Category: Tax Law

A federal court just refused to let a regional bank walk away from a $230 million Ponzi scheme. In iCap Trust v. Columbia Bank, No. 2:25-cv-01870 (W.D. Wash. 2026), investors’ assigned claims survived dismissal because the bank’s own compliance files allegedly showed it understood what was flowing through the accounts and kept processing anyway. For New Mexico investors — Santa Fe retirees pitched at church, Hobbs families sold oil-and-gas “working interests,” Albuquerque professionals lured onto crypto platforms — the ruling is a map. Recovery comes from several directions, and knowing where to look first can change the outcome by six figures.

What did the federal court decide in the iCap case against Columbia Bank?

iCap, a Pacific Northwest real estate enterprise, raised roughly $230 million from more than 1,800 investors before collapsing into bankruptcy, where the Bankruptcy Court for the Eastern District of Washington found substantial evidence of a Ponzi scheme running from 2018 to 2023. A liquidating trust holding investor-assigned claims then sued Columbia Bank (formerly Umpqua Bank), which held the accounts.

The bank moved to dismiss, arguing the complaint showed only routine banking; the court disagreed. Actual knowledge was plausibly alleged through the bank’s own know-your-customer work: high-risk classifications, at least seventeen enhanced due diligence reviews, and monitoring that allegedly let it see investor money coming in, roughly $585 million in withdrawals going out, commingling, and transfers landing in a principal’s personal accounts. Substantial assistance followed from keeping the accounts open and processing transactions anyway. It is a pleading-stage decision — nothing is proven — but it shows a compliance paper trail can become the victims’ best evidence.

What must a fraud victim prove to hold a bank liable for aiding and abetting?

Aiding-and-abetting liability generally follows Restatement (Second) of Torts § 876(b): an underlying fraud or breach of fiduciary duty, the defendant’s actual knowledge of it, and substantial assistance. Constructive knowledge — red flags the bank should have investigated — is not enough in most jurisdictions, and routine banking rarely counts as substantial assistance, which is why most of these suits fail; in O’Dell v. Berkshire Bank, No. 5:24-cv-00652 (N.D.N.Y. Oct. 31, 2024), claims built on an unusually active account and generic anti-money-laundering duties were dismissed with prejudice.

Two lessons follow. First, winning complaints tie knowledge to what the bank’s own systems generated — due diligence memos, risk classifications, monitoring reports. Second, claim ownership matters as much as the merits: in Isaiah v. JPMorgan Chase Bank, N.A., 960 F.3d 1296 (11th Cir. 2020), a receiver’s claims failed because the receiver stood in the shoes of the fraud’s own corporate instruments — a trap the iCap Trust avoided by taking direct assignments from individual investors.

Where does recovery actually come from when a Ponzi scheme collapses?

The first source is the estate: victims file claims with the receiver or bankruptcy trustee and share pro rata in what is recovered — typically over years, often at pennies on the dollar. The estate’s strongest tool is fraudulent transfer law: under the judicially developed Ponzi-scheme presumption, transfers in furtherance of the scheme are presumed made with actual intent to defraud creditors under 11 U.S.C. § 548(a)(1)(A) and parallel state law — in New Mexico, the Uniform Voidable Transactions Act, NMSA 1978, §§ 56-10-14 through 56-10-25, reachable through 11 U.S.C. § 544(b).

That presumption cuts both ways. Investors who cashed out early with a profit — “net winners” — face clawback suits for everything above principal, because courts net withdrawals against contributions, Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008); good faith protects principal under § 548(c), but never fictitious profits. Anyone holding a trustee’s demand letter should review clawback defenses before responding. SIPC, finally, protects cash and securities up to $500,000 ($250,000 cash) only at member broker-dealers — real estate programs like iCap, private oil-and-gas deals, and crypto platforms sit outside it. Because the promoter is usually judgment-proof, the realistic deep pockets are third parties — banks, auditors, brokers, promoters; the iCap litigation named dozens. That is why the Columbia Bank theory matters to victims, and why preserving subscription documents, wire confirmations, and communications early can determine whether a viable claim exists.

How does the federal theft loss deduction work after the OBBBA?

While litigation grinds on, the tax code often delivers the fastest real dollars. Under 26 U.S.C. § 165(e), a theft loss is deductible in the year of discovery, to the extent there is no reasonable prospect of recovery, and Rev. Rul. 2009-9 confirmed a Ponzi loss is a theft loss from a transaction entered into for profit under § 165(c)(2) — an ordinary deduction, not a capital loss trapped behind the $3,000 annual limit.

That distinction became critical after the Tax Cuts and Jobs Act, whose § 165(h)(5) suspended personal casualty and theft losses outside federally declared disasters — a suspension the One Big Beautiful Bill Act of 2025 made permanent while extending it to certain state-declared disasters. Profit-motivated theft losses were never suspended, and the IRS reinforced the line in Chief Counsel Memorandum 202511015 (Mar. 2025): investment-style scam victims — including crypto “pig butchering” targets — can show profit motive; purely personal scams generally cannot. The firm’s pig butchering theft loss analysis walks through that line.

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What would the safe harbor look like for a Santa Fe retiree who lost $250,000?

Rev. Proc. 2009-20 (as modified by Rev. Proc. 2011-58) gives qualified investors a safe harbor that avoids IRS fights over discovery year and recovery prospects. It applies once the scheme’s lead figure is criminally charged (or a civil complaint is paired with an admission or an appointed receiver or trustee), and fixes the deduction at 95 percent of the qualified loss for an investor forgoing third-party recovery claims, or 75 percent for one pursuing them, reduced by insurance or SIPC recoveries.

Take a Santa Fe retiree who invested $220,000 cash, reported and reinvested $30,000 of Form 1099 “interest” that never existed, and withdrew nothing. Her qualified investment is $250,000 — deposits plus previously taxed phantom income, minus withdrawals. The 95 percent option yields a $237,500 ordinary deduction in the year charges are filed; joining the bank litigation drops it to $187,500, a $50,000 swing to weigh against the lawsuit’s realistic value. New Mexico’s income tax builds on federal taxable income, so the deduction cuts state tax too. If it exceeds her income, § 172(d)(4)(C) treats a theft loss as a business deduction for net operating loss purposes, though under current 26 U.S.C. § 172 the NOL cannot generally be carried back — it carries forward against up to 80 percent of taxable income. Even so, a certain deduction next April routinely beats a contingent recovery five years out.

What red flags should New Mexico investors and their advisors watch for?

The Columbia Bank ruling carries an uncomfortable inversion: the facts said to establish the bank’s knowledge — commingling, investor money paying investor “returns,” insider personal-account transfers — are facts a diligent advisor can probe before wiring a dollar. Ask where funds are custodied and whether accounts are segregated; demand audited financials; insist on third-party escrow for real estate deals. Steady above-market returns, pressure to roll over rather than withdraw, and paperwork that swaps entity names midstream are the signals a bank’s due diligence flags.

New Mexico’s fraud landscape has its own patterns: affinity fraud in Santa Fe and Las Cruces churches and retirement communities, unregistered oil-and-gas working-interest offerings sold off the Permian Basin boom in Hobbs and the Lea and Eddy County oilfields, and crypto pig-butchering operations targeting professionals statewide. In each, the pitch borrows credibility — a congregation, a producing basin, a slick app — the numbers never earn.

Frequently Asked Questions

Is a Ponzi scheme loss still deductible after the Tax Cuts and Jobs Act and the OBBBA?

Yes. The § 165(h)(5) suspension, made permanent by the OBBBA, applies only to personal casualty and theft losses. A Ponzi loss from an investment made for profit remains fully deductible as an ordinary loss under § 165(c)(2) per Rev. Rul. 2009-9.

Do I have to sue anyone to use the Rev. Proc. 2009-20 safe harbor?

