a negative qualification. The Registrar determined that because hereditary rights were already registered under a judicial declaration, petitioner was required to present a supplementary judicial resolution identifying the specific individuals called to inherit the repudiated portion. After a denied motion for recalibration, petitioner filed an administrative appeal before the Supreme Court.

II. Court’s Holding

In an opinion delivered by Associate Justice Kolthoff Caraballo, the Court held that where hereditary rights are previously recorded under a judicial declaration of heirs, submitting a supplementary judicial resolution establishing the identity of parties called to succeed the repudiated portion constitutes an indispensable condition precedent for recording the repudiation. Procedurally, the Court dismissed a distinct assignment of error regarding an unrelated presentation entry for lack of jurisdiction.

Substantively, the Court emphasized that repudiation is a unilateral, irrevocable act that cannot be made conditionally or extended to deny succession rights to one's lineage. Petitioner's attempt to extend repudiation to her descendants was legally impermissible, providing the Registrar valid cause to question the document's validity. To protect registry accuracy and successive chain of title (tracto sucesivo), the new hereditary call resulting from representation or accretion must be formally proven through competent authority. Because original rights were registered via judicial decree, an amending judicial resolution is required.

Associate Justice Colón Pérez concurred in the result, agreeing that registration was properly denied because petitioner impermissibly attempted to repudiate for her descendants. However, Justice Colón Pérez expressed concern that mandating a judicial resolution to identify substitute heirs establishes an unwarranted administrative requirement not expressly provided by current statutory law.

&TaxLawyers

FEDERAL COURT DISMISSES APA CHALLENGE TO $723,993 FOREIGN-GIFT REPORTING PENALTIESOn July 30, 2026, the United States Di...
05/10/2026

FEDERAL COURT DISMISSES APA CHALLENGE TO $723,993 FOREIGN-GIFT REPORTING PENALTIES

On July 30, 2026, the United States District Court for the Northern District of California (Court), decided Zhang v. IRS, Docket No. 5:26-cv-00525, dismissing Ziyue Zhang’s (Taxpayer) Administrative Procedure Act (APA) challenge to penalties imposed by the Internal Revenue Service (IRS) under Section 6039F of the United States Internal Revenue Code (Code) for failing to timely report foreign gifts.

We hereby highlight the Court’s analysis and decision.

I. Background

Taxpayer, who moved from China to the United States shortly before 2017, received gifts exceeding $100,000 from family members in China during 2017 and 2018. Although taxpayers receiving foreign gifts above the statutory threshold generally must report them on Form 3520, Taxpayer did not timely file the required forms.

After learning of the requirement, Taxpayer filed late Forms 3520 in March 2019 for 2017 and September 2020 for 2018. In April 2021, the IRS assessed penalties of $49,985 and $674,008, totaling $723,993, representing 25% of the foreign gifts received. Taxpayer sought relief based on reasonable cause, but the IRS denied her request, stating that ignorance of the tax law did not establish reasonable cause. Her subsequent request for review by the IRS Independent Office of Appeals received no response.

Taxpayer filed suit in January 2026 asserting four APA claims, including alleged due process violations, arbitrary and capricious agency action, and the imposition of an allegedly automatic penalty contrary to Section 6039F(c)(2). She sought relief setting aside the penalties and remanding the matter to the IRS or IRS Appeals for reconsideration.

The IRS moved to dismiss under Federal Rule of Civil Procedure 12(b)(1), arguing that APA review was unavailable because Taxpayer had adequate alternative judicial remedies. It also raised Article III standing, the Anti-Injunction Act, and the Declaratory Judgment Act. A separate Rule 12(b)(6) argument became moot after Zhang clarified that she was not asserting a standalone constitutional due process claim.

II. Court’s Analysis

Because Taxpayer clarified at oral argument that she did not assert a standalone Due Process Clause claim, the Court deemed the Rule 12(b)(6) motion moot and resolved the case under Rule 12(b)(1).

