TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, October 6, 2005

Tax_news_roundup_14

New York Times:

      • Proposals to use tax breaks for rebuilding areas devastated by the recent hurricanes may provide only limited help to people and businesses that suffered actual losses, according to many economists. The biggest beneficiaries could turn out to be companies from outside the devastated areas that have big federal contracts to carry out cleanup and reconstruction work.
  • At the Very Top, a Surge in Income in '03 (David Cay Johnston) (10/5):
    • After falling for two years, the share of income going to the richest slice of Americans - the top tenth of 1% - grew significantly in 2003 while the share going to 99% of Americans fell, tax data released yesterday showed. At the same time, the effective income tax rates paid by the top tenth of 1% fell sharply, declining at more than 10 times the rate reduction for middle-class taxpayers, the new report, by the IRS, showed.
  • IRS Helps Companies Help Katrina Victims (10/5):
    • The government is making it easier for small companies and their employees to give to Hurricane Katrina victims, allowing businesses of any size to donate the value of employees' unused leave and vacation to Katrina-related charities
  • Yukos Loses an Appeal of Tax Case (10/5):
    • Yukos, the Russian oil company entangled in a long-running tax dispute with the Kremlin, lost an appellate court ruling Tuesday that opens the door to the possible seizure of assets, a company spokeswoman said. Yukos is already nearly broke after a losing streak in Russian courts that culminated with the loss of its largest production unit, Yuganskneftegaz, to tax authorities last year.
  • MCI Settles 17 Tax Claims (10/4):
    • MCI, the No. 2 long-distance telephone company, agreed to pay $331 million to settle claims that it underpaid taxes in 16 states and the District of Columbia.
  • KPMG Had Doubts About Its Tax Shelters, Memos Show (10/3):
    • Internal e-mail messages and memorandums that have emerged in two lawsuits brought by former clients against the accounting firm KPMG describe how former top executives in 2001 and 2002 doubted the legitimacy of two aggressive tax shelters sold by the firm.

Wall Street Journal:

    • The trial of nine defendants in the KPMG tax shelter case is due to get under way soon in New York. All nine -- eight former KPMG partners and one outside lawyer -- have pleaded not guilty, despite an admission of wrongdoing by the company and a pledge by KPMG to cooperate with the government. The closer we've looked at this case, however, the more troubling it seems as a matter of tax law and due process.
    • KPMG's cooperation with the feds was part of the price it paid to avoid a threatened indictment of the firm as a whole. As Arthur Andersen learned the hard way, that would have been a death sentence. KPMG has also agreed to cut its former partners off from financial support for their defense, forcing them to defend actions taken as KPMG employees on their own dime, or more accurately at $400 an hour.
    • This might be understandable if it were a case of a few bad actors selling tax shelters that they knew to be illegal, as much of the press coverage would lead one to believe. But the facts tell a different story. All indications are that the Justice Department has conducted this investigation in an unprecedentedly aggressive fashion, both in how it held KPMG's feet to the fire and in the way it is now prosecuting the nine defendants.
    • According to the U.S. Attorney's indictment, the IRS began investigating the shelters in 2001, and "listed" at least two of them on July 26, 2001 (although KPMG stopped marketing or selling the shelters in 1999 and 2000). "Listing" is an IRS practice that dates back to the 1980s. It is a kind of early warning system for taxpayers, putting them on notice that the IRS considers the shelter suspect and that those who employ it may be subject to challenge in a Tax Court.
    • Contrary to what has been reported in the media, however, the IRS does not "ban" tax shelters. Whether a shelter qualifies as a tax deduction is, like any other point of law, adjudicated in court. But BLIPS, FLIP, OPIS and the other tax shelters in this case have never been brought before a judge, so their legality and legitimacy has never been settled as a point of law.
    • Never. The way tax law has usually developed in this country is that the IRS issues its point of view on a shelter, putting taxpayers who use it on notice. If the IRS then takes the taxpayer to court over the shelter, he has the chance to respond before a judge, who makes a ruling and precedents are thus established. In this case, the IRS has called in the prosecutors first.
    • This in itself is striking. Despite some recent legal setbacks, the IRS has an excellent track record of obtaining favorable rulings on tax shelters it dislikes. Yet no taxpayer has been brought to court over these shelters, and no judge has ruled on whether they "work," in the jargon of the tax-shelter business. In America, last we checked, the accused are innocent until proven guilty. That gives this KPMG trial an Alice-in-Wonderland quality; the accused are on trial for promoting a fraudulent tax shelter that has never been proved to be fraudulent in the first place.
    • This is not the first time the Justice Department has taken this route, and recent history suggests it may have a tough road ahead. Last November, Justice froze $500 million in assets at Xelan, a charitable trust set up for doctors in California, alleging that the trust was a vehicle for tax fraud. Six weeks later, the Federal Court for the Southern District of California threw out the case, noting, among other shortcomings, that the prosecutors could not show that any court had ever ruled that Xelan's activities were illegal under the tax code.
    • As in the Xelan case, Justice has chosen in KPMG to go not after taxpayers, who under settled law are legally responsible for their own tax returns, but has instead targeted those offering shelters. And as in the Xelan case, the tax-reduction techniques in the KPMG partners' trial were never themselves brought before a court. The U.S. Attorney's office for the Southern District of New York did not respond to our requests for comment. But this pre-emptive prosecution may in part be the product of several recent IRS setbacks in Tax Court.
    • Nine months into 2005, U.S. companies have announced plans to repatriate about $206 billion in foreign profits under a special one-year tax break. But it's far from clear whether the spending has spurred the job growth that backers of the break touted. A law signed by President Bush shortly before the 2004 election allows companies to transfer profit from overseas operations back to the U.S. this year at a special low tax rate of 5.25%. Businesses often keep such funds outside the country in part to avoid paying taxes in the U.S., where the effective rate on repatriated profit for many companies is normally closer to 25%. Backers said the measure would provide an incentive to companies to invest those funds in U.S. operations. Most companies using the break have offered only broad outlines for how they intend to use their windfall. For the most part, they say they are using the bulk of the money for tasks such as paying down debt and meeting payrolls. Direct job creation rarely appears on the list.
  • An Estate Tax Forecast (Tom Herman) (10/2):
    • Even before Hurricanes Katrina and Rita, advocates of estate-tax repeal said they didn't think they had enough votes in the Senate to overcome a possible filibuster and win approval for legislation to kill what they call the "death" tax permanently. Now, with Congress focusing on hurricane-relief efforts, Iraq, Afghanistan and other major issues, the chances that the Senate will vote this year for permanent estate-tax repeal look very slim.