No. The safe harbor is triggered by government action against the scheme’s lead figure — a criminal charge, or a civil complaint paired with an admission or an appointed receiver or trustee. Choosing not to pursue third-party recovery actually raises the percentage from 75 to 95 percent.

What happens if I withdrew money from the scheme before it collapsed?

Withdrawals reduce your deductible qualified investment dollar for dollar. If you withdrew more than you invested, you are a “net winner” who may face a clawback suit for the fictitious profits, because good faith protects only principal under 11 U.S.C. § 548(c) and New Mexico’s Uniform Voidable Transactions Act.

Can I amend old returns to remove the phantom income I reported?

You can amend open-year returns to strip out fictitious income instead of using the safe harbor — but that route forfeits Rev. Proc. 2009-20 protection, requires proving discovery year and recovery prospects the hard way, and cannot reach closed years. The safe harbor instead builds previously taxed phantom income into the deductible loss.

How fast can a fraud victim actually see money from the theft loss deduction?

Often within months. Once the lead figure is charged, the deduction goes on that year’s return — no lawsuit, no waiting for distributions. Excess losses become a net operating loss carrying forward against up to 80 percent of taxable income, since current § 172 generally allows no carryback.

How North Star Law Firm Can Help

North Star Law Firm helps investment fraud victims across New Mexico — Albuquerque, Santa Fe, Las Cruces, and beyond — coordinate estate claims, third-party recovery options, clawback demands, and the tax recovery most victims leave on the table. Phillip Zagotti, JD/CPA, represents New Mexico taxpayers before the IRS and the U.S. Tax Court under Circular 230, and the firm’s combined federal tax defense and tax planning perspective fits a problem where safe-harbor elections, netting computations, and litigation strategy intertwine. If you have lost money in a Ponzi scheme or suspect an investment is not what it claims, contact the firm for a free consultation before deadlines close any doors.

If you sell pottery on Etsy from Taos, drive for a delivery app in Albuquerque, or run a side business through Venmo or PayPal anywhere in New Mexico, the IRS just finished rewriting the rules that decide when your payment platform must report you — and when it must start skimming 24 percent off your gross sales. On August 10, 2026, Treasury and the IRS published final regulations, T.D. 10053, 91 Fed. Reg. 51391 (Aug. 10, 2026), conforming the backup withholding rules under 26 U.S.C. § 3406 to the restored $20,000-and-200-transaction Form 1099-K threshold under 26 U.S.C. § 6050W(e), effective for payments in calendar years beginning after December 31, 2024. The five-year saga behind the rule explains why your platform may have demanded a Form W-9 — and what happens if you ignore it.

What did the IRS’s final backup withholding regulations actually change?

Backup withholding under § 3406 applies only to “reportable payments” — payments a payor must report to the IRS on an information return. The old regulations no longer matched the threshold Congress restored to § 6050W(e) in 2025, so T.D. 10053 amends Treas. Reg. §§ 31.3406(a)-1 and 31.3406(b)(3)-5, adopting January 2026 proposed regulations without change: a payment by a third party settlement organization — the entity behind a payment app or online marketplace — becomes a reportable payment subject to backup withholding only once the payee’s aggregate payments for the calendar year exceed $20,000 and the transaction count exceeds 200.

Two mechanical points matter. First, once a payee crosses the threshold, the crossing payment and every later payment that year are reportable — exposure attaches mid-year. Second, a payee who exceeded the threshold in one year is treated as reportable in the immediately following year regardless of volume: a Farmington eBay reseller with a big 2025 stays in the system for 2026.

How did the 1099-K threshold end up back at $20,000 — and why was your platform asking for a W-9?

Section 6050W was added to the Code in 2008 with a de minimis exception from the start: a third party settlement organization filed Form 1099-K only if the year’s payments exceeded $20,000 and 200 transactions. The American Rescue Plan Act of 2021 (ARPA) cut the trigger to $600 with no transaction minimum, effective for 2022. The predictable result was panic — tens of millions of casual sellers faced 1099-Ks for selling a used couch — and the IRS blinked three times: Notice 2023-10 delayed the $600 threshold for 2022, Notice 2023-74 delayed it again for 2023, and Notice 2024-85 improvised a transition schedule of $5,000 for 2024, $2,500 for 2025, and $600 thereafter.

Congress ended the saga in the One Big Beautiful Bill Act, Pub. L. No. 119-21 (July 4, 2025). Section 70432 restored the $20,000/200 threshold in § 6050W(e) retroactively, as if the ARPA change had never taken effect, and made a companion amendment to § 3406 for payments in calendar years beginning after December 31, 2024. T.D. 10053 is the final administrative step. That history explains platform behavior: while the threshold was headed to $600, platforms began collecting taxpayer identification numbers from nearly everyone — and many have kept those W-9 demands even with the trigger back at $20,000.

What is backup withholding, and how much can the IRS take?

Backup withholding is not a penalty, but it can feel like one. Under § 3406(a), a payor of a reportable payment must withhold tax at “the fourth lowest rate of tax applicable under section 1(c)” — currently 24 percent — when the payee fails to furnish a TIN, furnishes an obviously incorrect one, or when the IRS notifies the payor that the payee’s name and TIN do not match its records. For third party network transactions, § 3406(b) ties reportability to the § 6050W(e) thresholds — precisely what T.D. 10053 implements.

The critical feature is that the 24 percent comes out of gross payments. Backup withholding ignores cost of goods, platform fees, shipping, and rent; it is calculated on the full settlement amount and remitted to the IRS. You recover it as a credit on your income tax return — often a year or more after the cash left your account.

How much could a New Mexico online seller lose to backup withholding?

Consider a Taos potter selling through Etsy who grosses $30,000 across 220 transactions in 2026. She is past both prongs of the § 6050W(e) threshold, so Etsy will file a Form 1099-K. Now suppose she registered under her married name while Social Security records still show her maiden name. The IRS flags the mismatch, Etsy receives a notice, and if it is not cured, Etsy must withhold 24 percent of every settlement. On $30,000 gross, that is $7,200 per year diverted to the IRS — from a business whose actual profit, after clay, glazes, kiln costs, fees, and shipping, might be $12,000. Withholding would consume 60 percent of her real economics, recoverable only after her return processes the following spring. For a seller who depends on the Christmas and summer tourism markets, that cash-flow hit can be existential.

How do you fix a B-notice or TIN mismatch before withholding starts?

When the IRS notifies a payor of a name/TIN mismatch, the payor must send the payee a “B-notice.” A first B-notice can generally be cured with a corrected Form W-9. A second B-notice within three years is stricter: the payee must validate the number at the source — Social Security Administration documentation for an SSN, or IRS Letter 147C for an EIN. The common traps are mundane: a post-marriage name change that never reached the SSA; a single-member LLC’s business name paired with the owner’s SSN in the wrong boxes; an EIN whose IRS name control reflects an old d/b/a. The fix is clerical, but miss the platform’s response window and withholding begins on the next settlement — and does not stop until the cure is processed.

Does the $20,000 threshold mean income below it is tax-free?

No — and this is the most dangerous misreading of the saga. Section 6050W decides when a platform must tell the IRS about you, not when your income becomes taxable. Gross income under 26 U.S.C. § 61 includes gains from selling goods and compensation for services from the first dollar: an Albuquerque handyman paid $14,000 through a payment app owes income and self-employment tax on his profit though no 1099-K will ever issue. New Mexico adds a second layer — the state’s gross receipts tax generally applies regardless of any federal reporting threshold, and the Taxation and Revenue Department runs its own audits. The firm’s New Mexico gross receipts tax audit guide explains how those audits unfold and why marketplace sellers are a frequent target.

The flip side is unfiled-return risk. For every year a platform filed a Form 1099-K, the IRS holds a third-party record of your gross receipts; when no return matches it, the IRS can prepare a substitute for return treating the entire gross amount as profit — no cost of goods, no expenses. The firm’s unfiled tax returns page explains the path back into compliance.

Who still gets a 1099-K below the federal threshold?