Addressing sovereign immunity, the Court held that while APA § 702 waives immunity for non-monetary relief, APA § 704 strictly limits judicial review to agency actions "for which there is no other adequate remedy in a court."

The Court rejected Taxpayer’s characterization that her action challenged only administrative procedures. Because her requested relief sought to vacate the individual penalty determinations, her lawsuit constituted a substantive challenge to her tax liability. A tax-refund suit under Section 7422 of the Code, requiring full prepayment of penalties under Flora v. United States, provides an adequate alternative remedy. A taxpayer's failure to prepay penalties does not render the statutory refund mechanism inadequate.

Additionally, if the IRS initiates collection efforts via tax levies or liens under Section 6502, Taxpayer can challenge penalty liability without prepayment in a Collection Due Process (CDP) hearing under Sections 6320 and 6330 of the Code, with judicial review available in the U.S. Tax Court.

Because these two adequate alternative statutory remedies foreclose APA jurisdiction, and because Taxpayer conceded that amendment would be futile, the Court granted Taxpayer’s motion to dismiss without leave to amend.

&TaxLawyers

INTERNAL REVENUE SERVICE PROPOSE RULES ON SECTION 898 TRANSITION TAXES AND SECTION 960 FOREIGN TAX CREDIT DISALLOWANCEOn...
28/09/2026

INTERNAL REVENUE SERVICE PROPOSE RULES ON SECTION 898 TRANSITION TAXES AND SECTION 960 FOREIGN TAX CREDIT DISALLOWANCE

On July 31, 2026, the Internal Revenue Service (IRS) issued proposed regulations (REG-115145-25; 91 F.R. 48794–48807) under Sections 898(c) and 960(d)(4) of the United States Internal Revenue Code (Code). These regulations govern the allocation of foreign taxes accrued by specified foreign corporations (SFCs) affected by the repeal of the one-month deferral election. Additionally, the rules implement provisions restricting foreign tax credits (FTCs) on distributions of previously taxed earnings and profits (PTEP) derived from Section 951A inclusions.

We hereby highlight various provisions of the proposed regulations.

I. Section 898(c) Foreign Tax Allocation Rules

Section 70352 of the OBBBA repealed the Section 898(c)(2) one-month deferral election for taxable years of SFCs beginning after November 30, 2025. Affected corporations that previously utilized deferral must adjust their taxable year to match their majority United States shareholder's required year, resulting in a short initial taxable year. Proposed Treasury Regulation § 1.898(c)-1 addresses tax mismatches by allocating specified foreign income taxes between an affected corporation's short first required year and its succeeding taxable year.

Specified foreign income taxes generally comprise foreign net income taxes accrued under an accrual accounting method. The framework applies a default allocation percentage based on foreign law taxable income principles derived from Treasury Regulation § 1.1502-76(b). Taxpayers may elect alternative treatments, including:

- Allocating distributive shares of creditable foreign tax expenditures (CFTEs) from affected partnerships;

- Allocating relevant succeeding year taxes when foreign and U.S. taxable years do not align;

- Forgoing allocation entirely and recognizing foreign income taxes in the short first required year.

II. Section 960(d)(4) Foreign Tax Credit Disallowance

Section 70312 of the OBBBA increased the Section 960(d)(1) deemed-paid FTC percentage for GILTI inclusions from 80 percent to 90 percent while establishing Section 960(d)(4). This provision disallows a foreign tax credit for 10% of foreign income taxes paid, accrued, or deemed paid on distributions of PTEP resulting from Section 951A inclusions.

Proposed Treasury Regulation § 1.960-3 operationalizes this mandate by bifurcating the Section 951A PTEP group into pre-June 29, 2025 PTEP and post-June 28, 2025 PTEP. The 10%-disallowance applies strictly to foreign taxes attributable to Section 959(a) distributions of post-June 28, 2025 Section 951A PTEP and reclassified post-June 28, 2025 Section 951A PTEP.

