The
Treasury's 2003 Offensive
During
2002 the Internal Revenue Service mounted a
Tax Shelter Disclosure Initiative, which it
said was a success, leading to 621 disclosures
covering 947 tax returns, and involving more
than $16 billion in claimed losses and deductions.
The
initiative was aimed at corporate taxpayers
and wealthy individuals worried that tax shelters
which they were using might be illegal, but
afraid to come forward. In return for full disclosure
regarding the transactions and details of the
schemes, the IRS promised to waive accuracy-related
penalties which might apply to tax shelter and
other questionable items on a return at a rate
as high as 20%.
'Hundreds
of taxpayers came forward and took advantage
of this opportunity to voluntarily disclose
questionable tax transactions and submit the
names of abusive tax shelter promoters,' said
Larry Langdon, the IRS Commissioner of Large
and Mid-Size Business.
In
May, 2003, the US Treasury Department and Internal
Revenue Service released a final version of
their new rules designed to curb the promotion
and use of abusive tax shelters.
The
rules are intended to update earlier tax shelter
disclosure laws which were too narrow, and allowed
many tax shelter promoters to slip through the
net. However, concerns were expressed that they
will almost certainly lead to an additional
compliance burden for individual and corporate
taxpayers, who will likely be asked to disclose
details of perfectly legal arrangements.
According
to a Treasury statement, six categories of potential
tax avoidance transactions are covered. Taxpayers
will be required to disclose and promoters will
be require to maintain investor lists for six
categories of transactions:
-
Listed transactions (i.e., transaction that
have been specifically identified by the IRS
as tax avoidance transactions);
-
Transactions marketed under conditions of
confidentiality;
-
Transactions with contractual protection;
-
Transactions generating a tax loss exceeding
specified amounts;
-
Transactions resulting in a book-tax difference
exceeding $10 million; and
-
Transactions generating a tax credit when
the underlying asset is held for a brief period
of time.
The
US Treasury Department also issued new rules
covering professional conduct known as 'Circular
230'. This was circulated in draft in early
2003, and late in the year the Treasury confirmed
that the stiff draft rules would be put into
force. Assistant Treasury Secretary for tax
policy Pamela Olson explained: "We initially
thought we were going to be making a lot of
changes” to the draft proposals. "But
after reflecting on what we've seen in the last
couple of years, we don't think we should be
watering these down," added Olson. "We think
we should come out with a strong set of rules."
The
focus during 2003 was indeed very much on professionals
involved in setting up tax shelters, both in
terms of attacking them directly, and in terms
of trying to force them to disgorge details
of shelters they have set up for taxpayers,
although the IRS has had only mixed success
in this latter endeavour.
In
June the IRS issued a summons against a top
law firm, ordering it to disclose the names
of 600 wealthy clients that the agency alleged
were sold tax shelter schemes. Chicago federal
judge John W. Darrah approved a request by the
Revenue to issue the summons against Dallas-based
law firm Jenkens and Gilchrist on the grounds
that the firm had supposedly taken around $72
million in fees for tax shelter advice, according
to Justice Department papers. Jenkens and Gilchrist
declared that it had no intention of compromising
client confidentiality and would not divulge
details of any of the names contained in the
summons.
Then
in July a three-judge panel at the United States
Court of Appeals for the Seventh Circuit ruled
that accounting firm BDO Seidman must turn over
the names of investors in tax shelters to the
IRS. The court found that under the US tax code,
BDO is obliged to keep records on tax sheltering
arrangements, and to report to the IRS the indentities
of investors in such schemes. This, the panel
explained, means that investors in the tax shelters
did not have 'an expectation of confidentiality
in their communications with BDO,' as the accounting
firm had argued. And in October a federal court
ruled that the Chicago office of law firm, Sidley
Austin Brown & Wood must hand over information
about clients who have invested in 13 tax minimization
schemes since 1996. IRS Commissioner, Mark Everson
explained that: "Our actions show that we will
require attorneys who act as promoters to comply
with the law's requirement that they maintain
lists of investors for certain abusive transactions
and furnish those lists, upon request, to the
IRS."
On
the other hand, one of the IRS's most prominent
targets, KPMG, scored a success in October when
a specially appointed Master recommended to
a federal court that the company did not have
to hand over all the documents requested by
the IRS, according to a Wall Street Journal
report. The IRS was seeking to enforce 25 summonses
that it had sent to KPMG demanding tax sheltering
documentation. The firm had handed over hundreds
of boxes of paperwork, but had also withheld
many documents, arguing that to lay them open
to scrutiny would be to breach client privilege.
Consequently, in December 2002, the Washington
DC federal court appointed retired US Magistrate
Judge Patrick Attridge to appraise KPMG's claim
and examine the documents in question. In his
judgement delivered on October 8, Judge Attridge
ruled that whilst KPMG must hand over some of
the documents, those that contained material
covered by client-attorney privilege may be
retained by the firm.
Congress
was also been playing its part in the tax-shelter
crack-down in 2003. In December, Charles Grassley,
Chairman of the influential Senate Finance Committee,
announced that he wanted to accelerate legislation
that would crack down on so-called LILO (lease
in, lease out) tax shelters which had become
a popular tax saving vehicle with many corporations.
Under the leasing schemes, municipalities are
paid an up-front accommodation fee to lease
their infrastructure to a corporation. Grassley
says that the cash received by the municipality,
however, pales in comparison to the federal
tax benefits received by the corporations, which
are able to depreciate taxpayer-funded bridges,
subways, and rail systems as a result of the
lease. "The shelter promoters are hiding behind
the cities and are sending them to Capitol Hill
to talk about what an important source of funding
this is. This has nothing to do with a ‘public-private'
partnership. This is just good, old-fashioned
tax fraud," Grassley announced in a statement.
Hearings into tax sheltering held by the Senate
Permanent Subcommittee on Investigations in
November, 2003, also gained a lot of publicity,
although they did not lead to much legislation
since they were organised largely by Democrat
senators. The Senate subcommittee came to the
following conclusions: "First, the investigation
has found that the tax shelter industry is no
longer focused primarily on providing individualized
tax advice to persons who initiate contact with
a tax advisor. Instead, the industry focus has
expanded to developing a steady supply of generic
“tax products” that can be aggressively marketed
to multiple clients. In short, the tax shelter
industry has moved from providing one-on-one
tax advice in response to tax inquiries to also
initiating, designing, and mass marketing tax
shelter products."
"Secondly,
the investigation has found that numerous respected
members of the American business community are
now heavily involved in the development, marketing,
and implementation of generic tax products whose
objective is not to achieve a business or economic
purpose, but to reduce or eliminate a client’s
US tax liability. Dubious tax shelter sales
are no longer the province of shady, fly-by-night
companies with limited resources. They are now
big business, assigned to talented professionals
at the top of their fields and able to draw
upon the vast resources and reputations of the
country’s largest accounting firms, law firms,
investment advisory firms, and banks." Well,
what a surprise!
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