The restored trigger is a federal floor for third party settlement organizations — not a universal rule. Several states, including Maryland, Massachusetts, Vermont, and Virginia, require platforms to report at $600; New Mexico has not enacted a lower threshold. Payment card transactions are a separate category entirely: the § 6050W(e) exception covers only third party settlement organizations, so a merchant acquiring bank reporting card swipes — the Santa Fe gallery running Visa transactions through a terminal — reports from the first dollar. Platforms may also file voluntarily below the threshold. The safe assumption for New Mexico sellers: the IRS either knows or can learn your gross receipts, whatever this year’s threshold is.

Frequently Asked Questions

Is money I receive through Venmo or PayPal taxable if I never get a Form 1099-K?

Yes, if it is business or sales income. The 1099-K threshold controls only whether the platform files an information return. Income from selling goods or services is taxable from the first dollar, and New Mexico gross receipts tax applies under its own rules regardless of any federal form.

What is the backup withholding rate in 2026?

24 percent. Section 3406(a) sets the rate at the fourth lowest rate of tax under section 1(c), and it applies to the gross amount of each reportable payment — not to profit after expenses.

Do personal payments between friends count toward the $20,000 threshold?

No. Form 1099-K reporting covers payments settled through third party payment networks for goods and services. Reimbursing a roommate or splitting dinner does not belong in that category, but mislabeled payments can be misreported — keep personal and business accounts separate.

How do I stop backup withholding once a platform starts taking 24 percent?

Cure the underlying problem: respond to the B-notice with a corrected Form W-9, or after a second B-notice, validate your number with Social Security Administration documentation or IRS Letter 147C. Withholding already remitted is recovered as a credit on that year’s return.

Does New Mexico have its own lower 1099-K reporting threshold?

No. New Mexico follows the federal $20,000/200 trigger, but gross receipts tax applies to most sales and services independent of any reporting threshold, and the Taxation and Revenue Department audits online sellers on its own authority.

What if I have unfiled returns for years a platform issued a 1099-K?

The IRS holds the platform’s report of your gross receipts and can prepare a substitute for return treating the full gross amount as taxable profit. Filing accurate original returns with documented expenses is almost always better than fighting a substitute-for-return assessment later.

How North Star Law Firm Can Help

North Star Law Firm advises online sellers, gig workers, and small businesses across New Mexico — Albuquerque, Santa Fe, Las Cruces, and beyond — when platform reporting and tax filings do not line up. Phillip Zagotti, JD/CPA, represents New Mexico taxpayers before the IRS and the U.S. Tax Court under Circular 230, handling B-notice cures, recovery of withheld amounts, and the audits that 1099-K matching generates. The firm’s tax defense practice handles IRS examinations and collections, while its tax law practice helps sellers structure platform businesses before problems start. To discuss a 1099-K notice, backup withholding, or unfiled returns, contact North Star Law Firm for a free consultation.

When the call finally comes — a private equity firm wants to buy your company — the price gets all the attention. It shouldn’t get all of it. How the deal is run determines whether the price sticks, whether disgruntled stockholders can drag the transaction through years of litigation, and, for the founder being asked to roll equity into the buyer’s new structure, what the tax bill looks like. A 2026 Delaware Court of Chancery decision dismissing a challenge to the $4.6 billion KnowBe4 take-private is close to a checklist for getting it right.

The case is Le Clair v. KnowBe4, Inc., C.A. No. 2024-1143-KSJM (Del. Ch. May 27, 2026). Most New Mexico companies of any scale are incorporated in Delaware or negotiate against Delaware norms when they sell, so what Chancery rewards is, practically speaking, what a Santa Fe or Albuquerque founder should build.

What was the KnowBe4 lawsuit about?

KnowBe4, a publicly traded security-awareness training company, was taken private by Vista Equity Partners in early 2023 at $24.90 per share. The buyer insisted that roughly $682 million of equity be rolled into the post-closing company — by the founder-CEO and two institutional investors — rather than cashed out. Nearly two years later, former stockholders sued, claiming those three had operated as a “control group” steering the deal for its own benefit, and that the board breached its duty of loyalty.

The court dismissed everything. Two rulings carry the freight. First, alignment is not control: investors who each independently prefer the same outcome do not become a control group without an actual agreement to act together. Second, because there was no controller, an informed and uncoerced vote of the stockholders — KnowBe4’s minority holders approved at around 99 percent — cleansed any board-level conflicts under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), restoring the deferential business judgment rule and ending the case at the pleading stage.

When do aligned investors become a “control group”?

The distinction matters enormously, because a transaction with a conflicted controller faces entire fairness review — Delaware’s most demanding standard — unless the dual protections of Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014), are in place from the start: an empowered independent special committee plus a majority-of-the-minority vote. A plaintiff pleading a control group must allege a legally significant connection among its members — a contract, a coordination agreement, a documented history of investing in tandem — not merely that several large holders all wanted the same deal. In KnowBe4’s case, the CEO and the two funds had invested at different times, largely independently, and their parallel decisions to roll equity reflected the economics every take-private buyer demands of large insiders. Parallel interests, the court held, are not an agreement.

Notably, KnowBe4’s board had adopted the MFW protections anyway, belt-and-suspenders, and the plaintiffs argued that doing so admitted a controller existed. The court refused to punish caution: implementing safeguards cannot be treated as a concession, or no board would ever implement them.

How does a fully informed stockholder vote protect a deal?

Corwin is the workhorse. Where no controller stands on the other side, approval by a fully informed, uncoerced majority of disinterested stockholders restores the business judgment rule, and the litigation as a practical matter is over. The entire fight therefore migrates to disclosure: plaintiffs must plead that the proxy omitted or misstated something material. KnowBe4’s plaintiffs tried five theories — committee members’ supposed conflicts, the financial advisor’s holdings, the evolving rollover amounts, the labeling of a large stockholder, and the framing of the bidding history — and the court rejected each, emphasizing that Delaware demands a complete and accurate telling, not a running transcript of every board deliberation or disclosure of preliminary interest that never became a bid. The lesson cuts both ways: fulsome, accurate disclosure is not paperwork; it is the substantive shield.

What does a clean process look like for a Santa Fe software company?

Translate this to a hypothetical Santa Fe software company: a founder-CEO holding 18 percent, two venture funds at 15 percent each, and a private equity buyer that wants the founder to roll half his equity. The clean sequence looks like this. The board forms a special committee of independent directors early — before anyone talks price — and gives it real authority, including the power to say no, with its own bankers and lawyers. The committee quarantines the founder and the funds from the negotiation. Price is negotiated first and separately; the founder’s rollover terms are negotiated later, on a parallel track that the committee supervises but the founder does not control. The committee runs a genuine market check — KnowBe4’s touched sixteen potential buyers — and documents why the winning bid won. If there is any argument someone controls the company, the deal is conditioned from the outset on both MFW protections. Then the proxy or information statement tells the whole story, including the uncomfortable parts, and stockholders vote.

Where do deals go wrong? Almost always at the same junctures: the committee is formed after price is already framed by the insider’s conversations with the buyer; the founder negotiates his rollover and employment package in the same breath as the company’s price; the market check is a formality; or the disclosure buries the advisor’s relationships and the negotiation history. Each of those failures is an invitation for a strike suit that a clean record would have foreclosed on a motion to dismiss — and process discipline is also what representation-and-warranty insurers and buyers’ diligence teams price when they mark up the disclosure schedules.

Why must the tax structure and the sale process be negotiated together?