III. Compliance Procedures and Applicability

Elections under Proposed Treasury Regulation § 1.898(c)-1 must be executed by controlling domestic shareholders by attaching designated election statements to Form 5471 filed with timely tax returns.

Finally, public comments and hearing requests are due by September 17, 2026, with finalization anticipated by January 4, 2027.

&TaxLawyers

FEDERAL CLAIMS COURT INVALIDATES TREASURY REGULATION RESTRICTING GILTI AMORTIZATION DEDUCTIONSOn July 2, 2026, the Unite...
21/09/2026

FEDERAL CLAIMS COURT INVALIDATES TREASURY REGULATION RESTRICTING GILTI AMORTIZATION DEDUCTIONS

On July 2, 2026, the United States Court of Federal Claims (Court) held in Keysight Technologies, Inc. & Subsidiaries v. United States, Docket No. 25-137, that the Department of the Treasury (Treasury) lacked statutory authority to promulgate Treasury Regulation 1.951A-2(c)(5).

I. Background

Keysight, a multinational technology company, sought federal income tax refunds for the 2020, 2021, and 2022 tax years. The dispute involved Section 197 amortization deductions arising from transactions involving controlled foreign corporations (CFCs). Keysight maintained that the deductions were properly allocable to its CFCs’ gross tested income and therefore should reduce its GILTI inclusions under Section 951A of the Internal Revenue Code (Code).

Treasury Regulation 1.951A-2(c)(5), however, classified deductions associated with “disqualified basis” as allocable solely to residual CFC gross income. This treatment effectively prevented Keysight from using the amortization deductions to reduce income subject to GILTI taxation.

We hereby highlight the Court’s analysis.

II. Court’s Analysis

- Application of Loper Bright and Statutory Authority - The Court analyzed the case through the framework of Loper Bright Enterprises v. Raimondo, which recently overruled Chevron deference and unambiguously reassigned statutory interpretive authority to the courts. The United States argued that the Treasury possessed broad rulemaking authority under Section 7805(a) and specific gap-filling authority under Section 951A(c)(2)(A)(ii) to define which deductions are “properly allocable”. The government also relied on Section 954(b)(5), asserting that Congress expressly permitted the Treasury to prescribe regulations regarding these deductions. The Court firmly rejected the government’s stance. Judge Tapp found that Section 7805(a) alone does not grant the Secretary unfettered discretion to restructure federal law simply because the agency disapproves of a congressional omission. Such an interpretation would render Loper Bright meaningless by presumptively validating virtually all agency regulations. Furthermore, the Court determined that the plain text of Section 951A(c) is altogether ambiguous and lacks any language granting specific authority to the Secretary. The Court also noted that Section 954(b)(5) explicitly limits the Secretary’s regulatory authority to foreign base company income, not GILTI.

- Skidmore Deference and Final Ruling - while Loper Bright permits courts to seek guidance from agency interpretations under Skidmore v. Swift Co., such interpretations are only afforded weight based on their thoroughness, validity, and power to persuade. Evaluating the Treasury’s interpretation of the undefined statutory phrase “properly allocable”, the Court looked to historical definitions and legislative intent. Keysight demonstrated that legislative intent supported a definition rooted in a factual relationship test, rather than the expansive definition adopted by the Treasury. Ultimately, the Court found the Treasury's interpretation lacked both persuasive reasoning and consistency. Permitting an administrative agency to resolve statutory ambiguities without a clear congressional grant of authority constitutes the exact overreach that Loper Bright was designed to foreclose. Consequently, the Court found that the Treasury lacked the authority to promulgate Treasury Regulation 1.951A-2(c)(5).

&TaxLawyers

Grateful to Fulcro for inviting Valerm Law Group to participate in Who’s Next In Your Business?, a conversation between ...
18/09/2026

Grateful to Fulcro for inviting Valerm Law Group to participate in Who’s Next In Your Business?, a conversation between corporate/tax lawyers, CPAs, financial planners and financial advisors on the legal and financial aspects of business succession and business acquisitions.

