Second Circuit Affirms Tax Liability resulting from S Corporation ownership

On February 9, 2026, the United States Court of Appeals for the Second Circuit  upheld an individual income-tax deficiency and associated penalties against taxpayer Karen Veeraswamy for the 2014 tax year. The court’s decision reinforces the principle of consistency in taxpayer representations, the presumption of correctness of IRS deficiency notices, and the limited function of Tax Court Rule 155 computations. Veeraswamy v. Commissioner highlights the risks taxpayers face when their representations in one forum are used against them in another forum.

The underlying dispute centered on whether Ms. Veeraswamy was a 50 percent shareholder of Ashand Enterprises who realized capital gains and rental income in 2014. The Commissioner determined that Veeraswamy, was a half-owner of Ashand, and was liable for tax on her pro rata share of the corporation’s income. The taxpayer claimed she was not a stockholder of the company in 2014.

The Second Circuit’s analysis focused on the role of judicial estoppel and consistency of representations across proceedings. Although Veeraswamy argued that Ashand’s bankruptcy proceedings established that her then-husband was the sole owner, the appellate court agreed with the Tax Court that the bankruptcy confirmation order did not resolve the ownership issue on the merits and thus did not preclude the IRS’s contrary position. The court applied federal preclusion law, concluding that neither claim preclusion nor issue preclusion barred the Commissioner from litigating ownership because the bankruptcy court did not enter a final decision adjudicating Veeraswamy’s ownership interest and the issue was not “actually litigated and decided” in that forum.

Moreover, the Second Circuit emphasized that the Commissioner’s tax deficiency assessment had a rational basis, which triggered the statutory presumption of correctness applicable to IRS notices of deficiency. Veeraswamy’s own statements in the bankruptcy proceedings that she was a 50 percent shareholder of Ashand provided a rational connection between the taxpayer and the corporation’s income, supporting the IRS’s determination. The court also noted that Veeraswamy failed to produce contemporaneous documentation substantiating her claimed lack of ownership or contributions to Ashand at trial, and therefore did not rebut the presumption of correctness.

The Second Circuit also upheld the Tax Court’s handling of the Rule 155 computation process. Veeraswamy attempted to use Tax Court Rule 155 to introduce additional deductions for taxes, utilities, and building expenses that she argued should reduce her tax liability, but the court found that these arguments sought to relitigate issues already decided on the merits. Rule 155 is intended solely for mechanical computation of tax liability based on established findings, not as a vehicle to raise new substantive issues or reargue matters already resolved. The appellate court therefore found no abuse of discretion in the Tax Court’s rejection of these post-opinion computations.

Finally, the Second Circuit affirmed the imposition of penalties under Internal Revenue Code § 6651(a) for failure to file and pay. Veeraswamy argued that she had reasonable cause based on accounting consultations, but the court agreed with the Tax Court that mere consultation with an accountant, without specific advice to the effect that she had no obligation to file or pay, did not establish reasonable cause. The court also rejected her arguments concerning estimated tax penalties, finding that speculative concerns about potential criminal liability did not qualify as casualty, disaster, or unusual circumstances warranting penalty relief.

The Veeraswamy decision demonstrates that inconsistent representations across legal proceedings can have significant tax consequences and that taxpayers must be attentive to how assertions made in one forum, including bankruptcy court, may affect tax liability in another forum. It also reinforces the principle that the Tax Court’s Rule 155 process is procedural and not a means to reopen or expand factual and legal determinations already made on the merits. If you have questions about this update, please contact Liskow attorneys Leon Rittenberg III, John Rouchell, Caroline Lafourcade, and Kevin Naccari and visit our Tax practice page.