Here is the piece deal lawyers and accountants too often handle in separate silos. Rollover equity is not just a governance fact; it is a tax event whose treatment depends entirely on structure. A rollover into a partnership-taxed holding vehicle can qualify for non-recognition under 26 U.S.C. § 721; a stock-for-stock exchange may defer gain under the reorganization rules of 26 U.S.C. § 368; and a poorly structured rollover is simply a taxable sale of the rolled shares, meaning the founder pays tax on value received in illiquid paper. The rollover percentage, the entity form of the buyer’s topco, the mix of cash and equity, and the timing all drive both the Delaware-law optics — how big the founder’s conflict looks — and the founder’s after-tax outcome. Negotiating price, process, and tax structure as one integrated problem, with the special committee aware of the rollover’s terms and the tax advisors aware of the process constraints, is how both the deal and the founder come out whole.

What should New Mexico owners take away?

New Mexico’s own Business Corporation Act imposes fiduciary duties on directors that run along familiar lines, but as a practical matter Delaware case law sets the playbook for exits: most investor-backed New Mexico companies are Delaware entities, and buyers, insurers, and opinion-givers all measure process against Chancery’s standards. The good news from Le Clair is that the standards are achievable. Independence, sequencing, a real market check, and honest disclosure are not exotic — they are habits, and they are far cheaper than the alternative. For a founder, the practical rule of thumb is this: the moment a buyer’s interest becomes real, the process questions and the tax questions should land on the same table, at the same time, before anyone talks numbers.

Frequently Asked Questions

Does a founder rolling over equity automatically create a conflicted deal?

No. Rollovers are standard in take-privates, and Le Clair confirms that rolling equity — even alongside other large investors doing the same — does not by itself create a control group or doom the deal. It does create a personal interest that a well-run process isolates from the price negotiation.

What is Corwin cleansing?

Under Corwin v. KKR Financial Holdings, when no controlling stockholder stands on the other side of a deal, approval by a fully informed, uncoerced majority of disinterested stockholders restores the business judgment rule. Practically, it means well-disclosed deals get dismissed at the pleading stage.

What are the MFW protections and when are they needed?

From Kahn v. M&F Worldwide: an empowered, independent special committee plus a non-waivable majority-of-the-minority vote, both in place before substantive negotiations. They are required to get business judgment review when a conflicted controller is on the other side, and boards may adopt them protectively without conceding a controller exists.

My company is a New Mexico corporation, not Delaware. Does any of this apply?

Largely yes in practice. New Mexico corporate law imposes comparable fiduciary duties, and buyers, insurers, and lawyers evaluate sale processes against Delaware norms regardless of the state of incorporation. Running a Delaware-clean process is the conservative course either way.

Is rollover equity taxable?

It depends entirely on structure. A rollover into a partnership-taxed vehicle under § 721, or a qualifying stock-for-stock reorganization under § 368, can defer gain on the rolled portion; a rollover that fails those frameworks is a taxable sale even though the founder received illiquid equity rather than cash. Structure must be negotiated with the deal, not after it.

How early should the special committee be formed?

Before any price framing occurs — ideally as soon as a credible acquisition interest surfaces. In KnowBe4’s deal the committee was in place before price negotiations, which is a major reason the challenge failed at the motion-to-dismiss stage.

How North Star Law Firm Can Help

North Star Law Firm helps New Mexico owners and boards prepare companies for sale with the deal process and the tax structure designed together — special committee mechanics, rollover structuring, and the tax planning that determines what the founder actually keeps. Because the firm is led by an attorney-CPA, it also handles the aftermath when structures are questioned, through its tax defense practice. Owners fielding buyer interest can contact the firm for a free analysis by phone or video before the first price conversation happens.

Every owner of a closely held New Mexico company eventually faces the same question: who takes this over, and what does the exit cost me in tax? For construction firms, machine shops, and professional practices without a family successor, one answer deserves more attention than it gets in this state — selling to your own employees through an employee stock ownership plan. And a July 2026 decision from the Seventh Circuit just made the ESOP route meaningfully safer for the owners, boards, and trustees who run these deals well.

The case is Rush v. GreatBanc Trust Co., No. 25-1736, 2026 U.S. App. LEXIS 21177 (7th Cir. July 17, 2026). It arose from the sale of an ESOP-owned printing company, and it answers a question that hangs over every ESOP transaction: how hard will a court second-guess the fiduciaries afterward?

What did the Seventh Circuit hold in Rush v. GreatBanc?

Segerdahl Corporation, a direct-mail printer doing business as sg360°, was wholly owned by its ESOP. In 2016, the company was sold to a private equity buyer, ICV Partners, for $265 million. A former senior manager and plan participant sued the ESOP’s independent trustee, GreatBanc, and the company’s board, arguing they should have marketed the company differently — to strategic competitors rather than financial buyers — and would have fetched a better price. He also argued that the CEO’s agreement to reinvest in the company after the sale amounted to an ERISA prohibited transaction. After a bench trial that ran three weeks, the district court rejected every claim, and the Seventh Circuit affirmed.

Three holdings matter beyond the parties. First, drawing on ordinary trust-law principles, the court held that decisions made by a conflict-free fiduciary in an ESOP deal receive judicial deference — review for abuse of discretion, not de novo reexamination of every judgment call. Second, the trustee satisfied its duty of prudence under 29 U.S.C. § 1104 through a careful, impartial investigation, which properly included relying on the company’s investment banker and outside valuation and legal advisors. Third, the CEO’s post-closing rollover investment was not automatically a prohibited transaction under 29 U.S.C. § 1106 — the court declined to adopt a per se rule, observing that buyers expect management to keep skin in the game and that forbidding it would depress prices for the very employee-owners ERISA protects.

Why should New Mexico owners care about an Illinois printing company?

Because the fear that kills ESOP conversations is litigation fear. Owners hear that ESOP trustees get sued, that the Department of Labor scrutinizes valuations, and they quietly cross the option off the list. Rush is the appellate courts saying, with unusual clarity, that fiduciaries who run a clean process — independent trustee, real investigation, credible advisors, no conflicts — get the benefit of the doubt when someone attacks the deal in hindsight. That protection runs both at formation, when the owner sells to the plan, and years later, when the ESOP-owned company itself is sold, which is exactly the Rush posture.

What tax advantages does an ESOP sale offer the selling owner?

This is where the attorney-CPA lens earns its keep, because the ESOP’s appeal is substantially a tax story. An owner selling C corporation stock to an ESOP that ends up holding at least 30 percent of the company can elect under 26 U.S.C. § 1042 to defer the entire capital gain by reinvesting the proceeds in qualified replacement property — generally stocks and bonds of domestic operating companies — within a fifteen-month window. Hold the replacement property until death and the basis steps up; the deferred gain can disappear entirely.

The S corporation story is different but just as striking. An ESOP trust is a tax-exempt shareholder, and 26 U.S.C. § 512(e) excludes its S corporation flow-through income from unrelated business income tax. A 100 percent ESOP-owned S corporation therefore pays essentially no federal income tax on its operating earnings — a structural advantage that compounds year after year and helps the company service the debt used to buy out the owner. The trade-off: § 1042 deferral is available only for C corporation stock, so entity classification has to be planned, sometimes years ahead.

How would the numbers look for an Albuquerque contractor?

Take an illustrative Albuquerque commercial contractor with $12 million in revenue, roughly $1.5 million in normalized earnings, and an appraised equity value around $7 million, owned by a founder nearing retirement with negligible basis. A third-party sale at $7 million triggers federal capital gains tax at 20 percent, the 3.8 percent net investment income tax, and New Mexico income tax on top — call the combined bite somewhere near $2 million, leaving about $5 million. A staged ESOP sale of the same company, structured as a C corporation with a § 1042 election, can defer the entire gain: the owner takes back a market-rate seller note (often with warrants) as the ESOP pays over time, reinvests in qualified replacement property, and potentially eliminates the gain at death. The gross price may be somewhat lower than a strategic buyer might pay — an ESOP pays fair market value, not a synergy premium — but the after-tax and after-legacy comparison is far closer than most owners assume, and the company stays in Albuquerque with its crews employed rather than being folded into an out-of-state acquirer.

What happens when the ESOP-owned company is later sold?

