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District Court upholds imposition of failure-to-deposit penalty despite full, timely tax deposits

Recently the District Court for the Western District of Kentucky upheld the imposition of a penalty under I.R.C. sec. 6656(a), which provides a penalty in the case of any failure to deposit a tax payment on the due date unless that failure is due to reasonable cause and not due to willful neglect. Commonwealth Bank and Trust Company v. United States, Civ. No. 3:13-CV-01204-CRS (July 3, 2014). At first glance, the ruling may seem peculiar in that it upholds the imposition of a failure-to-deposit penalty even though the taxpayer made full, timely payments to the IRS. However, the Treasury Regulations require that taxpayers who deposit more than $200,000 in taxes must use electronic funds transfer (EFT) to make deposits of these taxes. Treas. Reg. sec. 31.6302-1(h)(2)(ii).

ITIN Users Need Not Apply

The IRS has revised its plan to revoke Individual Tax Identification Numbers (ITINs) after five years of issuance based on the response from taxpayers and their representatives. Instead, beginning in 2016, the IRS will only retire those ITINs which have not been used on a federal income tax return for five consecutive years. For more information, read the IRS Press Release.

Tax-Exempt Status just got Easier

The IRS has created a new form to help small charitable organizations obtain 501(c)(3) tax-status. Instead of filing the 26-page Form 102, qualified organizations may use the IRS' new form, 1023-EZ, to complete the application. An estimated 70 percent of organizations seeking tax-exempt status will qualify for the streamlined approach, if gross receipts are $50,000 or less and assets do not exceed $250,000. For more information, read the IRS Press Release.

FTB Collects $1 Billion!

Six years ago, the FTB endeavored to implement a tax system modernization project, Enterprise Data to Revenue(EDR),to update existing systems that would allow the FTB to use data more efficiently and automate manual processes. The project has already doubled its projected revenue and is 10 months ahead of schedule.

Supreme Court rules on standards for evidentiary hearings in summons enforcement proceedings

Yesterday the Supreme Court issued an opinion in which it set forth standards for obtaining an evidentiary hearing in the context of a summons enforcement proceeding. Clarke v. U.S., No. 13-301 (June 19, 2014).

The threshold for the government to obtain summons enforcement in a U.S. district court is fairly low. In general, the government simply needs to meet the Powell factors: (1) that the investigation will be conducted pursuant to a legitimate purpose; (2) that the inquiry may be relevant to the purpose; (3) that the information sought is not already within the government's possession; and (4) that the administrative steps required by the Internal Revenue Code have been followed. U.S. v. Powell, 379 U.S. 48, 57-58 (1964).

Ninth Circuit affirms Tax Court judgment that OPIS tax shelter transaction lacked economic substance

On Friday, the Ninth Circuit Court of Appeals affirmed the Tax Court's decision to disallow a capital loss deduction on the ground that the underlying transaction lacked economic substance and was designed to create substantial capital losses. Reddam v. Commissioner, No. 12-72135 (9th Cir. Jun. 13, 2014).

The case involved the founder of DiTech, a home mortgage company that was sold to GMAC Mortgage. That sale generated $48,500,000 in capital gains, and the taxpayer entered into the Offshore Portfolio Investment Strategy ("OPIS") transaction marketed by KPMG in an attempt to offset those gains. On his 1999 tax return, the taxpayer claimed an offsetting loss of $50,200,000 related to the OPIS transaction, which involved a series of structured transactions designed to generate a large tax loss.

87-year old Florida man receives highest FBAR penalty for Swiss account.

A federal jury found that Carl Zwerner must pay more than $2 million for wilfully failing to file Reports of Foreign Bank and Financial Accounts (FBARs). In this case, the IRS sought a 50 percent penalty for each of the four years at issue, for a total of 200 percent in a civil case. Clearly, the punishment for not coming forward and reporting offshore accounts is pricey. In this case, the highest value of the account over the four years was approximately $1.55 million, but the total penalties for failing to file this report, which carries no tax, were approximately $2.24 million.

IRS issues first list of approved Foreign Financial Institutions that are in compliance with FATCA regulations.

As promised, the IRS has released the first list of financial institutions that have obtained their Global Intermediary Identification Numbers (GIINs) and have met the other requirements of FATCA. Taxpayers may now search financial institutions by name, country or GIIN to determine whether the financial institution is in compliance. This list will be updated by the IRS each month.

Tax Court rejects $10.7 million in transferee assessments proposed by the IRS

Last week the Tax Court issued an opinion involving proposed transferee liability assessments in excess of $10.7 million in which it rejected the IRS's proposed application of federal law to recast a transaction under the substance over form doctrine. Swords Trust v. Commissioner, 142 T.C. No. 19. The court held that the trusts were not liable as transferees under I.R.C. sec. 6901.

The initial liability had been incurred by a personal holding company, Davreyn Corporation, pursuant to an IRS income tax examination in which the IRS recharacterized a sale of stock to a sale of assets followed by a distribution to the corporation's shareholders. That recharacterization resulted in an increase of $13.4 million in long-term capital gain and a $4.6 income tax deficiency.

Credit Suisse Pleads Guilty

Swiss authorities have been working with the United States since 2009 to ensure its banks are no longer utilized as a haven for U.S. tax evasion. Swiss government officials and banks have continued to cooperate with the United States in uncovering illegal activities and changing business operations. Most recently, Credit Suisse pleaded guilty to a criminal charge for its role in assisting American's with tax evasion, resulting in an agreement to pay $2.6 billion in penalties but without a requirement to provide names of the U.S. clients who may have used the bank to hide money from the IRS.

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