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Monthly Archives: May 2012

Tax Delinquents May Have Passports Canceled & Be Questioned at Air & Sea Ports

May 31, 2012

Almost unnoticed, Congress is close to approving a law under which the Internal Revenue Service (IRS) will be able to revoke the passports of Americans who owe substantial unpaid taxes.
It would allow federal officials to revoke or deny passports to delinquent taxpayers who owe the Internal Revenue Service $50,000 or more.
The provision passed the Senate in February and is before the House now. Revenues it generates would be used to help fund a highway-transportation bill that extends provisions set to expire on June 30.
The measure comes on the heels of a 2011 Government Accountability Office study requested by Senate Finance Committee Chairman Max Baucus (D., Mont.) and then-ranking Republican member Charles Grassley (R., Iowa).
The GAO report found that for the year it studied—2008—the State Department issued passports to more than 224,000 citizens who owed about $6 billion in tax. Most of it was for individual income taxes, and nearly two-thirds was more than three years old. 
The report also gave details of 15 cases in which passport recipients owe lots of unpaid tax.
The biggest Tax Debtor owed $46.6 million and was part-owner of a professional sports team. Another owed nearly $40 million and had traveled to 10 foreign countries in the recent past. The report said that the IRS had filed tax liens against both individuals but large amounts of tax still were uncollected.
If a taxpayer has an outstanding tax debt but can't be found, the IRS can alert Homeland Security officials to question the person on his way into the U.S. Typically, they will ask where the person is going and for how long, so the IRS can get in touch, but they can't arrest a taxpayer.
Because of the potential for abuse, people should know what's allowed and what isn't.
If you have US Tax Problems, contact the Tax Lawyers at Marini & Associates, P.A. for a FREE Tax Consultation at www.TaxAid.us or www.TaxLaw.ms or Toll Free at 888-8TaxAid (888 882-9243).
For more on this story go to the WallStreet Journal.

Read more at: Tax Times blog

Fast Track Settlement – A Process for Prompt Resolution of Large Business and International Tax Issues

May 30, 2012

IRS has recently released Publication 4539, which provides taxpayers with an overview of the Fast Track Settlement (FTS) process. The pub includes information on who can use FTS, advantages to its use, and how a taxpayer can start the FTS process.

Corporate taxpayers under examination by IRS's Large Business and International Division (LB&I) can get an expedited resolution of their case while it is still within LB&I's jurisdiction by participating in IRS's FTS program. The FTS program, which is jointly administered by LB&I and IRS's Office of Appeals, gives LB&I personnel and taxpayers an opportunity to mediate their disputes with an Appeals Official acting as a neutral party.
According to IRS, use of FTS provides taxpayers with a way to resolve audit issues during the examination process in 120 days or less. FTS is a key part of IRS's initiative to reduce the amount of time that the examination and resolution processes take.

According to IRS Commissioner Douglas Shulman, 83% of cases accepted into FTS resulted in a resolution.

FTS is generally available for all cases within LB&I's Compliance jurisdiction and certain cases outside of LB&I's jurisdiction. According to IRS, it works best with a limited number of unagreed issues. FTS can also be used in conjunction with LB&I's Compliance Assurance Process (CAP), which allows participating large corporations to work collaboratively with an IRS team to identify and resolve potential tax issues before the tax return is filed each year.

FTS can be used to settle most factual and legal issues, listed transactions, appeals and compliance coordinated issues, and issues requiring hazards of litigation settlement (i.e., where IRS considers its odds of winning a case and factors this into its decision of whether to settle or go to trial).

However, FTS isn't available in situations involving issues that are designated for litigation (i.e., where IRS essentially wants to litigate an issue, generally to establish judicial precedent, and thus won't consider settling it absent a taxpayer's complete concession), issues for which the taxpayer has submitted a request for Competent Authority assistance, "whipsaw" issues, and issues that have been excluded from the FTS process by a Chief Counsel Notice or equivalent publication.

According to Pub 4539, the advantages of using FTS include:

  • Quick resolution (i.e., within 120 days) of audit issues;
  • One-page application;
  • Consideration of the hazards of litigation (which can be considered by appeals officers and IRS counsel, but not IRS examining agents);
  • Preventing the accrual of "hot" interest (i.e., the additional 2% interest imposed on large corporate underpayments under Code Sec. 6621(c));
  • Withdrawal from the process at any time; and
  • Retention of all traditional appeal rights (see below).