ESOP ownership is not forever; many ESOP companies eventually sell, as sg360° did. Rush maps the safe path for that second transaction. The trustee — not the conflicted insiders — makes the call for the plan, investigates carefully, and documents reliance on qualified advisors. The board’s and participants’ interests are typically aligned on price, since everyone gains from a higher number. Management rollover gets negotiated transparently and does not, standing alone, poison the deal. For participants, a sale at a strong price is the payday: their accounts convert to cash at the deal value. For trustees and directors, the case is a process manual — the defendants won because the record showed meetings, analysis, advisor input, and a reasoned approval, not because courts rubber-stamp ESOP sales.

How should owners weigh an ESOP against an outside sale?

The decision usually turns on four questions asked in order. Is there a buyer who would pay a genuine strategic premium — because if a competitor will pay half again what the appraisal says, tax deferral rarely closes that gap. Does the owner need all the cash at closing — ESOP sales are commonly seller-financed over years, which suits owners who want income more than a lump sum. Does the company have the management bench to run without the founder — an ESOP buys stock, not leadership. And does legacy matter — keeping a Barelas machine shop or a Santa Fe engineering firm locally owned and its jobs in place is a real term of the deal to many founders, and it is one no financial buyer will offer. Owners should also budget honestly for the ongoing obligations: an annual independent valuation, plan administration, and the repurchase obligation to cash out departing employees, which has to be modeled like the long-term liability it is.

Does Rush apply in New Mexico?

New Mexico sits in the Tenth Circuit, and the Tenth Circuit has not squarely adopted Rush’s deferential formulation for reviewing ESOP transaction fiduciaries, so the case is persuasive rather than binding here. But the duties it construes are the same federal duties — § 1104 prudence and loyalty, § 1106 prohibited transactions — that govern a New Mexico ESOP, and DOL investigations follow the same national playbook. The practical guidance travels intact: independent trustee, real investigation, credible valuation, conflicts isolated, everything documented. A New Mexico fiduciary who builds that record has both the best available defense in the Tenth Circuit and a well-reasoned appellate decision to point to.

Frequently Asked Questions

What is an ESOP sale, in plain terms?

The company sets up a tax-qualified retirement trust for its employees, and the trust buys some or all of the owner’s stock at a price set by an independent appraisal, usually financed by a bank loan, a seller note, or both. Employees earn accounts in the trust over time and are cashed out when they leave or retire.

How does the § 1042 rollover actually defer my gain?

If you sell C corporation stock to an ESOP that holds at least 30 percent of the company afterward, and you reinvest the proceeds in qualified replacement property within the statutory window, the capital gain is deferred until you sell the replacement property. Held until death, the replacement property takes a stepped-up basis and the deferred gain can escape income tax entirely.

Is it true a 100 percent ESOP-owned S corporation pays no federal income tax?

Essentially yes. The ESOP trust is a tax-exempt shareholder, and the Code excludes its S corporation flow-through income from unrelated business income tax, so a wholly ESOP-owned S corporation generally pays no federal income tax on operating earnings. That cash flow typically services the buyout debt.

Did Rush v. GreatBanc make ESOP lawsuits impossible?

No. It held that conflict-free fiduciaries who conduct a careful, impartial investigation get deferential review, and that management rollover is not automatically prohibited. Fiduciaries with conflicts, thin records, or stale valuations remain fully exposed, and the Department of Labor continues to scrutinize ESOP valuations closely.

Does Rush bind courts in New Mexico?

No — New Mexico is in the Tenth Circuit, which has not squarely adopted the same formulation, so Rush is persuasive authority. Because the underlying ERISA duties are identical nationwide, the process disciplines Rush rewards are the right playbook in New Mexico regardless.

What does the repurchase obligation mean for the company later?

An ESOP company must buy back shares from departing and retiring employees at the then-current appraised value. That is a real long-term liability that should be forecast and funded from the start; ignoring it is one of the most common ESOP planning failures.

How North Star Law Firm Can Help

North Star Law Firm advises New Mexico owners on exit and succession structures where the legal design and the tax result are inseparable — ESOP feasibility, § 1042 planning, entity classification, and the valuation and fiduciary-process questions that decisions like Rush reward. As an attorney-CPA practice, the firm integrates the tax planning with deal execution and can defend the result if the IRS or DOL later asks questions through its tax defense practice. Owners weighing an ESOP against an outside sale can contact the firm for a free analysis by phone or video.

For most New Mexico businesses that sponsor a 401(k) or 403(b) plan, 2026 is the year SECURE 2.0’s most operationally disruptive rule finally bit: participants aged 50 or older who earned more than $150,000 in FICA wages from the sponsoring employer in 2025 can no longer make pre-tax catch-up contributions. Their catch-ups must go in as designated Roth contributions, taxed now. The rule has been running in payroll since January, but the paperwork deadline is still ahead. Plan documents must be formally amended to reflect the new regime by December 31, 2026, and the amendment is only the visible tip of a coordination exercise involving payroll, the recordkeeper, and participant communications that should not wait for December.

The population this hits in New Mexico is exactly the firm’s neighborhood: physicians’ groups and specialty practices in Albuquerque, oilfield services S corporations working the Permian out of Hobbs and Carlsbad, engineering and professional firms in Santa Fe and Las Cruces, and any closely held company whose owners pay themselves six-figure W-2 wages and lean on catch-up contributions to build retirement savings late in their careers.

What Does the Mandatory Roth Catch-Up Rule Actually Require?

Section 603 of the SECURE 2.0 Act added subsection (v)(7) to 26 U.S.C. § 414. In brief: if a participant’s wages, as defined for Social Security tax purposes, from the employer sponsoring the plan exceeded an indexed threshold in the preceding calendar year, any catch-up contribution the participant makes must be a designated Roth contribution. The statute nominally took effect in 2024, but the IRS granted a two-year administrative transition period in Notice 2023-62, treating 2024 and 2025 as compliance-free. Treasury then issued final regulations on September 15, 2025. The upshot is that for calendar-year plans, the mandate genuinely operates beginning January 1, 2026, with 2026 administration governed by a reasonable, good-faith reading of the statute while the final regulations phase in fully for later years.

Who Is Caught by the $150,000 Prior-Year Wage Test?

The threshold started at $145,000 and is indexed; per Notice 2025-67, the figure that governs 2026 is $150,000 of 2025 FICA wages. Three features of the test do the real analytical work. First, it looks only backward: a participant’s 2026 mandate depends entirely on 2025 wages, so payroll can identify the affected group on January 1 with certainty. Second, it counts only wages from the employer sponsoring the plan. An executive hired in mid-2026 who earned $300,000 elsewhere in 2025 has no prior-year wages from this employer and is not subject to the mandate for 2026. Third, it counts only FICA wages, which produces the rule’s most interesting carve-out.

Why Are Partners and Self-Employed Owners Off the Hook?

This is the detail an attorney-CPA cannot resist. Partners in a partnership, members of an LLC taxed as a partnership, and sole proprietors do not receive FICA wages from the business; they have self-employment earnings taxed under SECA instead. Because the statutory test runs on FICA wages, a law firm partner or physician-group partner with $600,000 of K-1 income has zero prior-year wages from the sponsoring employer and may keep making fully pre-tax catch-up contributions in 2026. Meanwhile the practice’s employed office manager earning $155,000 in W-2 wages is forced into Roth. The final regulations confirm this reading. For New Mexico professional groups weighing entity structure, this is one more asymmetry between the partnership form and the S corporation, whose owners do take W-2 wages that count toward the test, to weigh alongside reasonable-compensation and self-employment tax considerations.

What Do the 2026 Numbers Look Like for a Santa Fe Practice Owner?

