U.S. Tax Court upholds $10,000 penalty against a PRIVATE foundation who filed a return late

In Grace Foundation v. Comm., T.C. Memo 2014-229, the U.S. Tax Court sustained an Internal Revenue Service levy of a $10,000 penalty on a private foundation.  The Tax Court rejected all of the foundation’s arguments that there were errors in the IRS's conduct of the taxpayer's collection due process (CDP) hearing.  First, the Tax Court made clear that a private foundation which is not exempt from tax must comply with the same return filing requirements as organizations described in Code Sec. 501(c)(3) which are exempt from tax under Code Sec. 501(a). (Code Sec. 6033(d)) and that Code Sec. 6652(c)(1)(A) imposes a penalty for failing to file Form 990 in a timely manner.

Lesson learned #1:  The Internal Revenue Service will impose penalties for failure to timely file returns on private foundations and the Tax Court will uphold these penalties. 

Lesson learned #2:  All taxpayers, even private foundations, should have proper advice and counsel of their filing obligations so these issues do not occur. 

 

 

Richard Weber, the Chief of I.R.S. - Criminal Investigation issues statement regarding no longer seizing structured funds of otherwise legal source activity.

Richard Weber, the Chief of I.R.S. - Criminal Investigation issues statement regarding no longer seizing structured funds of otherwise licit activity.  This means that 31 U.S.C. 5324 will only be applied on a forward going basis to structuring of non-legal sourced funds.  This does not change the affect the government’s ability to audit and recommend criminal prosecution where structuring is a part of avoiding reporting for income tax purposes.

Here is the full statement:

After a thorough review of our structuring cases over the last year and in order to provide consistency throughout the country (between our field offices and the U.S. attorney offices) regarding our policies, I.R.S.-C.I. [Criminal Investigation] will no longer pursue the seizure and forfeiture of funds associated solely with “legal source” structuring cases unless there are exceptional circumstances justifying the seizure and forfeiture and the case has been approved at the director of field operations (D.F.O.) level. While the act of structuring — whether the funds are from a legal or illegal source — is against the law, I.R.S.-C.I. special agents will use this act as an indicator that further illegal activity may be occurring. This policy update will ensure that C.I. continues to focus our limited investigative resources on identifying and investigating violations within our jurisdiction that closely align with C.I.'s mission and key priorities. The policy involving seizure and forfeiture in “illegal source” structuring cases will remain the same.

 

A merger of two family-owned companies may result in taxable gifts

In Cavallaro, v. Comm., T.C. Memo 2014-189 (2014), the Tax Court determined that a merger of one co. owned by the parents and the other co. owned by their sons, resulted in a taxable gift from parents to sons. The ruling was based upon the Tax Court determining the parents' company to have been undervalued. Background. Code Sec. §2501(a) imposes the gift tax on any transfer of property by gift regardless of the form of the gift transaction. Any time that property is transferred for less than full and adequate consideration, the excess value is considered a gift. (Code §2512) Taxable gifts include "sales, exchanges and other dispositions of property for a consideration to the extent that the value of the property transferred by the donor exceeds the value in money or money's worth of the consideration given therefor." (Treas. Reg. §25.2512-8) Conclusion: Any type of transaction can be a deemed gift. This is especially so when there are transactions involving family members. Be sure to be vigilant in any transactions that could contain any type of gifting element so that the gift tax consequences, if any, can be ascertained and proper planning done to consider non-gift alternative transactions.

Internal Revenue Service is committed to whistleblower program

Internal Revenue Service is committed to whistleblower program IRS Deputy Commissioner John Dalrymple issued a memo providing procedures and goals for the IRS whistleblower program while IRS Commissioner John Koskinen issued a statement that he is also committed to increasing the reach of the program. Commissioner Koskinen's statement stated that over the last three fiscal years, more than $186 million in awards have been paid, on collection of more than $1 billion based on whistleblower information. Background. I.R.C. §7623(a), gives the IRS discretion to pay awards to whistleblowers between 15% to 30% of the "collected proceeds" resulting from an action based on information provided by the whistleblower. There is also the authority to pay up to 10% where the information provided by the whistleblower is “less substantial.” On Aug. 7, 2014, the Treasury issued final regulations on the whistleblower program. The Dalrymple memo makes three points: debriefing whistleblowers, protecting the identity of whistleblowers, and timeliness. There will typically be a debriefing interview with the whistleblower unless it is deemed unnecessary. The whistleblower’s identity and even the existence of a whistleblower from the taxpayer. Even the examiners will not know the identity or existence of the whistleblower. The Internal Revenue Service is also promising more timeliness: claims received should be initially evaluated by the Whistleblower Office within 90 days; review should be completed within 90 days of receipt, and whistleblowers should be notified of an award decision within 90 days.