&TaxLawyers

PUERTO RICO SUPREME COURT DEFINES “INTERESTED PARTY” AND LIMITS THE REGISTRAR’S AUTHORITY TO REVIEW RECORDED RESTRICTION...
14/09/2026

PUERTO RICO SUPREME COURT DEFINES “INTERESTED PARTY” AND LIMITS THE REGISTRAR’S AUTHORITY TO REVIEW RECORDED RESTRICTIONS

On June 18, 2026, the Supreme Court of Puerto Rico (Court) issued an opinion in the case of Jonathan Rosario Collazo and Ediris Caro Rivera v. Hon. Aminda Colón Soto (2026 TSPR 66) in which it addressed the scope of a Property Registrar’s authority and interpreted who qualifies as an “interested party” under Article 244 of Act No. 210-2015, the Puerto Rico Real Property Registry Act.

The controversy involved a perpetual usufruct over municipal property in Aguada. The Registry reflected a restrictive condition prohibiting the assignment, transfer, donation, or sale of the usufruct without the prior consent of the Municipal Legislature. In 2019, the usufruct rights and the structure located on the property were conveyed through a deed of sale. When the deed was presented for recordation, the Registrar required evidence of municipal authorization.

The notary requested reconsideration, asserting that the restriction was void ab initio because the law under which the perpetual usufruct had originally been granted allegedly made the right transferable, inheritable, and alienable. The Registrar nevertheless denied recordation, reasoning that she lacked authority to invalidate or disregard a restriction already appearing in the Registry.

We hereby highlight the Court’s analysis.

I. Court’s Analysis

- Standing and the "Interested Party" Doctrine- addressing the jurisdictional threshold, the Court interpreted the undefined statutory term “interested party” using a broad and functional legal approach. The Court determined that an interested party is any individual or entity who can demonstrate a real, direct legal interest in the registration or denial of a specific registry entry. Because the appellants’ property rights derived from Deed No. 46 were entirely dependent on the successful prior registration of Deed No. 209, they possessed a conditioned proprietary interest that fully satisfied the "interested party" requirement. Since the notary had timely filed the requisite Requalification Brief, the Court found that the jurisdictional prerequisites to hear the appeal were properly met.

- Scope of the Registrar's Authority- ruling on the substantive merits, the Court reinforced the principle that a Property Registrar's adjudicatory function is inherently limited. The Registrar is solely responsible for verifying the legality of documents to uphold the registry's public faith, thereby ensuring only perfectly valid acts are officially recorded. However, this role strictly excludes adjudicating rights, resolving substantive legal disputes, or performing judicial tasks. The Court emphasized that registered acts are legally presumed valid until formally nullified by a judicial decree. Because the municipal restriction was a previously registered condition encumbering the property, the Registrar acted lawfully by requiring compliance and denying the new inscription. The Court concluded that determining the constitutionality of a registered clause significantly exceeds the Registrar's authority; such constitutional matters must be exclusively litigated and resolved before a trial court.

&TaxLawyers

INTERNAL REVENUE SERVICE INTRODUCES AUTOMATIC PENALTY RELIEF FOR TAXPAYERS WITH STRONG COMPLIANCE HISTORIESOn July 8, 20...
07/09/2026

INTERNAL REVENUE SERVICE INTRODUCES AUTOMATIC PENALTY RELIEF FOR TAXPAYERS WITH STRONG COMPLIANCE HISTORIES

On July 8, 2026, the Internal Revenue Service (IRS) announced the creation of the Automatic Exemption from Penalty program (AEP), a systemic administrative relief procedure intended to provide qualifying taxpayers with automatic relief from certain federal tax penalties. The new program will replace the IRS’s long-standing First Time Abate administrative relief and is expected to begin operating during the summer of 2026.