Take a 55-year-old Santa Fe practice owner who paid herself $180,000 of W-2 wages from her S corporation in 2025. For 2026 the regular elective deferral limit is $24,500 and the age-50 catch-up limit is $8,000, both per Notice 2025-67. Her $180,000 of 2025 wages exceeds $150,000, so the $24,500 can still go in pre-tax, but the $8,000 catch-up must be Roth. At a 24 percent federal bracket plus New Mexico’s top individual rate of 5.9 percent, losing the deduction on $8,000 costs her roughly $2,392 in current tax. What she buys with that is tax-free growth and tax-free qualified withdrawals, plus a bucket of retirement money with no lifetime required minimum distributions. For an owner who expects comparable or higher rates in retirement, mandatory Roth is closer to forced good planning than a penalty; for one counting on much lower retirement brackets, it is a genuine cost. If she were 60 through 63, SECURE 2.0’s separate enhanced catch-up under section 109 would raise her catch-up limit to $11,250 for 2026, all of it Roth, roughly $3,364 of current tax at the same rates.

What Must Plans Without a Roth Feature Do Before Year-End?

The mandate creates a fork for the minority of plans that never added a Roth deferral option: add one, or accept that participants over the wage threshold can make no catch-up contributions at all. The regulations soften the administration in two useful ways. A plan may provide a deemed Roth election, under which a high-wage participant’s attempted pre-tax catch-up is automatically treated as an irrevocable Roth designation, so long as the participant has an effective opportunity to elect otherwise or opt out. And where errors occur, corrections can run through a Form W-2 correction or an in-plan Roth rollover, with a de minimis pass for small amounts. None of that works unless payroll and the recordkeeper are exchanging the right data: 2025 FICA wage figures by participant, catch-up flags in the deferral election system, and participant notices explaining why a longtime pre-tax saver is suddenly seeing Roth withholding. Sponsors should be validating that pipeline now, not in December, and confirming that what payroll has actually been doing since January matches what the amendment will say the plan does.

What Happens If a Plan Misses the December 31, 2026 Deadline?

Under Notice 2024-2’s consolidated SECURE 2.0 amendment schedule, most plans must adopt conforming amendments by December 31, 2026, with later deadlines for collectively bargained plans and governmental plans tied to bargaining cycles and legislative sessions. The amendment deadline is forgiving in one sense: a plan may operate the new rule all year and paper it in December, provided operation and the eventual amendment match. It is unforgiving in the other direction. A plan that lets a $150,000-plus participant make pre-tax catch-ups in 2026 has an operational failure, and an unamended document at year-end becomes a document failure; both put the plan’s tax qualification at risk, which is the nuclear scenario for every participant, not just the affected executives. The realistic path back is correction, through the W-2 and in-plan rollover methods in the regulations or the IRS’s Employee Plans Compliance Resolution System, and corrections get more expensive the longer errors run. This is the same year-end discipline the firm urged for a very different new regime in its post on Trump Accounts and the Rev. Proc. 2026-25 gift tax safe harbor: when Congress builds a new savings vehicle, the paperwork deadlines are where taxpayers actually get hurt.

Frequently Asked Questions

Does the mandatory Roth catch-up rule apply to SIMPLE IRA plans?

No. The mandate applies to 401(k), 403(b), and governmental 457(b) plans; SIMPLE plans are excluded from the Roth catch-up requirement, and Notice 2025-67 confirms the $150,000 threshold applies to applicable employer plans other than SIMPLE arrangements.

Do wages from all jobs count toward the $150,000 test?

No. Only prior-year FICA wages from the employer sponsoring the plan count. Wages from an unrelated employer, and self-employment earnings, are ignored, which is why new hires and partners typically escape the mandate.

Our payroll has been handling this since January. Do we still need an amendment?

Yes. Operating correctly does not substitute for the plan document. Most plans must adopt a conforming amendment by December 31, 2026 under Notice 2024-2, and the amendment must match what the plan actually did in operation during the year.

Is being forced into Roth catch-ups bad for the owner?

Not necessarily. The owner loses a current deduction, roughly $2,400 on an $8,000 catch-up at combined federal and New Mexico rates, but gains tax-free growth, tax-free qualified distributions, and freedom from lifetime required minimum distributions. The answer turns on expected retirement tax rates.

What if the plan has no Roth feature and does not want one?

Then participants over the wage threshold simply cannot make catch-up contributions, and the regulations permit that restriction without violating universal availability rules. Most sponsors conclude that adding a Roth feature is the better outcome for their people.

What if we discover 2026 catch-ups went in pre-tax for a covered participant?

Correct promptly. The final regulations allow a Form W-2 correction or an in-plan Roth rollover, with a small de minimis exception, and broader failures can be fixed through EPCRS. Left uncorrected, the error threatens the plan’s qualified status.

How North Star Law Firm Can Help

Retirement plan compliance sits squarely at the intersection of tax law and payroll mechanics, which is where an attorney-CPA practice earns its keep. North Star Law Firm can determine which participants a New Mexico sponsor must move to Roth catch-ups, coordinate amendment language with the recordkeeper and payroll provider before the December 31, 2026 deadline, model the pre-tax versus Roth math for affected owners, and manage corrections if 2026 operations have already drifted, drawing on its tax law and tax defense practices. Plan sponsors who want a year-end compliance review can contact the firm for a free analysis by phone or video.

Halfway through 2026, the IRS raised the optional standard mileage rate for business driving from 72.5 cents to 76 cents per mile, effective July 1, 2026. The change arrived in Announcement 2026-11, published in Internal Revenue Bulletin 2026-29 on July 13, 2026, and the IRS attributed the mid-year move to rising fuel prices. The medical and moving rate rose to 23.5 cents, while the charitable rate stays fixed by statute at 14 cents under 26 U.S.C. § 170(i).

For New Mexico employers, this is more than a bookkeeping update. Distances here are long: a home-health aide covering Albuquerque’s West Side, a title runner working between Santa Fe and Española, a pest-control tech running US 550 out of Rio Rancho, or an oilfield services coordinator shuttling between Hobbs and Carlsbad can each put hundreds of business miles a month on a personal vehicle. When employees drive that much, a stale reimbursement policy quietly becomes a tax problem, and for lower-wage workers, a wage-and-hour problem.

What Does the IRS Rate Actually Do, and What Does It Not Do?

The standard mileage rate is optional. No federal statute requires any employer to reimburse mileage at all, let alone at 76 cents. What the rate does is provide a substantiation safe harbor: reimbursements at or below the standard rate for substantiated business miles are deemed to satisfy the expense-substantiation rules, so they can be paid free of income and payroll taxes under an accountable plan. The framework comes from 26 U.S.C. § 62(a)(2)(A) and (c) and the regulations at Treas. Reg. § 1.62-2: the expense must have a business connection, the employee must substantiate miles, dates, and business purpose within a reasonable period, and any excess advance must be returned. Pay more than the standard rate without proof of higher actual costs, and the excess is wages. Skip the substantiation, and the entire payment is wages.

Can Paying Less Than 76 Cents Violate Wage Law?

Here is the trap employers miss. The Fair Labor Standards Act never mentions mileage, but its regulations require that minimum wages be paid free and clear. Under the kickback rule of 29 C.F.R. § 531.35, when an employee bears a cost that is primarily for the employer’s benefit, such as gas, tires, and depreciation on a car the job requires, the unreimbursed cost is treated as if it were kicked back to the employer. If that deemed kickback cuts a nonexempt employee’s effective hourly rate below the applicable minimum wage in any workweek, the employer has a violation even though the paychecks looked lawful on their face.

New Mexico adds its own floor. The Minimum Wage Act, NMSA 1978, § 50-4-22, sets the state minimum at $12.00 per hour, well above the federal $7.25, and Santa Fe, Las Cruces, and Albuquerque have local ordinances that can push the floor higher still. Because the relevant minimum here is $12.00 or more rather than $7.25, New Mexico employers have far less cushion before under-reimbursed driving drags a paycheck below the line than the federal rule alone would suggest.

What Did the Sixth Circuit’s Pizza-Delivery Cases Decide?

