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Friday August 22, 2014

Washington News

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Con Artists Posing as IRS Agents

Timothy Camus, Deputy Inspector General for Investigations at the Treasury Inspector General for Tax Administration, spoke on August 12 to the National Association of Tax Professionals in Orlando, Florida. He reported that over 1,100 taxpayers have been fleeced of $5.25 million by con artists claiming to represent the IRS.

The IRS is currently tracking over 91,000 reports of con artists who are impersonating IRS employees. Camus stated, “That has been and continues to be the number one issue for us. I have spoken to people about identity theft, and though it continues to be a big, big problem, I think this impersonation scheme has overtaken it, in terms of impacting a broad number of people with large dollar amounts.”

The prime method for these con artists is to use a series of telephone calls. On the initial call, the con artist claims that he or she has an IRS badge number and often can state the final four numbers of the victim’s Social Security number. These last four digits are frequently acquired through records from medical centers, clinics or nursing homes.

The con artist claims to be from the IRS and many individuals are persuaded that this is the case. He or she typically will threaten the victim. Because the IRS has power to seize assets, the victim is frequently intimidated. The con artist will also regularly threaten to take away the victim’s driver’s license or business license.

The first caller is often followed by a second caller. This person claims to be a sheriff or police officer and states that the victim is going to suffer loss of various assets if the tax bill is not paid immediately.

The collection method is through a prepaid debit card. The con artist threatens victims and then directs them to go to a local store to purchase a debit card. This card is then transferred to the con artist.

Camus sought to reassure the attendees by noting, “Victims who refuse to cooperate are threatened with deportation or loss of business or driver’s license. The one thing I can guarantee you all is that the IRS will not take anybody’s driver’s license for not paying your taxes.”

Editor’s Note: Individuals and their professional advisors are urged to take basic steps to protect their personal information. It’s also important when you are on the Internet to avoid suspicious web sites. If you receive unsolicited and suspicious emails, block the sender using the appropriate command in your email account.

CPAs, attorneys and other professional advisors should encourage clients to be aware of the importance of protecting personal data. If clients are contacted by a con artist, they should report that person to the IRS. If the taxpayer does owe taxes, then the IRS number is 800-829-1040. However, if no taxes are owed and the taxpayer believes that the caller is a con artist, then he or she should contact the Treasury Inspector General for Tax Administration at 800-366-4484.

Senator Wyden Preparing Anti-Inversion Bill


As the August Washington recess continues, Senate Finance Committee Chair Ron Wyden (D-OR) is conferring with Sen. Charles Schumer (D-NY) and Sen. Orrin Hatch (R-UT) on an anti-inversion bill. Senator Wyden urges prompt action to reduce the number of large corporations who are proceeding to invert or move their tax headquarters overseas. Wyden stated, “This issue demands a resolution in the near term, and I hope to have bipartisan legislation in place come September.”

There are ongoing discussions regarding the method for addressing inversions. Sen. Schumer is proposing a bill that would reduce from 50% to 25% the maximum amount that net interest paid to a related party can exceed adjusted taxable income.

The interest deduction method is referred to as “earnings stripping.” The deduction by the U.S. division of the overseas entity creates reduced taxable income and lower U.S. corporate tax. However, little or no tax is paid on the interest under the foreign nation tax rules.

Currently, any disallowed net interest is carried forward indefinitely. In addition to reducing the threshold limit from 50% to 25%, Schumer’s bill proposes a five year limit to the carry forward.

Walgreens Corporation reported last week that it did not plan to go forward with a proposed inversion. If Walgreens had inverted and transferred its tax headquarters to Switzerland, a report by Barclays Capital, Inc. stated that it could save $797 million in tax per year. Ninety-eight percent of these savings would be the result of earnings stripping.

Senator Hatch indicated that he is open to working toward finding a short-term solution. However, he stated that his cooperation is contingent upon taking steps toward comprehensive tax reform in 2015.

