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May 23, 2011

IRS May Seek Gift Tax Returns from Donors to GOP Leaning 501(c)(4)s

The IRS confirmed May 13 that it is examining donations to one or more Section 501(c)(4) organizations to determine whether the donors should have paid the federal gift tax on the donations. The development has shocked some tax lawyers, who have been advising clients for decades that donations to 501(c)(4) "social welfare" groups—including those that get involved in political and issue-advocacy campaigns—routinely are not subject to the gift tax.

Stay tuned.  If the IRS takes the position that the donations are taxable gifts, there will surely be a battle that will spill into the Federal courts.  Donations to 501(c)(4)s are not characterized by the "disinterested generosity" that is required of a gift for transfer tax (estate and gift tax) purposes. 

Internal Revenue Code Section 501(c)(4) exempts from tax "civic leagues...operated exclusively for the promotion of social welfare...."  High profile Section 501(c)(4)s include Crossroads GPS, an organization that opposes President Obama's agenda and became a force as a fundraising juggernaut in the 2010 elections.  Others include Priorities USA; Americans For Tax Reform; and Americans For Prosperity, a group fronting special interests started by oil billionaire David Koch.  People For The American Way is a prominent left wing 501(c)(4).

May 02, 2011

Hard Rock Hotel Owner Beats IRS on Two Issues

Peter Morton, one of the cofounders of the Hard Rock Cafe chain, and the creator and developer of the Hard Rock brand, conducted his business through a number of S corporations.  He owned a Gulfstream III and decided to trade it--as an IRC Section 1031 tax-deferred exchange --for a Gulfstream IV.  The IRS was unhappy for two reasons.

First, the IRS felt that the G-III was not used as business property due to the amount of personal usage (flying Morton's friends and family).  Morton argued that, in determing whether it was used as business property, he could take into account the use by his S corporations.  The IRS objected.  The IRS said that, based on very important Supreme Court decisions--Deputy v. Du Pont (1940) and Moline Properties, Inc. v. Commissioner(1943)--a shareholder must be treated separately from his corporations.  The Court of Federal Claims held that while that might be true for C corporations, it is not true for S corporations, since an S is virtually the same as the individual shareholder. 

Second, the IRS seized upon a mistake by the escrow agent during the 1031 exchange: the escrow agent accidentally wired funds from the escrow account to one of Morton's S corporations.  That violated the 1031 rule that the taxpayer not benefit from the money held by the QI (qualified intermediary).  The IRS tried to disallow the 1031 exchange even though Morton immediately returned the funds.  The court held that Morton should not be penalized for someone else's mistake.  However, this shows a danger of a 1031 transaction: any mistake will lead to an IRS or FTB attack.

April 20, 2011

IRS Tries To Use California Property Tax Records To Catch Gift Tax Non-Filers

Clients ask tax lawyers and CPAs all the time: "But how will the IRS catch me?"  The tax advisers take great care to point out that our tax system is based on self-reporting, so, although we are not going to call the IRS on our own clients, the clients SHOULD have the proper returns prepared and filed.

This is especially difficult in the case of gift and estate tax returns.  In contrast with income tax returns, which the IRS expects to receive every year, the IRS does not send a warning letter if you fail to file an IRS Form 709 (gift tax return) or 706 (estate tax return).

Starting about two years ago IRS speakers, at professional seminars, told us that it was going to look into property tax records to find non-filers.  Since the IRS is busy with so many different initiatives, witness the large matter of the non-reporting of UBS accounts, and since the IRS is typically underfunded and understaffed, you can forgive us if we were skeptical of the possibility of the IRS going down to the L.A. County Recorder's office.

Well, in In re the tax liabilities of John Does, No. 2:10-mc-00130-MCE-EFB (E.D. Cal., Feb. 27, 2011), 59 DTR K-4 (March 28, 2011), the IRS has requested that a U.S. District Court grant a summons against the California State Board of Equalization to compel it to provide the IRS with the names of all individuals who have made gratuitous or nearly-gratuitous transfers of real property to family members in 2005 to 2010.  Perhaps the IRS now has the "people power" or fancy computer programs needed to find deeds that are ripe with the non-payment of gift tax.  For example, Joe and Kathy Jones transfer 50 percent of their interest in a 100 unit apartment building in Van Nuys to the Mike Jones, Trustee, of the J&K Jones Children's Trust.  If the IRS did not receive a Form 709 for that year describing that deed, then an audit should ensue.