In March 2024, the Sixth Circuit decided Parker v. Battle Creek Pizza, Inc., No. 22-2119 (6th Cir. Mar. 12, 2024), consolidated with Bradford v. Team Pizza, Inc., No. 22-3561, a pair of cases about how to value delivery drivers’ vehicle costs for minimum-wage purposes. The drivers wanted courts to presume costs equal the IRS standard rate; the employers wanted a lenient “reasonable approximation” standard borrowed from the overtime regulation at 29 C.F.R. § 778.217. The court rejected both. The IRS rate is a nationwide average that can overpay or underpay any particular driver, and a mere approximation cannot prove that minimum wages were actually paid free and clear. The court also declined to defer to the Department of Labor’s Field Operations Handbook, which had blessed the IRS-rate shortcut.

New Mexico sits in the Tenth Circuit, which has not resolved the question, so neither the drivers’ shortcut nor the employers’ shortcut is settled law here. That cuts both ways: an employer reimbursing at the full IRS rate has a strong practical defense, but no court in this circuit has held that anything less, or anything approximated, is automatically safe. The prudent reading of Parker for a New Mexico employer is that documentation of actual costs, not proxies, wins these disputes.

How Does the Math Play Out for an Albuquerque Home-Health Aide?

Run the numbers on a realistic case. An Albuquerque agency pays a nonexempt home-health aide $13.00 per hour for 160 hours a month, or $2,080, and the aide drives 800 business miles a month between client homes in her own car. Suppose her true all-in vehicle cost is 55 cents per mile, or $440 a month. If the agency reimburses 25 cents per mile, it pays $200 and leaves $240 unreimbursed. Her free-and-clear pay is $2,080 minus $240, or $1,840, which works out to $11.50 per hour, below New Mexico’s $12.00 minimum even though it comfortably clears the federal floor. The agency has a state wage violation hiding inside a policy that looked generous on paper. Notice how thin the cushion is: at $13.00 per hour, this aide can absorb only $160 of unreimbursed monthly expense, one dollar per hour, before the paycheck goes under. Employers of drivers earning near the minimum should treat every reimbursement rate cut as a wage-and-hour decision, not just a budget decision.

Is an Accountable Plan Cheaper Than Just Raising Pay?

Some employers respond by grossing up wages instead of running a mileage program. The tax math punishes that choice. Reimbursing that same aide’s 800 miles at the new 76-cent rate under an accountable plan costs the agency $608 a month, deductible and free of employment tax. Paying an extra $608 in wages instead triggers the employer’s 7.65 percent FICA share, about $46.51 a month or $558 a year per employee, plus unemployment tax and workers’ compensation premium effects, while the aide loses her own income and payroll tax on the money, so less of it actually covers her car. And the employee has no self-help remedy at tax time: unreimbursed employee business expenses are nondeductible miscellaneous itemized deductions under 26 U.S.C. § 67(g), a Tax Cuts and Jobs Act suspension that 2025 legislation made permanent. The accountable plan is the only structure that delivers a full dollar of car cost for a dollar of employer spend.

The mid-year change adds one wrinkle worth building into payroll now: 2026 is a two-rate year. Miles driven through June 30 substantiate at 72.5 cents; miles on or after July 1 substantiate at 76 cents. Expense systems must apply the rate based on the date the miles were driven, not the date the report was filed, and year-end totals for self-employed taxpayers using the standard mileage method must be split the same way. Sloppy date-handling turns safe-harbor reimbursements into partially taxable wages, and mileage logs are exactly the kind of contemporaneous documentation that decides examinations, a lesson the firm makes at length in its New Mexico gross receipts tax audit guide.

What Should a New Mexico Employer’s Policy Tune-Up Cover?

A defensible 2026 policy does a handful of things in plain language. It states the reimbursement rate and ties it to a rationale, whether the IRS safe harbor or a documented cost study for the vehicles and territory your employees actually drive; New Mexico’s long rural stretches and washboard county roads are not the national average the IRS rate reflects. It requires mileage logs with dates, distances, and business purpose submitted on a set cycle, and it recovers excess advances. It flags low-wage drivers for a workweek-level check so that reimbursement shortfalls never push effective pay below $12.00, or the higher Santa Fe-area floors. And it revisits the rate whenever the IRS moves mid-year, as it just did. None of that is burdensome compared to defending a collective action or a payroll tax exam after the fact.

Frequently Asked Questions

Does New Mexico law require employers to reimburse mileage?

No statute mandates mileage reimbursement in New Mexico, unlike California or Illinois. The exposure comes indirectly: unreimbursed vehicle costs can drive a nonexempt employee’s effective pay below the $12.00 state minimum under the free-and-clear principle, creating liability under the Minimum Wage Act and the FLSA.

Is paying the IRS rate a legal safe harbor against wage claims?

It is a tax substantiation safe harbor, not a wage-and-hour one. The Sixth Circuit in Parker rejected the IRS rate as a legal measure of drivers’ costs, and the Tenth Circuit, which covers New Mexico, has not ruled. Practically, reimbursing at the full rate makes a minimum-wage claim hard to build, but it is not an automatic defense.

Can we reimburse more than 76 cents per mile?

Yes, but amounts above the standard rate are taxable wages unless the employee substantiates actual expenses exceeding the rate. Employers with heavy-duty use cases sometimes run a fixed-and-variable-rate (FAVR) program instead, which the IRS also recognizes.

What records should employees submit?

Date, miles, origin and destination, and business purpose for each trip, submitted within a reasonable period, with any excess advances returned. Under an accountable plan, that substantiation is what keeps the reimbursement out of wages entirely.

How does the mid-year increase affect self-employed New Mexicans?

A Schedule C driver using the standard mileage method must split 2026 miles at July 1: the first half deducts at 72.5 cents and the second at 76 cents. A contemporaneous log that dates each trip makes the split trivial; a reconstructed log makes it an audit issue.

Do higher local minimum wages change the analysis?

Yes. The kickback test runs against the highest applicable minimum wage, so employers with drivers based in Santa Fe or Las Cruces must test reimbursement adequacy against those local floors, not just the $12.00 state rate.

How North Star Law Firm Can Help

North Star Law Firm brings an attorney-CPA’s perspective to problems that sit exactly where this one does, at the seam between payroll tax and employment exposure. The firm can review reimbursement policies against the accountable plan rules, model the FICA and minimum-wage math for a specific workforce, structure mileage programs that survive both an IRS exam and a wage claim, and defend employers when the government comes asking, through its tax law and IRS audit defense practices. New Mexico employers who want their mileage policy stress-tested before the two-rate 2026 year closes can contact the firm for a free consultation by phone or video.

Prime Inc., a refrigerated-freight giant, filed a federal refund suit against the government in Missouri this June, asking for more than $11 million of diesel excise tax back. None of the diesel at issue ever moved a truck an inch down the highway. It ran the refrigeration units mounted on Prime’s trailers, and Prime’s theory is that fuel burned in a reefer motor is a nontaxable off-highway business use, not taxable highway fuel. The IRS denied the company’s refund claims administratively, its Office of Appeals affirmed the denial in 2026, and the dispute is now in federal court.

You do not need ten thousand trailers for this fight to matter. The credit Prime is litigating belongs to any business that pays highway tax on diesel it burns for something other than propulsion, including the five-truck reefer outfit hauling milk out of the Clovis and Portales dairy corridor, the produce and green chile shippers moving loads from the Hatch and Mesilla Valleys up I-25, the long-haul operators running I-40 through Albuquerque and Gallup, and the Permian Basin service companies in Lea and Eddy Counties idling auxiliary power units all night at a well site. If any of that describes your operation, the practical question is simple: is your operation quietly overpaying a federal tax it is entitled to get back?

What Federal Tax Is Built Into Every Gallon of Reefer Diesel?

