Tax Watch: ‘Global cartel’ takes the heat off tax havens

A self-styled grass-roots movement is warning that “a high-tax global cartel threatens American taxpayers, American privacy and American sovereignty.”

Reportedly, the movement is the work of a lobbyist with a home office in Virginia. And the ominous cartel? That turns out to be the 30-nation Organization for Economic Cooperation and Development, to which the United States belongs.

With U.S. support, the Paris-based organization for years has pushed for reforms in places where strict bank-secrecy laws and low or non-existent taxes allow rich people to hide their income from their own countries’ tax collectors, including the Internal Revenue Service.

Lately, that crackdown has shown signs of stalling. The OECD has pushed back to 2003 the earliest possible sanctions on its blacklist of shelter countries, it has stopped calling for those countries to charge foreigners the same taxes they charge their own citizens, and it faces a move to limit the proposed sharing of information about shelter accounts.

That slowdown in the OECD crackdown reflects the apparent willingness of the Bush administration to listen to the opposition’s arguments – including those of the grass-roots movement.

The IRS estimates that it loses $70 billion annually from Americans with offshore accounts. But opponents argue that the government must respect both its citizens’ privacy and the laws of overseas countries that legally shelter Americans’ income. Those opponents warn that a crackdown could devastate some of those countries.

Treasury Secretary Paul O’Neill insists that the United States remains committed to fighting tax evasion, but he has questioned whether the OECD should be goading other nations to change their tax laws.

Under U.S. pressure since President Bush took office, the OECD is no longer pushing offshore centers to charge foreign accounts the same taxes that they do their own citizens.

No audit needed

to impose penalty

The IRS has decided that it can impose an abusive-tax-shelter penalty against a bond lawyer who rendered false advice on government mortgage revenue bonds, even though the IRS didn’t pursue an audit to determine whether the bonds satisfied the tax rules. But the IRS can’t escape other burdens of proof.

A city issued mortgage revenue bonds to finance a moderate- to low-income housing project. The IRS began an audit but abandoned it after the city had redeemed all the bonds.

The IRS wanted to impose a Section 6700, “Promoting Abusive Tax Shelters,” penalty against the parties who marketed and sold the bonds, including the lawyer who advised the city on the excludability of the interest from the bondholders’ gross income.

The IRS concluded that it could pursue a Section 6700 penalty against the lawyer without conducting an audit. However, because the IRS has to prove its case, it must gather enough evidence to satisfy all of Section 6700.

Specifically, the IRS must establish whether the lawyer organized or participated in the bond sales, whether he made a statement regarding the taxation of the interest, whether the statement was false and whether he knew or had reason to know the statement was false.

Cite: Field Service Advice 200129011

Rental not a dodge

to avoid liability

The rental of two apartments above the garage of his residence by a former owner and CEO of a bankrupt trucking company did not trigger his personal liability for withdrawal from a multiemployer pension plan, because the apartment rental was not a “trade or business,” an appeals court has ruled.

During the 32 years that they owned the property, the Whites reported income and expenses from the apartment rental on their Form 1040, Schedule E (Supplemental Income and Loss).

The Whites’ trucking company turned out to be unsuccessful and went out of business in December 1992.

The pension fund, Central States, determined that the trucking company had completely withdrawn, and assessed its withdrawal liability at that time at about $7 million.

Almost six years after Central States settled with the Whites’ bankrupt trucking company for its withdrawal liability, it filed suit against the Whites, seeking to hold them personally responsible for the defunct company’s withdrawal liability.

Central States claimed that the Whites’ garage apartment rental constituted a trade or business that, along with the trucking company, was under the Whites’ common control. Central States contended that the Whites were personally liable for the payment, which had grown to more than $16 million.

A U.S. District Court agreed with Central States. After all, under the Employee Retirement Income Security Act, an employer who ceases to contribute to a multiemployer pension fund is subject to withdrawal liability.

Under Erisa, all employees of trades or businesses under common control are treated as employed by a single employer, and all such trades or businesses are treated as a single employer.

The appeals court decided that apartment rental activities were not a “trade or business.” Even though the trucking company and the Whites’ garage apartment rental activities were under common control, the Whites were not necessarily subject to the trucking company’s withdrawal liability, the appeals court said.

The appeals court decided that the Whites’ two apartments did not offend Congress’ purposes of preventing businesses from shirking their Erisa obligations through fractionalization of their assets.

Cite: Central States, Southwest and Southwest Areas Pension Fund v. White (2001, CA7) 2001 WL 818782

Dentist has no pull

on a tax credit

An intraoral camera system bought by a dentist is not eligible for a disabled-access tax credit even if it helps him communicate with his hearing-impaired patients, according to the U.S. Tax Court.

Under the tax rules, small businesses are entitled to a tax credit for expenditures to make a business accessible to disabled people.

Eligible expenditures include amounts paid for enabling the business to comply with the provisions of the Americans With Disabilities Act of 1990.

In addition to expenditures for removing physical barriers, the credit is available for providing interpreters or other methods of making usually spoken materials available to the hearing impaired or to provide qualified readers, taped texts and other methods of making normally visual materials available to the visually impaired.

The acquisition of the system, according to the IRS and the court, did not enable the dentist to comply with the ADA, because he was already in compliance with the ADA through the use of handwritten notes to communicate with his hearing-impaired patients.

Cite: Fan v. Commissioner, 117 T.C. No. 3, 7/24/01