AEP is designed to reduce the administrative burden on taxpayers who have consistently complied with their federal tax filing and payment obligations. Unlike First Time Abate, eligible taxpayers will not be required to affirmatively contact the IRS or submit a formal request for relief.

We hereby highlight the new program.

I. Eligibility and Covered Penalties

AEP will generally apply to eligible original returns beginning with tax year 2025, quarterly returns filed for periods beginning in 2026, and qualifying returns for subsequent tax periods.

To qualify, a taxpayer must have timely filed the applicable return and paid all taxes due during the preceding three years. For quarterly returns, the taxpayer must demonstrate timely compliance for the preceding 12 consecutive quarters.

For eligible taxpayers, the IRS will refrain from assessing the following penalties during return processing:

- Failure-to-file penalties;
- Failure-to-pay penalties; and
- Failure-to-deposit penalties.

When relief is granted, the IRS will issue a notice confirming the taxpayer’s eligibility and the application of AEP.

II. Returns Excluded from Automatic Relief

Not all federal tax returns will qualify for AEP. Information returns and returns filed in connection with specific transactions or infrequent events will generally be excluded. The IRS specifically identified Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, and Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, as examples of returns that are generally ineligible.

III. Transition from First Time Abate

The IRS will begin phasing out First Time Abate during the summer of 2026. Because the transition will occur gradually, some taxpayers who otherwise qualify for relief may continue to receive penalty notices relating to tax year 2025 returns or 2026 quarterly returns. During this transitional period, affected taxpayers may contact the IRS and request relief under the existing First Time Abate procedures.

AEP will fully replace First Time Abate for eligible returns with original filing due dates on or after January 1, 2027.

IV. Reasonable-Cause Relief Remains Available

Taxpayers who do not qualify for AEP may continue to request penalty abatement based on reasonable cause. The IRS will evaluate those requests under its existing administrative standards and notify taxpayers of its determination.

AEP does not eliminate the taxpayer’s underlying liability. Taxpayers remain responsible for paying all taxes and accrued interest, together with any penalties that are not covered by the automatic relief program.

&TaxLawyer

INTERNAL REVENUE SERVICE PROVIDES TRANSITIONAL GUIDANCE FOR QUALIFIED OPPORTUNITY ZONES UNDER OBBBA AMENDMENTSOn July 6,...
31/08/2026

INTERNAL REVENUE SERVICE PROVIDES TRANSITIONAL GUIDANCE FOR QUALIFIED OPPORTUNITY ZONES UNDER OBBBA AMENDMENTS

On July 6, 2026, IRS Notice 2026-40 (Notice) announced that the Internal Revenue Service (IRS) intends to issue proposed regulations addressing the Qualified Opportunity Zone (QOZ) rules under Internal Revenue Code Sections 1400Z-1 and 1400Z-2, as amended by Section 70421 of the One, Big, Beautiful Bill Act (OBBBA). The Notice provides transitional guidance for QOZ designations, investors, Qualified Opportunity Funds (QOFs), and Qualified Opportunity Zone Businesses (QOZBs) pending issuance of forthcoming proposed regulations.

We hereby highlight the proposed guidance.

I. Designations and Limitations

Under prior law, QOZ designations were capped at 25% of a state's eligible low-income census tracts. The OBBBA amends Section 1400Z-1 to apply this limitation exclusively to the newly defined 10-year designation period beginning on a zone's “applicable start date.”

Previously designated QOZs (certified prior to OBBBA) will not diminish the number of census tracts a state chief executive may nominate for the upcoming cycle commencing January 1, 2027.

The new 10-year designation period for zones certified by the Secretary in 2026 will officially run from January 1, 2027, through December 31, 2036.

II. Investor Guidance and Deferral Mechanics

The Notice bifurcates the treatment of deferred eligible gains based on the ex*****on date of the qualifying investment:

- Pre-2027 Investments: Gains invested in a QOF on or before December 31, 2026, trigger a mandatory income inclusion on December 31, 2026. This “deemed included gain” cannot be subsequently deferred under any election. However, taxpayers retaining their qualifying QOF investments retain full eligibility for the Section1400Z-2(c) fair market value basis step-up upon ultimate disposition after a 10-year holding period.

