Tax Watch: Psst! Want to lease the Brooklyn Bridge?

Recent Senate Finance Committee hearings targeting sellers and promoters of illegal tax shelters demonstrated that tax shelter schemes are thriving despite increased government enforcement. Those hearings also exposed a form of tax shelter that is attracting increased attention.

A former leasing company executive – who testified with his identity hidden for fear of retaliation – explained how tax shelter architects use the leasing of roads, subways, bridges and other public-service systems in Europe and the United States to shelter billions of dollars from U.S. taxes.

“It seems nothing is safe from the illicit tax shelter promoter,” said Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee.

“Roads and bridges built with tax dollars are leased out to shelter promoters so major corporations can get a phony tax deduction,” he said. “Even the subway system of Washington, D.C., our nation’s capital, has been leased as part of a shelter scheme.”

To shut down such illegal tax shelters, Mr. Grassley has introduced a bipartisan bill that would impose “a mandatory disclosure regime” so that the Internal Revenue Service would have more information about questionable transactions and could distinguish between legal tax transactions and illicit tax shelters.

“The promoters of illicit tax shelters are infinitely creative,” he said. “So far, Congress hasn’t written the laws fast enough to shut them down.”

Yes, the IRS wants to give you money

* The IRS is seeking the owners of 115,744 undeliverable checks from this summer’s advance child tax credit. These checks, worth more than $50 million, are among nearly 24 million checks issued this summer and fall for the credit. In all, more than $14 billion in child credit checks have been issued.

Time is running out to get an advance child credit check, IRS Commissioner Mark W. Everson reminded taxpayers. “We encourage taxpayers to visit irs.gov to see if they have an undelivered check from the advance child tax credit mail-out.”

After Dec. 5, taxpayers can’t claim the child tax credit checks until after they file their tax returns in 2004.

Another 92,810 “regular” checks issued to refund tax overpayments were also returned. These “regular” refund checks total more than $66 million, an average of $722 a check.

Governors troubled by Internet tax ban

* Although the National Governors Association has expressed support for a permanent ban on Internet-access taxes, the association is calling for a temporary moratorium to allow time for ambiguities in the legislation to be ironed out.

Congress has been working on a bill to ban taxes on Internet access permanently. Some state and local governments have objected, arguing that language in the legislation could unintentionally exempt telecommunications firms from all taxes as they deliver rising volumes of services through the net. The association calls this language “overly broad.”

“Not only would this new language exempt certain telecommunications services, but it would expand the pre-emption beyond sales taxes to include some income, property and other business taxes on this industry,” the Washington-based association recently wrote in a letter to Senate leaders.

“This ambiguity will only add to uncertainty for industry and consumers, encourage litigation and unnecessarily expose state and local governments to unanticipated revenue losses they cannot afford,” the governors wrote in the letter.

“With little time to negotiate an appropriate definition of `Internet access,’ we encourage you to support a simple, temporary extension of current law to allow Congress, industry, and state and local governments time to fashion a permanent moratorium that is thoughtful and fair.”

Bermuda: Report is short on facts

* The government of Bermuda recently denied a report in The Barbados Advocate that alleged the island had been placed on a four-country blacklist by the U.S. Department of the Treasury because its treaty with the United States is unsatisfactory.

The article reportedly stated that the list of countries the U.S. government considered in need of revising their tax treaties with the United States included Bermuda, Barbados, the Netherlands Antilles and Russia.

“Almost everything in the article is wrong,” said Donald Scott, financial secretary at the Ministry of Finance. He added that Bermuda wasn’t on the purported blacklist, as the jurisdiction doesn’t have a comprehensive double-taxation treaty with the United States.

According to Mr. Scott, the confusion arose when the Treasury Department issued a notice stipulating that American taxpayers holding stock in foreign companies could qualify for the new 15% rate on dividends only if that country was included in the U.S. double-taxation network.

“What the Treasury notice says is that you must have a full tax treaty to qualify as a U.S. taxpayer for the 15% capital gains rate on dividends received from a foreign country, and it lists the countries that have full treaties,” he said.

A cattle breeder wins on deductions

* The U.S. Tax Court recently held that a doctor’s cattle-breeding activity was for profit. The court allowed the claimed losses, though it sustained the IRS’ imposition of a late-filing penalty for one year.

George and Barbara Burrus filed joint tax returns for 1990 through 1995. In 1978, George Burrus, a doctor, entered into a partnership, the Foreman-Burrus Hereford Ranch, to breed cattle.

In 1980, the partnership bought 505 acres in Tennessee. The operation ran at a loss for several years, Dr. Burrus reduced his share of the profits and losses, and the business was terminated in 1989.

He retained his half interest in the land and bought out his partner’s interest in it. In 1990, he began a new cattle operation on the Tennessee property. The IRS issued the Burruses a deficiency notice that determined that the cattle activity wasn’t for profit, disallowed the losses and said the couple was liable for filing their 1990 return late.

Tax Court Judge Joseph H. Gale concluded that because the couple’s income from the farming hadn’t exceeded the deductions attributable to it, the farming activity must be treated as separate from the holding of the land. The judge said that Dr. Burrus had managed the cattle activity in a businesslike fashion, indicating an intent to make a profit.

The court also found that Dr. Burrus’ knowledge of the activity, the time spent engaged in it and the expectation of herd appreciation also indicated a profit motive.

The court found that the cattle activity had grown during the first six years and that the couple intended to profit from it. The judge reversed the IRS disallowance of the losses from the activity but sustained the penalty for the late return.

Cite: George R. Burrus, et ux., v. Commissioner, T.C. Memo 2003-285

Black & Decker wins in privilege ruling

* A U.S. District Court denied the government’s request to compel discovery of 63 documents, concluding that 53 of them were excludable as opinion work product and the other 10 as work product for which the privilege hasn’t been waived.

In 1998, Black & Decker Corp. in Towson, Md., began establishing D&D Health Care Management Inc. to manage the health-care benefits for its domestic employees and retirees, and its Canadian retirees.

To form the entity, Black & Decker and its affiliates exchanged money, stock and liabilities with D&D. The former claimed a large capital loss and a federal tax refund of $57 million for 1995 through 2000.

Black & Decker filed for the refund and, after waiting six months, brought suit.

During discovery, the government sought documents about the transaction from Black & Decker and from its auditor, Deloitte & Touche LLP of New York. Black & Decker refused to produce all the documents, including those between its in-house lawyers and the auditors.

U.S. Magistrate Judge Beth P. Gesner reviewed the documents in camera and noted that Black & Decker had provided Deloitte & Touche’s long opinion and short opinion, but had argued that they were protected by the attorney-client privilege because they supported the manufacturer’s in-house lawyers in preparing legal advice about D&D Health Care Management.

The court noted that several factors must be considered in determining if derivative privilege should apply, and those factors didn’t compel a clear conclusion that D&D was needed to help the communications between B&D and its lawyer. The court concluded that the derivative privilege protection wasn’t applicable to these documents.

The magistrate judge noted that the law recognizes that the work-product doctrine may be waived if the information has been placed at issue by the privilege holder. The court found that the work-product doctrine is “more robust” than the attorney-client privilege and harder to waive accidentally.

The court said the waiver usually won’t extend to opinion work products and that this case didn’t warrant the extraordinary findings of waiver. The court said that the 53 work-product documents weren’t subject to disclosure. The other 10 were also protected by the work-product doctrine, and privilege wasn’t waived.

The court denied the government’s motion to compel.

Cite: Black & Decker Corp. v. United States, D-Md.