Category Archives: Tax News

IRS Audit Rates Continue to Increase for High Income Earners

Posted on by

Last week the IRS announced performance statistics for fiscal year 2011, which ran from October 1, 2010 through September 30, 2011.  The IRS collected $55.2 million from enforcement actions during that period.  IRS enforcement actions include audits, assessments, collection actions, appeals, and litigation.

The IRS also reported that the number of million dollar earners subject to audit increased for the third straight year.  Among those making more than $1 million, 1 in 8 faced an IRS audit during fiscal year 2011.  “We are looking more at taxpayers at these income levels because we find more issues there,” said IRS Deputy Commissioner Steve Miller.

The same might be said for the IRS’s approach to large corporations.  Corporations with assets in excess of $250 million also saw an increase in audit activity.  The audit rate for those business climbed to 27.6%.  Closely held corporations, specifically those electing under subchapter S of the Internal Revenue Code, also saw an increase in audit activity of 13% over 2010.

The impact of an IRS audit remains severe.  More than 80% of of those audited by the Internal Revenue Service paid additional taxes according to the most recent information available.

 

U.S. District Court: California Must Turn Over Real Estate Information to the IRS

Posted on by

The U.S. District Court for the Eastern District of California has issued an order allowing the Internal Revenue Service to serve a John Doe Summons on the California State Board of Equalization. A John Doe Summons is defined by Section 7609(f) of the Internal Revenue Code and is used by the IRS to gather information from a third party about a class or group of taxpayers suspected of not complying with the internal revenue laws. It is called a John Doe Summons because the IRS doesn’t know the specific names of the alleged violators but is seeking to identify them through the summons process. John Doe Summons have been used to implicate taxpayers in domestic and international tax-advantaged transactions with banks like Wachovia, HSBC and UBS.

In this particular matter, the Internal Revenue Service is seeking information about the transfer of real estate between family members for less than full value. The IRS believes that such transfers are being used to avoid Federal Gift Tax liabilities. The investigation is most likely to affect decedents who passed away in 2010 or before and whose final Federal Estate Tax Return has not yet been filed or is still subject to audit because the lifetime gift tax exclusion for those years was only $1 million. The lifetime exclusion for 2011 and 2012 is more a robust $5 million dollars. Nonetheless, a Federal Gift Tax Return, Form 709, is required in any year which a gift of more than $13,000 is made. Failure to file a gift tax return is subject to a Section 6651 penalty.

The IRS targeted the California State Board of Equalization because it receives records of all California real property transfers to ensure compliance with Proposition 13, the well known California voter initiative which limits annual property tax assessment increases. The judge found that the IRS satisfied the technical requirements to serve the summons and ordered enforcement. The California BOE likely will be turning over the records at the beginning of the new year and you can expect the IRS to start initiating examinations based on what it collects sometime on 2012.

Read the order and memorandum here:
In the Matter of the Tax Liabilities of John Does, No. 2:10-mc-00130-MCE-EFB, (E.D. CA, December 15, 2011)

Tax Court: Western Union/First Data Settles $2B Transfer Pricing Litigation

Posted on by

On December 15, 2011, Western Union announced that it entered into an agreement with the Internal Revenue Service to settle a long standing transfer pricing dispute with its former parent company, First Data Corporation. According to documents filed with the Securities Exchange Commission, Western Union and First Data agreed to a total of $1.18 billion in transfer pricing related adjustments. The total adjustment included the recognition of $885 million of additional income in 2003 related to First Data’s restructuring plan, which transferred certain intangible assets out of the United States, and additional adjustments between 2004 and 2011 to reach the $1.18 billion total. Penalties were dropped.

Western Union and First Data will make approximately $470 million in payments to satisfy the adjustments under the settlement agreement. Western Union also announced that it will eliminate its tax reserve related to the case and should record a one-time tax benefit of approximately $200 million in 2011.

In March 2009, First Data Corporation filed a petition in the United States Tax Court disputing a notice of deficiency alleging more than $2 billion of transfer pricing related adjustments and penalties. The matter was notable not only for the size of the proposed adjustment but also for several other procedural and tactical moves that took place over the course of the dispute.

While undergoing an examination of its 2003 reorganization and the transfer pricing planning that accompanied that transaction, First Data also was subject to a John Doe Summons in which the IRS sought the names of merchants who transferred money outside the United States using First Data’s services (more particularly Western Union’s services). First Data resisted the Summons but a U.S. District Court judge in Denver ruled that First Data had to turn over the requested information.

Shortly before First Data’s petition was filed in the Tax Court, the Chief Counsel of the IRS issued a Technical Advice Memorandum (TAM), TAM 200907024, which held that the transfer of a portion of a taxpayer’s global delivery business overseas was fully attributable to identifiable intangible assets under section 936(h)(3)(b) therefore gave rise to a deemed royalty under section 367(d). The facts of the TAM were distinctly similar to those of the First Data case and were widely believed be drawn from the First Data examination. Some speculated, appropriately so, that the TAM was part of the IRS’s larger litigation strategy.

Dallas Mavericks Owner on Taxes and Patriotism

Posted on by

The often outspoken, but unquestionably successful, businessman and owner of the NBA’s Dallas Mavericks, Mark Cuban shared his thoughts on making money (“a boatload of it”) and paying taxes (“lots of taxes”) on his blog a couple of months ago (Sept 19). In short, his take was that the most patriotic thing you could do was to make money, spend money, and pay your taxes.

He followed that post up a couple of weeks ago with his views on corporate taxation. The latter post provoked several comments and the front page of Mr. Cuban’s blog (in post strangely dated September 20) now offers a more detailed explanation of his ideas on the federal government, taxes and small businesses with a list of 10 things that the government should do.