So this IRS venture may generate some interesting audits and attractive revenue, and remind taxpayers of the benefit of self-reporting.  However, going forward, with a $5,000,000 per person gift tax exclusion, this initiative may be less fruitful. 

April 07, 2011

Mayo Foundation: Impact On Tax Practice

In response to the Blog Question: "What will be the impact of the U.S. Supreme Court decision of Mayo Foundation on tax law?  For instance, how will it change tax legislation, the regulatory process, tax return disclosures and regulation challenges?

Before getting to Mayo, we must recall that in Chevron v. Natural Resources Defense Council, Inc. (1984), the Supreme Court, in a non-tax case, stated a two part test:

Continue reading "Mayo Foundation: Impact On Tax Practice" »

July 13, 2009

Another BDO Seidman Partner Pleads Guilty

On July 9, 2009, former BDO Seidman partner Robert Greisman pleaded guilty to three counts of conspiracy to defraud the United States in connection with tax shelter transactions involving his firm and the law firm of Jenkens & Gilchrist. He admitted criminal responsibility for the tax shelter known as the "short option" transaction to one client, who was charged fees of approximately $513,000 by BDO Seidman and $230,000 by Jenkens & Gilchrist.

The indictment lists the following amounts as earned by the various defendants: Paul Daugerdas, $95,700,000; Erwin Mayer, $28,700,000; Donna Guerin, $17,500,000; Denis Field, $24,600,000; robert greisman, $4,200,000; Craig Brubaker, $3,300,000; David Parse, $6,000,000.

They were accused of fraud in 1) designing the tax shelters, 2) marketing the tax shelters, 3) the opinion letters, 4) backdating transactions, 5) creation of false transactional documents, 6) preparation of income tax returns, 7) the IRS audits and litigation, and 8) using the shelters to reduce the tax on the income they earned from selling the shelters to others. WSJ, Tax Girl.

July 09, 2009

House Committee Approves $12.1 Billion 2010 IRS Budget

On July 7, 2009, the House Appropriations Committee approved a $12.1 billion 2010 budget for the IRS. This represents a $527 million increase over the FY 2009 IRS budget. Seventy-three percent of the increase is allocated to tax enforcement, specifically the administration's initiative to target wealthy individuals and businesses who avoid U.S. taxes by parking money in overseas tax havens. However, taxpayer services would be funded at $19.2 million below the FY 2009 level.

May 26, 2009

Another Offshore Tax Fraud

The Internal Revenue Service is constantly on the lookout for structures that are marketed with this characteristic: a deduction up front, followed by tax free access to cash at the back end.  That is usually going to fall under the category of being "too good to be true."

There is a common example of how the Internal Revenue Code prevents that type of result. It starts with the fact that the receipt of the proceeds of a life insurance policy—the death benefit—by the beneficiaries is generally not subject to income tax. That is such an important tenet of the income tax laws that it is Internal Revenue Code Section 101. However, for that reason—the income-tax-free nature of the proceeds—it is almost impossible to deduct the premiums on a life insurance policy. See Internal Revenue Code Sections 264 and 265. There is one "sort-of" exception: life insurance owned by a tax qualified employee retirement plan. However, that is not really an exception, and it requires a lengthy explanation. Now, back to the "too good to be true" story.

There is another way you can deduct an insurance premium and get income tax-free proceeds. Your business buys a fire insurance policy. The premiums are deductible as a business expense. Your business burns down. The proceeds paid to you by the fire insurance carrier are income tax free. However, that's a tough way to get income tax free cash.

What about if you deducted an insurance premium, and then the insurance company loaned you all the money back? What if the loan was interest free?

On May 22, 2009, the U.S. Justice Department announced that Anthony Merlo has pleaded guilty to conspiracy to defraud the United States. United States v. Merlo, W.D. Mich., #1:07-cr-00239. Merlo and five others were indicted and charged with conspiring to defraud the United States by promoting, marketing, selling, and administering fraudulent tax shelters called loss-of-income insurance policies. He admitted that he tried to hide from the IRS the relationship between the front end deduction of the premiums paid for the policies and the back end loans to the insureds of most of the premiums paid.

