Tax Watch: Court lets sun shine on tax shelter investors

A U.S. District Court in North Carolina recently denied injunctive relief to tax shelter investors seeking to prevent a bank from turning over investor lists. The court ruled that the law firm that promoted the shelter lacked an attorney-client relationship with the shelter investors.

This ruling is significant in light of the IRS’ recent “John Doe” summons to Jenkens & Gilchrist, the same law firm at issue in the North Carolina situation, to get the names of the people that invested in listed transactions devised and sold by that law firm.

In the North Carolina suit, the government is not a party to the proceedings. Rather, the defendant is Wachovia Bank NA of Charlotte, N.C., formerly First Union National Bank. The taxpayer-investors are the bank’s unnamed clients, who bought the confidential tax strategies devised by Dallas-based Jenkens & Gilchrist.

The Internal Revenue Service served an administrative summons on Wachovia in April 2003 for information on potentially abusive tax shelters, including investor lists.

After Wachovia determined compliance was necessary, two John Doe plaintiffs filed a motion for a temporary restraining order to prevent the bank from turning over their names.

Three John and Jane Doe couples intervened in the action. The IRS agreed to let Wachovia postpone compliance with the administrative summons.

Income tax? What income tax?

* A man who has been a longtime thorn in the side of the IRS has been told by a federal judge to stop selling a book that contends income taxes are voluntary, and people can escape them merely by filing returns listing no income.

The injunction was sought by the Department of Justice on behalf of the IRS, which has reportedly received more than 5,000 zero-tax returns filed by the author’s clients.

Judge Lloyd D. George of the U.S. District Court for the District of Nevada in Las Vegas ruled that the $38 book was central to a tax evasion scheme sold by Irwin Schiff, who has been convicted of tax crimes.

The judge barred Mr. Schiff and two associates from giving tax advice, preparing tax returns and selling Mr. Schiff’s book, “The Federal Mafia: How the Federal Government Illegally Imposes and Unlawfully Collects Federal Income Taxes.”

“The First Amendment does not shield criminal conduct in tax schemes,” the judge ruled. In fact, the record shows two criminal tax prosecutions of Mr. Schiff, which resulted in prison sentences, establishing, in the court’s mind, that his tax advice was inaccurate.

In addition to many Schiff clients who have lost civil cases after following his tax advice, a California chiropractor was sent to prison in 1999 for filing returns that listed no income.

The American Civil Liberties Union, the American Booksellers Association, the American Publishers Association, the American Library Association and PEN, a writers’ group, have opposed any restriction on sales of the book, arguing that that would be a violation of the First Amendment guarantees of free speech.

Accountant loses a tricky game

* A U.S. District Court recently granted the government’s motion for summary judgment in a certified public accountant’s suit for unauthorized disclosure because he had presented no evidence that the IRS had made any improper disclosure about him or improper inspections of his returns.

The Department of the Treasury’s inspector general for tax administration received a complaint that D. William Wewee, a CPA, had contacted taxpayers and told them the IRS had wrongfully disclosed their tax information, and that he would sue the IRS for them. His contact letter said he would bring suit for 20% of the recovery.

The inspector general investigated Mr. Wewee for devising a scheme to defraud by deceiving the IRS into making improper disclosures, then using the information to file frivolous suits.

The IRS’ agent, Bruce Mason, contacted nine individuals for whom Mr. Wewee had submitted record requests, and Mr. Mason testified that he hadn’t told them he was conducting a criminal investigation.

Mr. Wewee claimed that Mr. Mason and others had accessed the records without authorization.

The government claimed that the access to the records had been necessary for the employees’ official duties.

Senior U.S. District Judge William D. Browning ruled that Mr. Wewee’s evidence didn’t address whether Mr. Mason had made any disclosure concerning Mr. Wewee’s clients about a criminal investigation, so there wasn’t enough evidence for the claim to proceed.

As to the claim that records of Mr. Wewee and his clients were accessed without authorization, the court said that nine of the accesses were due to Mr. Wewee’s freedom-of-information requests, and the remaining were by IRS employees whose official duties would permit them to inspect records.

Because Mr. Wewee offered no evidence that these accesses had been unauthorized, the claim of unauthorized access failed.

Cite: D. William Wewee, et al., v. United States, D. Ariz.

A reprieve

* The IRS recently stopped its Schedule K-1 document-matching program after receiving complaints that the program im- posed a burden on compliant taxpayers.

Originally, the IRS intended to focus the program on two categories of income – interest and dividends – wherein matching was straightforward, and therefore the number of notices sent to compliant taxpayers could be minimized.

However, according to the General Accounting Office, the IRS changed the matching program to cover additional categories of flow-through income without clearly informing taxpayers and tax preparers. Matching these additional categories of income was less straightforward.

As a result, the IRS sent notices about suspected non-compliance to larger numbers of compliant taxpayers than it had intended. In fact, about two-thirds of the notices were sent to taxpayers later determined to be compliant.

After receiving complaints, the IRS stopped the notices – which already had been sent to 70% of those designated to receive them.

According to the GAO, the IRS has assessed about $41.4 million in additional tax from the notices that were sent, and about $26.9 million was directly attributable to Schedule K-1 underreporting.