- Post-2026 Investments: For corresponding amounts invested in a QOF on or after January 1, 2027, taxpayers may elect a new deferral. The inclusion event for these subsequent investments is deferred until the earlier of a disposition, a non-sale inclusion event, or five years from the date of the qualifying investment, at which point a 10% basis step-up may apply.

- Inclusion Event Gain: Gain triggered by an inclusion event remains eligible for deferral if reinvested in a QOF within 180 days of the event.

III. QOFs, QOZBs, and Property Acquisitions

Property acquired by purchase after December 31, 2026, generally cannot qualify as Qualified Opportunity Zone Business Property (QOZBP) if located in a previously designated QOZ. However, the Notice establishes specific safe harbors:

- Working Capital Plans: Property acquired post-2026 qualifies if purchased under a written working capital safe harbor plan adopted on or before December 31, 2026, provided the entity has received at least 10% of designated funds and expended at least 5% by that date.

- Ordinary Course Replacements: Tangible property acquired to replace or modernize existing assets in the ordinary course of a trade or business continues to qualify, expressly excluding acquisitions for business expansions.

IV. Post-Designation Compliance

Pre-OBBBA QOZ designations expire on December 31, 2027 (for Puerto Rico deemed designations) or December 31, 2028. To protect long-term investments, forthcoming regulations will permit QOFs and Qualified Opportunity Zone Businesses (QOZBs) to treat expired zones as legally valid for ongoing compliance testing. Entities may continue to satisfy the QOZBP "substantial use" test and the 50% active gross income test within these expired tracts through December 31, 2047.

&TaxAttorneys

TAX COURT SUSTAINS CIVIL FRAUD PENALTIES AND CONSTRUCTIVE DIVIDEND ASSESSMENTSOn June 23, 2026, the United States Tax Co...
24/08/2026

TAX COURT SUSTAINS CIVIL FRAUD PENALTIES AND CONSTRUCTIVE DIVIDEND ASSESSMENTS

On June 23, 2026, the United States Tax Court (Court), in Albert S.N. Hee v. Commissioner, Docket No. 24068-22 and Docket No. 24077-22, consolidated petitions from Albert and Wendy Hee and Waimana Enterprises, Inc., contesting Internal Revenue Service (IRS) deficiency determinations and civil fraud penalties spanning tax years 2003 through 2012. Albert Hee, the sole shareholder of Waimana, utilized personal credit cards to fund various expenditures, seeking corporate reimbursement.

We hereby highlight the Court’s analysis.

I. Disallowance of Corporate Deductions and Constructive Dividends

The Court evaluated Waimana's business deductions under Section 162(a) of the Internal Revenue Code (Code), which permits deductions for ordinary and necessary business expenses, and the heightened substantiation requirements of Section 274(d). The Court ruled against the petitioners. Personal expenses reimbursed by the corporation (including twice-weekly massage therapy sessions, tuition payments for Hee's children, and salaries paid to Hee's wife and children) lacked a substantiated, legitimate business purpose.

Furthermore, the Court disallowed extensive travel and entertainment deductions, such as family trips to France, Switzerland, Tahiti, and Walt Disney World. The Court found these trips were primarily personal, lacking documented business objectives or adequate receipts. The corporate purchase of a Santa Clara property, ostensibly for business travel, was revealed to be rent-free housing for Hee's children. Because these corporate disbursements failed to qualify as valid deductions and conferred a direct economic benefit upon the owner-taxpayer, the Court properly recharacterized them as constructive dividends.

II. Recharacterization of Shareholder Loans

The petitioners argued that numerous disbursements, including university tuition and housing costs, were bona fide shareholder loans. The Court rejected this characterization, applying established judicial factors to determine the existence of a true debtor-creditor relationship. The distributions lacked formalized promissory notes, collateral, and a fixed repayment schedule. Furthermore, Waimana did not contemporaneously record or charge interest. Consequently, the Court classified these purported loans as taxable constructive dividends benefiting the Hees.