Editor’s Note: Sen. Wyden is pursuing a two-part plan. First, he hopes to pass a bill that reduces the incentive for corporations to pursue an inversion. Second, Wyden also recognizes that the majority of industrialized nations now have a corporate tax rate of approximately 25%. If the U.S. is to retain its large corporations, then it will be necessary to broaden the base and reduce the rate close to that number.

Cemetery Lots Charitable Tax Shelter Expires


In Michael J. McElroy et ux. v. Commissioner; T.C. Memo. 2014-163; Memo. 15253-11 (12 Aug 2014), the taxpayer invested in a Maryland partnership that purchased cemetery lots. The partnership planned to purchase lots, hold the lots for one year and then donate them to charity. The Tax Court determined that the IRS final partnership administrative adjustments (FPAAs) were timely and not barred under Sec. 6501(a) by a three year statute of limitations. The court also denied a Sec. 165 loss deduction because the charitable plan was never intended to be profitable.

Promoter Glen R. Johnson created three Maryland partnerships: Partnership Heritage Memorial Park Associates 1995-2, Heritage Memorial Park Associates 1995-3 and Heritage Memorial Park Associates 1995-4. Each general partnership was created in subsequent years. Over the three years, the partnerships acquired multiple cemetery lots with a cost of $95,639, $169,167 and $252,373. Approximately one year after acquisition, the partnerships donated each group of lots to charity and claimed charitable contribution deductions of $1,864,850, $2,936,700 and $5,282,050.

Unfortunately for the investors, the partnership did not in fact hold the lots for one full year before the charitable transfer. Therefore, under Sec. 170(e), the charitable deductions were limited to cost basis.

Taxpayer McElroy invested $37,500 in 1995, 1996 and 1997. Promoter Johnson claimed that the deductions would produce tax savings of $50,000 or more each year, thus generating more value in tax savings than the initial investment. Based on his share of the partnership deductions, McElroy reported charitable contributions of $135,127 in 1996, $143,899 in 1997 and $155,820 in 1998. Because of the 30% of AGI limitation on appreciated property gifts, $51,633 of the total deductions was carried forward and deducted in 1999.

The IRS audited the partnerships and issued timely FPAAs on March 31, 2000, April 11, 2001 and March 29, 2002. Promoter and tax partner Johnson was the subject of a criminal investigation. He was charged with conspiracy to defraud the United States by causing others to claim millions of dollars in false and fraudulent tax deductions for charitable contributions. Johnson plead guilty to that fraud charge on April 12, 2007.

On April 1, 2013, the court determined that the appropriate deductions for McElroy were $6,999 in 1996, $8,372 in 1997 and $7,520 in 1998.

Taxpayer McElroy made two claims in the present action. First, under Sec. 6501(a) the three year statute of limitations had run because promoter Johnson was under criminal investigation. Therefore, the FPAAs were not timely. The court noted that there was no exception for this circumstance.

Second, McElroy noted that under Sec. 165(a) a business loss is deductible. Since the partnership had no value, the taxpayer should qualify for a $37,500 loss deduction. However, the court observed that under Sec. 165(c)(2), a business enterprise must seek a profit in order for the deduction to qualify. Because planning to produce a charitable deduction is not a profit-seeking motive, the loss was not qualified.

Editor’s Note: Fraudulent charitable tax shelters such as this are the primary reason for the rather extensive appraisal rules and the penalties on appraisers for inappropriate valuations. In addition, when taxpayers who have been involved in fraudulent charitable plans appear before the court, they cannot expect to be treated with generosity by the Tax Court Judge.

Applicable Federal Rate of 2.2% for August -- Rev. Rul. 2014-19: 2014-32 IRB 1 (18 July 2014)


The IRS has announced the Applicable Federal Rate (AFR) for August of 2014. The AFR under Section 7520 for the month of August will be 2.2%. The rates for July of 2.2% or June of 2.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2014, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return. Federal rates are available by clicking here.

Published August 15, 2014

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