Tax Watch: Ex-IRS counsel warns on shelter enforcement

A former Internal Revenue Service chief counsel warns that the agency could lose its war on tax shelters if enforcement becomes an overriding goal.

At a tax shelter conference sponsored by BNA Tax Management in Washington, B. John Williams said the continued implementation of specific audit strategies positions the IRS to strengthen compliance. “But it must be careful not to leave unmanaged the institutional tendency to focus on process over strategic results, to focus on increasing resources as a solution to every problem and to focus on enforcement over compliance,” he added.

Contempt citation in tax shelter case

* A federal judge recently issued a contempt citation against a Jamison, Mo., man who the government says promoted a tax avoidance scam. U.S. District Judge Gary A. Fenner found that Randall Brian Jarvis had violated an order barring him from continuing to promote the scheme.

According to the IRS, Mr. Jarvis promoted what appeared to be a variation of a common tax avoidance device – setting up trusts that, while appearing to separate control of the trust assets from the benefits of ownership, allow the taxpayer to retain control.

The government’s suit alleged that Mr. Jarvis had set up multiple trust and limited-liability companies for his clients. Bank accounts were opened in their names, and he allegedly instructed them to channel their income and their assets in the names of the trusts or LLCs.

Mr. Jarvis was named trustee, the suit alleged, and one of several Jarvis-associated entities claiming to be ministries was named beneficiary. The income and assets remained exclusively within the client’s control or were given to Mr. Jarvis, who deducted a fee as trustee and returned the rest to the client, according to the lawsuit.

In his contempt order, the judge imposed a fine of $500 a day and said he would order Mr. Jarvis to be incarcerated if he continued to defy the court. The fines reached $7,500.

The IRS has assessed more than $2 million in back taxes against the clients, at least one of whom has pleaded guilty to criminal charges.

Europe nudges U.S. on tax changes

* The European Commission has reminded the U.S. government that time is running out for Congress to repeal the Foreign Sales Corporation/Extraterritorial Income Act, which was ruled illegal by the World Trade Organization. The European Union is ready to impose retaliatory tariffs on $4 million in U.S. imports.

Earlier this year, the E.U. gave Congress until this fall to make progress in replacing the offending piece of legislation that provides subsidies for U.S. exporters. The E.U. has warned that should it deem that insufficient progress is being made in the U.S. legislation, it could impose punitive tariffs on a range of U.S. goods beginning Jan. 1.

U.S. lawmakers are considering a number of bills. The Senate Finance Committee marked up the so-called Jumpstart Our Business Strength (JOBS) Act on Oct. 1.

The JOBS bill would replace the Foreign Sales Corporation/Extraterritorial Income Act tax regime, which has been ruled as an impermissible export subsidy by the WTO. The law was implemented to help U.S. manufacturers compete with European manufacturers that don’t pay E.U. value-added taxes. The committee voted 19-2 for the bill, but some members said they will seek to amend parts of it when it comes before the full Senate.

Shelter registration constitutes return

* In a recently issued legal memorandum, the IRS advises that a tax shelter registration application, the fact of registration, the registration letter the IRS sends and the shelter’s registration number are return information under the Section 6103, “Tax Shelter Disclosure,” regulations.

The IRS notes that tax shelter registrants submit applications to the IRS at its Ogden, Utah, campus, and there are times when it would be advantageous for it to contact a person regarding the registration.

Similarly, individuals sometimes contact the IRS to obtain information relating to tax shelter registrations. Because a person required to register a tax shelter is subject to penalties for failing to register, the IRS concludes that information pertaining to a shelter’s registration is return information.

Thus, the IRS may disclose facts relating to a shelter’s registration only to the person who submitted the application. The fact that a shelter is organized as a partnership has no bearing on the person to whom the IRS may disclose information, the memorandum states.

Legal Memorandum 200336029