There is no Bankruptcy Protection from Inherited IRAs

There is no Bankruptcy Protection from Inherited IRAs The U.S. Supreme Court in Clark v. Rameker, 134 S. Ct. 2242, 113 A.F.T.R.2d 2014-2308, 59 Bankr. Ct. Dec. 159 (6/12/2014) has held that inherited IRAs do not qualify for a bankruptcy exemption, and therefore are not protected from creditors in bankruptcy. Many of us know that assets in an IRA are protected from creditors both under most state laws and in Bankruptcy. Pursuant to 11 U.S.C. 522(b)(3)(C), a debtor may exempt amounts that are both (1) "retirement funds," and (2) exempt from income tax under one of several specified Internal Revenue Code provisions, including Code Sec. 408, which exempts IRAs. In the Clark case, the daughter of an IRA account holder held an inherited IRA which allows her to keep the assets in the IRA and only take the assets out annually over her life expectancy. They then filed for bankruptcy and sought to keep the inherited IRA from the creditors. There had been a split amongst the circuits: the Seventh and Fifth Circuits were contradictory so the Supreme Court resolved the controversy by unanimous decision (Justice Sotomayor writing for the unanimous court) in favor of the creditors. She stated that the "text and purpose" of the Bankruptcy Code provided that funds held in inherited IRAs are not "retirement funds" for purposes of the Bankruptcy Code §522(b)(3)(C) exemption. Left open by the Court is the query of whether assets in a spousal rollover IRA would be factually distinct or might also be subject to creditors. Recommendation: A trust for the benefit of the beneficiary – rather than naming the beneficiary outright - may avoid the result that the Clarks had in this case.

NEW OFFSHORE VOLUNTARY DISCLOSURE PROGRAM (OVDP) RULES GO INTO EFFECT

NEW OFFSHORE VOLUNTARY DISCLOSURE PROGRAM (OVDP) RULES GO INTO EFFECT We have been hearing rumors that the Treasury Department was going to be amending the OVDP program. Yesterday they did amend the program. Briefly, for people that have not yet filed for OVDP, the 27.5% penalty that is currently available will go up to 50% for filings on or after July 1 for offshore accounts at foreign financial institutions that have indicated that they will be complying. Thus anyone with accounts overseas should strongly consider acting quickly and in June. For people that have already filed, there are tweaks in the program that may make it beneficial to elect the new program. Thus, if you are currently in the program, it would behoove you to analyze whether such an election would prove beneficial to you. Here is the link to the new program: irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revised

Commissioner of Internal Revenue Service talks of amending the Offshore Voluntary Disclosure Program (“OVDP”)

Commissioner of Internal Revenue Service talks of amending the Offshore Voluntary Disclosure Program (“OVDP”) IRS Commissioner John Koskinen has stated that the Internal Revenue Service "has also sought to encourage taxpayers to come into compliance voluntarily." Koskinen stated that the various OVDPs, ranging from the 2009 version and then the 2011 and now the current 2012 version have led to more than 43,000 voluntary disclosures from person paying over $6 billion in a combination of back taxes, interest, and penalties. Koskinen urged though that, while these three programs have been very successful, the IRS may amend the program "to accomplish even more." He said that the agency is "considering whether our voluntary programs have been too focused on those willfully evading their tax obligations and are not accommodating enough to others who don't necessarily need protection from criminal prosecution because their compliance failures have been of the non-willful variety." Those who have lived abroad for many years may be distinguished from U.S. resident taxpayers who were willfully hiding their investments overseas and stated that "[w]e expect we will have much more to say on these program enhancements in the very near future." The National Taxpayer Advocate has previously criticized the three OVDPs as prescribing a "one-size-fits-all" approach. The NTA states that the stiff penalty may be unfair since it fails to draw any distinction between those who willfully vs. inadvertently fail to report foreign accounts. Stay tuned for further developments when they occur.