Friday, April 17, 2009
2008 IRS Enforcement Statistics
Interesting statistics on IRS enforcement activities in 2008. See the statistics.
Wednesday, April 15, 2009
Statistical Portrayal of CI Released
The Treasury Inspector for Tax Administration has issued the Statistical Portrayal of the Criminal Investigation Division’s Enforcement Activities for Fiscal Years 2000 Through 2008. This report presents the results of the Inspector's review of statistical information that reflects activities of the Criminal Investigation Division. The overall objective of this review was to provide statistical information and trend analyses for the Division’s enforcement activities for Fiscal Years (FY) 2000 through 2008.
Five-Year Anniversary of TaxProf Blog
Congratulations to TaxProf Blog on its fifth anniversity. This is one of the best and most interesting tax blogs that exist. This is the first place many tax practitioners go each day to get an update and we are one of them. See some interesting facts about TaxProf Blog. Paul Caron does an excellent job in publishing this blog.
Beware of IRS’ 2009 “Dirty Dozen” Tax Scams
The IRS has released what it is calling the "Dirty Dozen" or tax scams for 2009. As we all practice tax law there are more and more thing to consider. See IR-2009-41.
Monday, April 13, 2009
Tax Court Puts Another Nail in the Coffin of Helmer Tax Shelters
In New Phoenix Sunrise Corp., et. al. v. Commissioner, 132 T.C. No. 9 (4/9/09), the Tax Court rejected a Helmer tax shelter claim. In Helmer v. Commissioner, T.C. Memo. 1975-160, at the IRS's request, the Court held that contingent liabilities contributed to a partnership do not enter the basis reduction calculation. Taking Helmer at face (taking anything at face is often dangerous in the tax context), tax shelter promoters created many variations of a gambit that would permit a large artificial basis upon which to claim a large artificial loss. New Phoenix involved one of the variations (the so-called digital option), masterminded (if that is the right word) by the Daugerdas-Jenkins & Gilchrist team.
In beginning its discussion of his conclusions, the Tax Court moved quickly to the core point:
From that core observation, the result surely followed:
Not only did the Court disallow the loss, the Court also disallowed the attorneys fees the taxpayer incurred in undertaking the transaction. Then, piling at least penalty, if not insult, to the substantive injury, the Court made the following key points on penalties:
1. The 40% gross valuation / basis misstatement penalty applies, specifically rejecting the notion that, because the deductions were denied on the basis of lack of economic substance. In doing so, the Court distinguished and rejected Heasley v. Commissioner, 902 F.2d 380 (5th Cir. 1990). Any notion derived from Heasley and its progeny that this penalty does not apply is quickly losing ground in the circuits.
2. The 20% substantial understatement of tax penalty applies. The Court found that the position lacked substantial authority and that the transaction was a tax shelter. Returning to his opening theme, The Court quoted Jade Trading, LLC v. United States, 80 Fed. Cl. 11, 58 as follows: "At bottom, the fictional nature of the transaction and its lack of economic reality outweigh Helmer in the substantial authority assessment."
3. The 20% negligence and intentional disregard penalty applies. The taxpayer urged in effect that Helmer and its progeny were substantial authority, and that authority had not been eroded below reasonable basis. In so holding, the Court noted that the IRS had already issued a statement of its position in Notice 2000-44 on Helmer and the taxpayer did not seek independent advice.
4. The taxpayer did not have reasonable cause and good faith for all the obvious reasons and some special twists unique to the facts.
5. Important to the penalty holdings was Jenkins & Gilchrist's clear conflict of interest that the taxpayer simply chose to ignore, thus eroding the reasonableness of reliance of the tax shelter opinion.
6. These penalties may not be stacked. Accordingly, the 40% penalty applies to the portion of the underlying tax attributable to the basis overstatement, but 20% penalty (either substantial understatement or negligence) applies to the balance.
Altogether, given the shift in the winds and prior precedents, this is not an altogether surprising opinion. Players in this area should note that interest on these penalties apply from the date the tax is due, so the cumulative cost of the tax, the penalties and the interest can be quite substantial.
In beginning its discussion of his conclusions, the Tax Court moved quickly to the core point:
We note at the outset that neither Mr. Wray, New Phoenix, nor Capital actually
suffered a $10 million economic loss during 2001. The loss claimed as a result
of the stepped-up basis in the Cisco stock was purely fictional.
From that core observation, the result surely followed:
Absent the benefit of the claimed tax loss, there was nothing but a cash flow that was negative for all relevant periods -- the "'hallmark[] of an economic sham'" as the Court of Appeals for the Sixth Circuit has held. Dow Chem. Co. v. United States, 435 F.3d at 602 (quoting Am. Elec. Power Co. v. United States, 326 F.3d 737, 742 (6th Cir. 2003). Such a deal lacks economic substance. Id. Because we find that the transaction at issue lacked economic substance, we do not consider Mr. Wray's and Capital's profit motive in entering into the transaction. Id. at 605; Rose v. Commissioner, 868 F.2d at 853; Illes v. Commissioner, 982 F.2d at 165. Pursuant to the aforementioned cases, the BLISS transaction must be ignored for Federal income tax purposes. Accordingly, the overstated loss claimed as a result of the sale of the CISCO stock is disregarded, as is the flowthrough loss from Olentangy Partners.
Not only did the Court disallow the loss, the Court also disallowed the attorneys fees the taxpayer incurred in undertaking the transaction. Then, piling at least penalty, if not insult, to the substantive injury, the Court made the following key points on penalties:
1. The 40% gross valuation / basis misstatement penalty applies, specifically rejecting the notion that, because the deductions were denied on the basis of lack of economic substance. In doing so, the Court distinguished and rejected Heasley v. Commissioner, 902 F.2d 380 (5th Cir. 1990). Any notion derived from Heasley and its progeny that this penalty does not apply is quickly losing ground in the circuits.
2. The 20% substantial understatement of tax penalty applies. The Court found that the position lacked substantial authority and that the transaction was a tax shelter. Returning to his opening theme, The Court quoted Jade Trading, LLC v. United States, 80 Fed. Cl. 11, 58 as follows: "At bottom, the fictional nature of the transaction and its lack of economic reality outweigh Helmer in the substantial authority assessment."
3. The 20% negligence and intentional disregard penalty applies. The taxpayer urged in effect that Helmer and its progeny were substantial authority, and that authority had not been eroded below reasonable basis. In so holding, the Court noted that the IRS had already issued a statement of its position in Notice 2000-44 on Helmer and the taxpayer did not seek independent advice.
4. The taxpayer did not have reasonable cause and good faith for all the obvious reasons and some special twists unique to the facts.
5. Important to the penalty holdings was Jenkins & Gilchrist's clear conflict of interest that the taxpayer simply chose to ignore, thus eroding the reasonableness of reliance of the tax shelter opinion.
6. These penalties may not be stacked. Accordingly, the 40% penalty applies to the portion of the underlying tax attributable to the basis overstatement, but 20% penalty (either substantial understatement or negligence) applies to the balance.
Altogether, given the shift in the winds and prior precedents, this is not an altogether surprising opinion. Players in this area should note that interest on these penalties apply from the date the tax is due, so the cumulative cost of the tax, the penalties and the interest can be quite substantial.
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