May 14, 2009

Roth IRA Conversions: Plan Now for 2010 Opportunity

Roth IRAs are attractive for several reasons: (i) in exchange for the nondeductibility of the contributions, the withdrawals are tax-free; (ii) there are no "required minimum distributions"; (iii) you can participate in a Roth IRA even if you participate in an "employer plan."  By contrast: (i) distributions from "regular" IRAs are taxed; (ii) beneficiaries of regular IRAs generally must start receiving distributions after age 70-1/2; and (iii) participants in "employer plans" may only contribute to a regular IRA if they are within certain income ranges.

Most wealthy people cannot qualify to convert a regular IRA to a Roth IRA because there is a $100,000 limit on "modified adjusted gross income."  In 2010 that limit is eliminated.  Additional good news: the tax that is incurred on the conversion can be paid 1/2 in 2011 and 1/2 in 2012. 

Example: in 2010 you convert a $1,000,000 IRA to a Roth IRA.  Your $450,000 income tax bill can be paid 1/2 ($225,000) in 2011 and 1/2 ($225,000) in 2012. 

There are many reasons to consider converting your regular IRA to a Roth, especially in 2010 when the MAGI limit is eliminated.  For example, you may—unfortunately—have large losses which you can use to offset the income generated by the conversion, which losses might otherwise go to waste. If you have no other reasons, the benefit of having tax free distributions in the future—in a time of rising income tax rates—is itself enough of a reason to convert an existing IRA or an existing profit sharing plan to a Roth IRA.

May 13, 2009

Obama Administration's Estate Tax Proposals

The so-called Green Book (available on the Treasury website), titled "General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals," contains interesting material.

First, there has long been a "step-up in basis" at death.  The meaning of this can be explained with an example. Your mom bought a house for $100,000. At her death the house was worth $1,000,000. You sell it shortly after her death for $1,000,000. Your taxable gain is zero, because your basis is not her $100,000 basis but the $1,000,000 fair market value at her death. The Obama administration is proposing that the executor file a report with the IRS as to the fair market value of the property. That will allow the IRS to match the value reported for estate tax purposes with the basis used by the heirs. A similar obligation will be imposed on donor's as to inherited property (a donee must use the donor's basis). Happily the administration is not proposing to do away with the step-up in basis on these facts. 

Second, the administration proposes to eliminate some of the valuation discounts currently available for interests in family-controlled entities. This is similar to a proposal made in January by a member of the House of Representatives.

Third, the administration would impose a minimum 10-year term on grantor retained annuity trusts (GRATs). GRATs are typically used to transfer interests in S corporation stock, in family limited partnerships, and in publicly traded securities to heirs. A GRAT is only successful in transferring the assets if the donor survives the term. For that reason, most GRATs use terms of less than 10 years to minimize the risk of the donor's death. This proposal will not eliminate GRATs. Instead, it will increase the pressure on the parent to buy life insurance to handle the situations in which the parent dies prematurely.

No one knows what proposals will pass. Some of these will almost certainly be viewed as anti-family business. The three of them are projected to raise $736,000,000 in 2010 and $1.6 billion in 2011, amounts that are barely rounding errors in a $3 trillion budget.

May 11, 2009

Obama Proposes "Operation National Tax Defier"

A May 7, 2009, fact sheet describes how President Obama's fiscal year 2010 budget proposes giving $2.9 million to the U.S. Justice Department's Tax Division to fund "Operation National Tax Defier." The money would be spent for 13 attorneys and 5 staff positions, to increase the Justice Department's ability to bring tax collection suits against tax defiers.

Criminal prosecutors in the Tax Division and in U.S. attorneys' offices have resulted in guilty verdicts or pleas in more than 200 tax defier cases since 2001. The division has also obtained civil injunctions barring more than 90 tax defier promoters and return preparers from encouraging taxpayers to violate the law.

November 17, 2011

November 15, 2011

November 07, 2011

October 28, 2011

October 10, 2011

October 05, 2011

October 03, 2011

September 30, 2011

September 29, 2011

September 27, 2011


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