When it appears that there might be unagreed issues raised during a taxpayer's exam, the taxpayer and LB&I team manager should have an early discussion regarding the possible use of FTS. Before the Form 5701 (Notice of Proposed Adjustment) is issued, the taxpayer and LB&I team should first agree on all of the facts and circumstances, and exhaust LB&I resolution authority on the issues.

After a Form 5701 is issued, and IRS receives a written response from the taxpayer, either of the parties may suggest participation in the FTS program. If the other party agrees, they contact the LB&I FTS Coordinator or the Appeals FTS Program Manager to determine if FTS is appropriate.

Both parties must complete and execute an application for FTS. The Form 5701 and taxpayer's written response should both be included in the FTS application package to help the FTS Program manager understand the dispute and determine whether the issue is sufficiently developed to be resolved via FTS. If the issue isn't ready, the LB&I FTS Coordinator and Appeals FTS Program Manager will advise the parties on what additional development might improve the odds of acceptance into FTS, or suggest other Alternative Dispute Resolution processes.

Both the taxpayer and those that have the authority to represent the taxpayer must be present during FTS. A Form 2848, Power of Attorney and Declaration of Representative, can be used.

If the parties decide that a resolution cannot be reached, the case will be closed promptly. The taxpayer retains all traditional appeal rights if the case or issue isn't settled. The administrative file will be returned to LB&I without Appeals' notes, but any written documents disclosed by the taxpayer during the FTS process will become available to be used by LB&I in its determination.

After the taxpayer, LB&I, and the Appeals Official sign the FTS Session Report acknowledging a basis of settlement, the Appeals Official will draft the appropriate settlement document to reflect the parties' agreed treatment of the issue.

An alternative to FTS is the Early Referral to Appeals. According to Pub 4539, this option is best utilized relatively early in the examination process when there are one or more developed, unagreed issues, and there are other undeveloped examination issues. Here, the developed, unagreed issues are referred to Appeals, while the other issues continue to be developed in LB&I.

Read more at: Tax Times blog

Second Circuit Court of Appeals Reverses Stockbroker's Tax Evasion Conviction

May 25, 2012

The U.S. Court of Appeals for the Second Circuit reversed a New York stockbroker's conviction April 30 on charges of tax evasion for 1996 and 1997 due to insufficient evidence, and vacated her convictions for mail fraud and tax evasion for 1995 on the grounds the counts were improperly joined (UnitedStates v. Litwok, 2d Cir., No. 10-1985-cr, 4/30/12).

The taxpayer, Evelyn Litwok of East Hampton, operated a number of private equity companies from her home and, while she owed nearly $1.5 million in taxes for the years at issue, failed to file personal tax returns. The Second Circuit found there was insufficient evidence to prove that she engaged in an affirmative act relating to 1996 and 1997 and reversed her conviction.

Additionally, the court found the trial record shows no link between Litwok's alleged mail fraud by filing a false insurance claim and her failure to report income. The Second Circuit vacated her conviction on those counts and remanded the case to the U.S. District Court for the Eastern District of New York.

Had the evidence against Litwok been overwhelming on both counts, or had the District Court admitted the tax evasion evidence and the mail fraud evidence with appropriate limiting instructions to the jury, we may well have reached a different conclusion and deemed the error harmless. See id. at 100–01 (citing Lane, 474 U.S. at 450). But the evidence was certainly not overwhelming, and the District Court gave no such limiting instructions.

In summary, the misjoinder of Counts One and Two prejudicially affected the jury's deliberations on each of these counts. We therefore vacate the judgment of conviction as to these counts and remand to the District Court for further proceedings. Having found the evidence insufficient to sustain Litwok's convictions of tax evasion for 1996 and 1997, we need not address her arguments that these offenses were also misjoined with Count One.

For the foregoing reasons, we REVERSE the judgment of conviction for tax evasion for the years 1996 and 1997 (Counts Three and Four), VACATE the judgment of conviction as to the counts of mail fraud and tax evasion for the year 1995 (Counts One and Two), and REMAND to the District Court for further proceedings consistent with this opinion.

Read more at: Tax Times blog

Partnership dissolution before death caused assets to be included in estate at full value

May 25, 2012

Estate of Lois L. Lockett, TC Memo 2012-123

The Tax Court has found that a family limited partnership terminated under state law when one partner, an individual, became the entity's sole owner. As a result, the individual owned 100% of the former entity's assets at her death and they were taxable in her estate at full fair market value. The Court also determined that some transfers from the entity to the decedent's children were loans and others were gifts.