Federal law imposes an excise tax of 24.4 cents per gallon on undyed diesel under 26 U.S.C. § 4081, collected far upstream when fuel is removed at the terminal rack. Because the tax is baked into the pump price, everyone pays it by default, including businesses whose use of the fuel was never supposed to bear a highway tax at all. Congress addressed that mismatch on the back end. When taxed diesel is put to a nontaxable use, 26 U.S.C. § 6427(l) authorizes a payment (in practice, a refund) to the ultimate purchaser, and 26 U.S.C. § 34 converts unclaimed fuel tax into a credit against income tax. Of the 24.4 cents, 24.3 cents is generally recoverable; the 0.1-cent Leaking Underground Storage Tank component stays with the government.

When Does Reefer Fuel Count as Off-Highway Business Use?

The statutory hook is 26 U.S.C. § 6421(e)(2), which defines off-highway business use as fuel used in a trade or business other than as fuel in a registered highway vehicle. A trailer refrigeration unit runs on its own small diesel engine, and that engine turns a compressor — it never propels anything down a road. The Treasury’s own dual-use regulation, Treas. Reg. § 48.4041-7, says the tax does not apply to fuel used in a separate motor to operate special equipment, whether or not that equipment is mounted on the vehicle, and IRS Publication 510 lists off-highway business use as a standard nontaxable use.

The tank configuration matters enormously in practice. If the reefer draws from its own dedicated tank filled through its own purchases, the gallons speak for themselves. If reefer fuel is drawn from the same tank that feeds the tractor engine, the regulation still permits a claim, but only on a reasonable determination of the split based on the operator’s actual experience, supported by records. That single-tank allocation is where claims die. When gallons cannot be cleanly traced, the IRS’s reflex is to treat every one of them as propulsion fuel, properly taxed, end of discussion.

How Does a Small New Mexico Fleet Actually File for the Money?

There are two main routes, and they are not interchangeable. The slow, universal route is Form 4136, Credit for Federal Tax Paid on Fuels, filed with the annual income tax return; it converts the year’s nontaxable-use gallons into a credit under § 34, which is refundable even if it exceeds the tax on the return. The faster route is a quarterly refund claim on Schedule 1 of Form 8849, Nontaxable Use of Fuels, but it carries a threshold: the claim must total at least $750, either from a single quarter or by aggregating quarters of the same tax year for which no claim has yet been filed, and it must be filed by the end of the quarter following the last quarter included. Miss that window and the gallons are not lost; they simply wait for Form 4136 at year end. A protective refund claim for open years is a third tool worth discussing with a professional while the Prime litigation plays out, because it preserves your position without waiting for a court to rule.

How Do You Estimate Reefer Gallons That Will Survive an Audit?

Reefer burn is measurable, which is exactly why the IRS expects you to measure it. Modern units log engine hours, and burn rates typically run from under half a gallon to a bit more than a gallon per hour depending on the unit, the setpoint, and a July crossing of the high desert between Tucumcari and Albuquerque. Consider a five-truck refrigerated operation based in Las Cruces. Each reefer runs about 3,000 hours a year at an average of 0.8 gallons per hour, or 2,400 gallons per unit. Fleetwide that is 12,000 gallons of diesel burned entirely off-highway. At the recoverable 24.3 cents, the annual claim is $2,916, and because that exceeds $750 the fleet can file quarterly on Form 8849 instead of waiting for the annual return. Over three open years, the same operation is looking at roughly $8,700, before interest on refund claims.

The proof package matters as much as the math. A separate reefer fuel card, hour-meter readings captured at service intervals, per-unit fuel logs tied to receipts, and a written allocation method applied consistently will carry a claim through examination. This is the same discipline the firm preaches for state exams in its New Mexico gross receipts tax audit guide: contemporaneous records built before the claim, not reconstructed after the audit letter arrives.

How Many Years Back Can You Still Claim?

Refund claims live and die by 26 U.S.C. § 6511, which generally gives you three years from the date the return was filed (or two years from payment, if later) to claim a credit or refund. For a calendar-year operator, that typically means the last three filed years remain open, and every filing season quietly closes another one. An operator who has never claimed reefer gallons is not just missing this year’s credit; it is forfeiting a closed year’s credit annually. The lookback is also why acting now, rather than waiting a year or more for the Prime case to resolve, has real dollar consequences.

What Does the Prime Inc. Lawsuit Change for Small Operators?

Candidly, nothing yet, and honesty about that is important. The credit already exists in the statute and the regulations; Prime is not asking a court to invent it. What the suit reveals is that the IRS has been denying reefer-fuel claims even from a carrier that ran dedicated fuel cards for reefer purchases and kept that diesel in its own tanks, which tells you the agency will contest proof and legal theory alike. A Prime win would strengthen every pending claim by making agency denials harder to sustain. A loss, or a narrow win, would at least clarify what proof the agency insists on seeing. Either outcome argues for the same posture today: track the fuel properly, file for open years, and consider protective claims so that a favorable ruling reaches back as far as the statute allows. Any operator filing now should understand the claim may be examined, and should size the position accordingly.

Does a Federal Refund Change What You Owe New Mexico?

No, and conflating the two regimes is a common mistake. New Mexico imposes its own special fuel excise tax on diesel (NMSA 1978, § 7-16A-3, currently 21 cents per gallon) and, separately, a weight-distance tax on heavy vehicles computed on New Mexico miles under the Weight Distance Tax Act (NMSA 1978, §§ 7-15A-1 through 7-15A-16), reported alongside IFTA obligations for interstate fleets. The federal off-highway refund does not reduce either state levy, and claiming the federal credit does not automatically entitle you to any state relief. The point of the federal claim is narrower and cleaner: getting back a federal highway tax you never owed on gallons that never propelled a truck.

Frequently Asked Questions

Can an owner-operator claim the reefer fuel credit, or only fleets?

The claim belongs to the ultimate purchaser of the fuel. A single owner-operator who buys the diesel that goes into a leased or owned reefer unit can claim it, subject to the same documentation standards as a large fleet. If a carrier buys the fuel under its cards and bears the cost, the carrier is typically the proper claimant.

Does reefer fuel drawn from the tractor’s main tank ever qualify?

Yes. Treas. Reg. § 48.4041-7 allows a reasonable determination of the gallons consumed by the separate motor based on operating experience, but you must keep records supporting the allocation. A dedicated reefer tank and separate purchases make a far stronger claim.

How much is the credit actually worth per truck?

Roughly 24.3 cents per off-highway gallon. A reefer running 3,000 hours a year at 0.8 gallons per hour generates about $583 per unit annually, and higher-utilization long-haul units can generate more. Multiplied across a fleet and three open years, the numbers become meaningful.

Should I wait for the Prime Inc. case to be decided before filing?

Generally no. The credit exists today, the three-year window under § 6511 keeps closing on older periods, and protective claims can preserve open years while the litigation proceeds. The case’s outcome will affect how hard the IRS fights, not whether the statute provides the credit.

Will claiming fuel tax credits trigger an IRS audit?

Fuel credits draw real scrutiny because the IRS has seen abusive claims, so expect the possibility of examination and build the file first: separate fuel cards, hour-meter logs, and a written allocation method. A well-documented claim that is examined and allowed is money recovered; an undocumented claim invites penalties.

Do auxiliary power units on oilfield trucks qualify too?

The analysis is the same. Diesel burned in a separate APU motor to power equipment, climate control, or hotel loads rather than to propel the vehicle is a candidate for off-highway business use treatment, which matters for Permian and San Juan Basin service fleets that idle units for long site hours.

How North Star Law Firm Can Help

North Star Law Firm pairs legal judgment with CPA-level numbers work, which is exactly the combination fuel tax refund claims demand. The firm can quantify a fleet’s open-year exposure, build the documentation an examiner will expect, file quarterly and annual claims, pursue protective refund claims while the Prime litigation develops, and defend the position if the IRS pushes back, drawing on its tax law and IRS audit defense practices along with the full range of tax defense services. New Mexico operators who want to know what their reefer and APU gallons are worth can contact the firm for a free analysis by phone or video.