It all makes for fun reading (at least for tax geeks like us) and is shared here for the point that tax policy (or at least strong ideas on tax policy) is increasingly becoming part of the national conversation. It also gives us a chance to post this cool photo of Dirk Nowitzki and Kobe Bryant which is at best tangentially related to anything else on this blog.

New York Raises Rates on Highest Earners

Posted on by

The New York State Legislature, following the lead of Governor Andrew Coumo, may have toppled the domino in the trend to tax higher income earners at higher rates. The two agreed to a measure to increase state income tax rates to 8.82% on those reporting more than $2 million of annual income. Read the New York Times coverage here.

High net worth individuals have been under increased scrutiny by the IRS since the rebranding and reorganization of the Large & Mid Sized Business examination division over a year ago into Large Business & International. Notably the new LB&I organization increased the IRS’s emphasis on the activities of high net worth taxpayers here and abroad. (See the “Wealth Squad” IDR we shared here a few months ago).

Now the talk of increasing rates on America’s highest earners that started with Warren Buffett and William Gates, Sr has found another advocate in the governor and lawmakers of the great state of New York. Whether this is an effect of the Occupy Wall Street movement, a budget necessity or a true compromise as suggested by members of both political parties in the New York General Assembly, the result is higher taxes for the wealthiest New Yorkers and most likely and increased scrutiny of how much they pay.

New York Times: Lauder Family Artfully Shelters Taxes

Posted on by

David Kocieniewski, a leading tax reporter for the New York Times, reports that Ronald S. Lauder and his family, heirs to the Estée Laduer fortune, employ a variety of strategies available only to the rich to reduce their tax liability. The article is interesting for covering certain high net worth strategies that have been investigated by the Internal Revenue Service in recent years, but I’m not sure if Mr. Kocieniewski doesn’t overreach a little bit in his discussion of Mr. Lauder’s father’s valuation case in the United States Tax Court. Mr. Kocieniewski writes:

“When Mr. Lauder’s father, Joseph, died in 1983, family members fought the I.R.S. for more than a decade to reduce their estate tax. The dispute involved a block of shares bequeathed to the family — the estate valued it at $29 million, while the I.R.S. placed it at $89.5 million. A panel of judges ultimately decided on $50 million, a decision that saved the estate more than $20 million in taxes.”

Presumably Mr. Kocieniewski is referring to Estate of Lauder v. Commissioner, T.C. Memo 1994-527 which was the third of three memorandum opinions written by Judge Hamblen on behalf of the Tax Court with regard to the Lauder case. It was this third opinion that focused on the valuation of Mr. Lauder’s estate.

Here’s the bone. The entire case, all three opinions, was about the proper valuation of Mr. Lauder’s estate. However, Mr. Kocieniewski writes that because Judge Hamblen determined the proper valuation of the estate was less than the IRS asserted the litigation “saved the estate more than $20 million in taxes.” Isn’t also possible that the IRS valuation was inflated, inaccurate or maybe simply incorrect? (It seems that Judge Hamblen felt as much.) In which case, Mr. Lauder’s estate didn’t “save” any taxes at all but rather paid the proper tax due.

Certainly valuation cases are complicated, and there were several procedural and substantive issues addressed in the Lauder litigation, but the implication that anyone who prevails in the face of a tax liability incorrectly asserted by the IRS is “saving” taxes seems a bit much.  Unfortunately, we cannot share the text of the Lauder estate opinions here without violating a copyright but if you have the tools to investigate them yourself the citations are: Estate of Lauder v. Commissioner, T.C. Memo 1992-736; Estate of Lauder v. Commissioner, T.C. Memo 1992-736; and the above-mentioned Estate of Lauder v. Commissioner, T.C. Memo 1994-527.

If you would like to read Mr. Kocieniewski’s article you can find it here.

Finally, a post script to Mr. Sheldon Cohen, whose comments in the article about the social value of certain tax benefits for benefactors of the arts are well taken.

Bloomberg Reports: IRS Examining Harvard

Posted on by

The IRS has another initiative underway to uncover taxpayers who may not have been closely examined before. Bloomberg Business reports that the Internal Revenue Service is reviewing more than 30 major colleges and universities for potential deficiencies in unrelated business income tax (UBIT). The focus of the government’s inquiries is on hotels and other properties which may be generating income subject to UBIT. The Bloomberg article emphasizes Harvard but also notes that Notre Dame, Purdue, the University of Texas at Austin, Texas A&M, the University of North Carolina, and the University of Georgia may also be under review.

Read the article here.

NLJ Reports: No Tax LL.M. Program for USC

Posted on by

In yet another diversion from our usual theme of reporting tax decisions, we take a minute to note that we may have reached critical mass for tax LL.M. programs. Dean Rasmussen suggests that USC abandoned its plan to open an LL.M. program in taxation because it would not improve potential students job prospects. While the value of an LL.M. in tax is open to debate, I do know of some tax firms that require it to join their practice and many that prefer it. It looks like folks in Los Angeles will have to look north or east to find a quality program.

Read the National Law Journal article here.

Department of Justice Trumpets Victories

Posted on by

The U.S. Department of Justice released a press release announcing victories in three tax cases on the same day. The press release characterizes all three cases as tax shelters. We will add all three cases, Southgate Master Fund LLC v. United States (5th Circuit), Pritired 1 LLC v. United States (S.D. Iowa), and WFC Holdings Corporation v. United States (D. Minn.) to the blog later this week.

Read the Department of Justice Press release here.