Washington Post:

  • Barry Had Been Warned on Taxes for 3 Years; Delinquency Notices Preceded IRS Criminal Probe, Officials Say (10/6):
    • The Internal Revenue Service launched a criminal investigation into Marion Barry's tax history after urging him for at least three years to file his tax returns, according to two officials familiar with the probe. The IRS sent delinquency notices to Barry, a D.C. Council member and former mayor, as early as 2002 and eventually assigned fraud investigators to the case, the officials said. The agency was focused on Barry's failure to file federal income tax returns since 1998 and decided early this year to refer the matter to the U.S. attorney's office, the officials said.
  • Marion Barry Is the Focus Of a Federal Tax Probe (10/5):
    • D.C. Council member and former mayor Marion Barry is under investigation for failing to file federal income tax returns and pay his taxes, according to two sources close to the probe. The sources said authorities have been in plea negotiations with Barry (D-Ward 8) to settle issues stemming from tax returns dating to 1998. The discussions follow an investigation by the Internal Revenue Service and the U.S. attorney's office in Washington, they said. It was not immediately clear how much money Barry could owe in taxes and potential penalties
  • Tribune Should Have Seen Bad News Coming (Allen Sloan) (10/4):
    • When Times Mirror did the 1998 deals that now haunt Tribune, they smelled so bad that I wrote a column predicting the Internal Revenue Service would try to knock them out.
  • IRS Reaches Agreement With Insurance Co. (10/3):
    • An insurance company that sold disability insurance to doctors and drew scrutiny from federal tax auditors has agreed to cease operation and return $500 million to participants, the Internal Revenue Service said Monday. Doctors Benefit Insurance Co., Ltd. of Barbados agreed to pay $2.34 million to the IRS but did not admit wrongdoing, according to an IRS statement. DBIC sold supplemental disability insurance policies to 2,800 U.S. doctors through Xelan, Inc., a now-bankrupt San Diego firm.
  • Taxes and Colorado's 'Apostate' (George Will) (10/2):
    • This autumn's angriest political controversy is reaching a roiling boil in Colorado. Conservatives, especially, are arguing, with their characteristic internecine fury, about whether a change in fiscal facts should cause Colorado to change its mind about a rule restricting government spending. Come November there will be a referendum on a temporary relaxation of the state's "taxpayer's bill of rights" -- TABOR. Adopted by referendum in 1992, it is the nation's most stringent limit on a state legislature's freedom to tax and spend. It says that spending in a given year cannot increase faster than population growth plus inflation; if both are 2 percent, spending can increase only 4 percent. Furthermore, revenue exceeding permissible spending must be rebated to taxpayers, who also must approve any tax increase. TABOR has been spectacularly successful.

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