Tax Watch: The ‘Wall Street rule’ isn’t a rule of law, the IRS insists

The so-called Wall Street rule is a concept commonly used in the securities market and often discussed as federal tax policy. According to Emily Parker, the acting chief counsel of the Internal Revenue Service, however, the “rule” isn’t “an acceptable principle and is not required by good tax policy or good tax administration.”

Speaking at a recent IRS financial services conference sponsored by the Tax Executives Institute Inc. in Washington, she tried to erase the myth associated with the Wall Street rule and the tax treatment of certain issues and transactions.

According to Ms. Parker, there are two accepted versions of the Wall Street rule in the tax world: The IRS can’t attack the tax treatment of a transaction if there is a long-standing and generally accepted understanding of this expected tax treatment, and the IRS is deemed to have acquiesced in the tax treatment of a transaction if the dollar amount involved is of a “significant magnitude.”

She clarified that as a legal matter, there is no such thing as a Wall Street rule. Taxpayers can’t rely on it, as it isn’t equitably or legally binding to the IRS.

“The failure of the IRS to issue published guidance on a transaction, and even the failure of the IRS to raise issues regarding a transaction in audit for many years, does not prevent the IRS from questioning the tax treatment of the transaction,” Ms. Parker said.

Fight continues against tax dodges

* Sen. Max Baucus, D-Mont., ranking minority member of the Senate Finance Committee, recently commented on the IRS’ announcement of a new partnership between the agency and the states to combat abusive tax-avoidance transactions.

“Abusive tax-avoidance transactions jeopardize the integrity of our voluntary tax system and annually deprive federal and state treasuries of billions of dollars,” Mr. Baucus said. “This simply is unfair to those honest taxpayers paying their fair share.”

At the grass-roots level, a Dallas couple was recently accused of a tax-evasion scam. The Department of Justice filed a civil complaint in an attempt to force the couple to shut down what tax officials have labeled a “multimillion-dollar tax-evasion scheme targeting wealthy married couples.”

The complaint accuses Daniel Fisher and Brenda Meyers-Fisher and their Dallas-based businesses, EOTL Systems Inc. and Tax Dynamix LLC, of helping their clients to funnel personal income, assets and expenses into shell partnerships to reduce or eliminate their income tax liability.

“The Fishers and their associates not only advised their clients to conceal their income and assets with the bogus partnerships,” the complaint states, “but also told them to take improper deductions and stop paying federal employment taxes.”

IRS officials estimated that the couple and their associates had prepared hundreds of fraudulent tax returns and were responsible for more than $5 million in tax evasion, the complaint stated.

In Sacramento, Calif., meanwhile, a federal judge ordered a businessman to resume withholding income taxes from his 25 employees and repay almost $500,000 in taxes that he hadn’t deducted from their paychecks in three years.

The tax resister, Walter “Al” Thompson of Redding, Calif., didn’t show up at a recent hearing. Mr. Thompson said he had filed a “plea in abatement” asking the government to prove its jurisdiction in the case.

“They never did it, so the [court] order is void,” Mr. Thompson contended. He also said that “withholding isn’t going to happen.”

Mr. Thompson, whose interpretations of the law rarely match those of the IRS, claims that he would be breaking the law if he collected taxes from his employees.

Finally, a chiropractor in Alaska has been sentenced to three years and five months in prison for failing to file three years’ federal income tax returns.

U.S. District Judge Ralph Beistline also fined Shane A. Massey of Wasila, Alaska, $7,500 and ordered him to file tax returns for 1968, when he earned $85,000; 1997, when he earned $150,000; and 1998, when he earned $130,000.

According to the Alaska U.S. attorney’s office, Mr. Massey undertook a six-year attempt to impede and obstruct the IRS, sending letters accusing IRS agents of fraud.

He urged banks to refuse to comply with IRS summonses and claimed he had copyrighted his name and was owed $500,000 by anyone who used his name without permission – including IRS agents and federal prosecutors.

In the past years, the IRS has investigated hundreds of businesses and promoters of illegal tax-evasion schemes. The Department of Justice has filed criminal cases against dozens of operators.

Although civil injunctions are the most efficient way to shut down tax-evasion businesses, Justice Department officials have said that the civil actions do not preclude criminal indictments against the operators.

And now the Treasury Department and the IRS have an agreement with 40 states and the District of Columbia to cooperate in a crackdown on tax-avoidance schemes.

Home-office-use deductions curbed

* The U.S. Tax Court has ruled that one couple’s home business deductions are limited by Section 280A, the rules on business use of the home. The court also required the couple to capitalize equipment because they had failed to elect to expense it under Section 179, where no second chance exists.

In 1997 and 1998, Michael Visin was a self-employed interior decorator and artist. His wife, Natalie Marselly, was a social worker. The couple rented an apartment, and Mr. Visin used a portion of it for business. In 1998, Mr. Visin spent $3,450 on computer equipment for business use.

Each year, the couple filed a joint tax return and attached a Schedule C for Mr. Visin’s business, including a Form 8829 for the business use of a home. Mr. Visin, however, claimed losses for 1997-98. Plus, the couple didn’t include a depreciation form in their returns.

The IRS issued the couple a deficiency notice and disallowed a portion of the home-office deduction based on the limitation on deductions in Section 280A. The IRS also treated the computer expense as a capital expenditure and allowed depreciation on it.

The Tax Court’s special trial judge, Robert N. Armen Jr., sustained the IRS’ position on the business use of the apartment. The court noted that Section 280A limits the couple’s deductions for the business use of an apartment and allows no deduction for the use if the deduction would give rise to or increase a net loss from the business.

The judge next noted that Form 4562, Part 1, is intended for a taxpayer’s use in making the election to expense Section 179 property and that the couple hadn’t attached the form or otherwise elected to expense the computer equipment under Section 179.

Disallowing the expense election under Section 179, the court noted that to the extent that the couple is denied the Section 179 deduction, they will be entitled to an increased home-office deduction because the limitation imposed by Section 280A will be that much less restrictive. The court sustained the IRS’ determination.

Cite: Michael N. Visin, et ux., v. Commissioner, T.C. Memo 2003-246