Background. The gift tax is imposed on the transfer of money or other property by gift. (Code Sec. 2501(a)) The gift tax applies whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. (Code Sec. 2511) The gift tax does not apply to a transfer for full and adequate consideration in money or money's worth. (Reg. § 25.2511-1(g)(1))

The gross estate of a decedent includes the value at the time of death of all her property, real or personal, tangible or intangible, wherever situated (Code Sec. 2031), including interests in property owned at death (Code Sec. 2033).

This case involved the estate of Lois L. Lockett (Mrs. Lockett), who died on Oct. 14, 2004. Her husband predeceased her and his will established a trust for her benefit (Trust A.) As part of her estate planning, in 2000, Mrs. Lockett participated in the creation of Mariposa Monarch, LLP, an Arizona limited liability limited partnership (Mariposa). A formal agreement for Mariposa was not signed, however, until 2002. The agreement named Mrs. Lockett's sons, Joseph and Robert, as general partners, and Mrs. Lockett, Joseph, Robert, and Trust A as limited partners. Soon after the agreement was signed, Mrs. Lockett and Trust A began funding the partnership. In May 2003, Trust A was terminated and Mrs. Lockett became the owner of Trust A's limited partnership interest in Mariposa.

In 2002, Mariposa made transfers to Joseph and Robert. In 2004, additional transfers were made to them and a transfer was made to a Meredith, a grandchild of Mrs. Lockett.

On the date of Mrs. Lockett's death, Mariposa held assets worth over $1 million. On its Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, the estate reported Mrs. Lockett as the 100% owner of Mariposa at her death. The estate valued Mrs. Lockett's 100% ownership interest in Mariposa at $667,000. The estate applied control and marketability discounts in determining the value of Mrs. Lockett's 100% ownership interest in Mariposa.

Subsequently, IRS issued two deficiency notices, taking inconsistent positions with respect to the transfers. One asserted that the transfers were gifts while the other said they were loans and the receivables for them were assets of the estate.

The Tax Court observed that the parties were in agreement that Mariposa transferred $335,000, $135,000, and $5,000 to Joseph, Robert, and Meredith, respectively. The only dispute was whether the transfers at issue were loans or gifts. The estate contended that the transfers were in form and substance loans. IRS countered that while they were in form loans, in substance, they were gifts. The Tax Court found as follows:

  • A $315,000 transfer to Joseph was a loan,
  • A $20,000 transfer was a gift,
  • A $135,000 transfer to Robert was a loan, and
  • A $5,000 transfer to Meredith was a gift.

IRS argued that Mariposa was not a valid partnership under state (Arizona) law because only Mrs. Lockett contributed assets to the partnership, and thus there was no association of two or more persons. It further argued that Mariposa was not a valid partnership under Arizona law because it did not operate a business for profit. The estate argued that a valid partnership was formed under Arizona law because the partnership was formed with two limited partners, Mrs. Lockett and Trust A, and two general partners, Robert and Joseph. The estate further argued that Mariposa operated a business for profit. The Tax Court found as follows:

  • Mariposa operated a business for profit.
  • Robert and Joseph at no time held interests in Mariposa.
  • Trust A contributed assets to Mariposa and was a limited partner.
  • There was an association of two persons to carry on as co-owners a business for profit in 2002-Trust A and Mrs. Lockett..
  • Trust A was terminated effective Dec. 31, 2002. As a result, Mrs. Lockett became the owner of Trust A's limited partnership interest in Mariposa. Since Trust A was the only other partner in Mariposa, upon termination of Trust A, Mrs. Lockett became the sole partner in Mariposa.
  • Arizona law provides that a partnership is dissolved and its business wound up upon the occurrence of an event agreed to in the partnership agreement resulting in the winding up of the partnership business. The Mariposa agreement provided Mariposa would be dissolved upon the acquisition by a partner of all the interests of the other partners. Therefore, Mrs. Lockett's acquisition of Trust A's limited partnership interest caused the dissolution of Mariposa under Arizona law.

Mrs. Lockett held a legal and beneficial interest in all the assets of Mariposa on the date of her death. As a result, the Tax Court held that 100% of the fair market value of those assets on Oct. 14, 2004, had to be included in her gross estate under Code Sec. 2031 and Code Sec. 2033. The parties agreed that the Mariposa assets were worth $1,106,841 on the date of Mrs. Lockett's death. Thus, the estate was liable for an estate tax deficiency that was to be determined under Tax Court rules.

Read more at: Tax Times blog

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