III. Civil Fraud and the Statute of Limitations

Because the IRS issued Notices of Deficiency beyond the standard three-year assessment window, the agency bore the burden of proving fraud to suspend the statute of limitations under Section 6501(c)(1). Relying on the established "badges of fraud," the Court found clear and convincing evidence of fraudulent intent by both Hee and Waimana. The Court highlighted a pattern of understating income, maintaining inadequate records for personal expenses, providing implausible explanations, and supplying misleading information to corporate tax preparers. Hee's prior criminal conviction for filing false tax returns further eroded his credibility. Consequently, the Court sustained the Section 6663 civil fraud penalties and allowed the retroactive tax assessments.

&TaxLawyers

PUERTO RICO SUPREME COURT CLARIFIES ESTATE TAX BURDENS BEFORE DISTRIBUTION OF INHERITANCEOn June 11, 2026, the Puerto Ri...
17/08/2026

PUERTO RICO SUPREME COURT CLARIFIES ESTATE TAX BURDENS BEFORE DISTRIBUTION OF INHERITANCE

On June 11, 2026, the Puerto Rico Supreme Court (Court) decided Ángel Manuel Torres Cubano v. Sucesión de Miriam Magdalena Domenech Rosado, in which the Court addressed the proper treatment of tax liabilities and valuation issues in the administration and liquidation of an estate.

I. Background

The case arose after the intestate death of Miriam M. Herrero Domenech in 2011. She was survived by her husband, Ángel Manuel Torres Cubano, and initially by her mother, Miriam Magdalena Domenech Rosado, who was the universal heir. Because the decedent had no descendants, the surviving spouse was entitled to a usufructuary widower’s share under the Puerto Rico Civil Code of 1930.

After years of litigation, the parties stipulated an inventory of estate assets with an asserted fair market value of approximately $1.49 million. The Court of First Instance calculated the widower’s usufructuary share, but then applied various deductions, including rents, assets allegedly retained by the surviving spouse, and a tax burden related to a capital transaction involving an estate asset. The lower court ultimately concluded that Torres Cubano owed a negative balance to the estate. The Court of Appeals modified the judgment in part, but substantially upheld the treatment of the tax burden.

We hereby highlight the Court’s analysis.

II. Court’s Analysis

The Supreme Court focused on whether the lower courts erred by assigning the full tax burden to the surviving spouse and by treating that liability as a deduction after calculating the usufructuary share. The Court also examined whether the correct age range had been used to determine the surviving spouse’s life expectancy for purposes of computing the present value of the usufructuary share.

- Payment of Debts Prior Distribution of Estate Assets: The Court reaffirmed the principle that debts must be paid before inheritance is distributed. In the context of estate administration, this includes tax debts and informational filing obligations owed to the Puerto Rico Department of Treasury. The Court emphasized that tax liabilities arising from estate assets are obligations of the estate and should not be allocated solely to one heir or beneficiary in his personal capacity.

Accordingly, the tax burden should have been deducted from the estate before calculating the distributable shares. The Court explained that the fair market value of the estate must be determined net of debts at the time of commutation or disbursement. Only after the estate is properly valued, and all debts are accounted for, may the usufructuary share be calculated.

- Age for the Usufructuary Calculation: The Court also held that the lower courts used the wrong age reference in determining life expectancy. For purposes of the usufructuary computation, the surviving spouse’s age must be measured as of the decedent’s death, not as of the later judgment date.

On remand, the Court of First Instance must confirm that the required estate tax returns were filed, ensure that all estate debts (including tax liabilities) were paid, recalculate the fair market value of the estate net of debts, use the widower’s age at the date of death to determine life expectancy, and then recompute and distribute the estate accordingly.

&TaxLawyers

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