Does Fraudulent Conduct by Someone Else Extend the Statute of Limitations Permitting the IRS to Pursue the Taxpayer?

Posted in Income Tax, IRS, Tax Planning

A fraudulent tax return is bad news for a taxpayer. Normally, the IRS has a limited period of time (3 years) to audit a taxpayer’s return.  The existence (or allegation) of fraud, however, gives the IRS an unlimited amount of time to make an assessment of tax liability.  But more importantly, taxpayers may be surprised to learn that the IRS considers fraud by someone other than the taxpayer to also trigger the open-ended statute of limitations. So if a return preparer or someone else affecting the reporting of your taxes engages in fraud, the taxpayer could be the one left on the hook to make the IRS whole (including the possibility of a 75% fraud penalty to boot). The Tax Court has given the IRS latitude in using this tool against taxpayers in these situations, but an appellate court recently limited the IRS’s reach on the issue.

Sometimes tax return preparers act fraudulently on their own initiative without the taxpayer’s knowledge and without the taxpayer’s own fraudulent intent to evade tax. It seems appropriate and just in these circumstances for the IRS and Justice Department to pursue the unscrupulous return preparer.  And the government frequently does so.  But, in seeking to recover any tax loss, the IRS may decide that the unwitting taxpayer who submitted the fraudulent return is liable to make the government whole.  The IRS approach is founded in the idea that the taxpayer signing and submitting the return is obligated to review it and is deemed to know its contents.  If the return is fraudulent, the unwitting taxpayer should have found the errors and had them corrected.  The argument that the taxpayer relied on the accountant and just signed the return without reviewing it generally does not stand up.

The framework for the IRS’s actions stems from an exception to the general three-year statute of limitations. Under IRC Section 6501(c)(1) and (2), fraudulent conduct can suspend the running of the limitations period indefinitely.  The key statutory phrase is “intent to evade tax.”  But the statute does not clearly state whose fraudulent intent triggers the open-ended assessment period by the IRS.  It should be noted, however, that the IRS will bear the burden of proving that the return was fraudulent by clear and convincing evidence.  It cannot merely make the assertion without something to back it up.

In the past decade, the Tax Court has considered this issue and decided several cases favorable to the IRS. For example, in Allen v. Commissioner, 128 T.C. 37 (2007), a tax return preparer put false itemized deductions on a taxpayer’s return without the taxpayer having indicated to the preparer that he was entitled to those deductions. The return preparer was eventually convicted of preparing false and fraudulent tax returns under IRC Section 7206(2). The IRS then sent deficiency notices to the taxpayer after the general three-year assessment period had passed, claiming that IRC Section 6501(c)(1) applied because fraud was present, even if it wasn’t the taxpayer’s own conduct that caused it.

The Tax Court upheld the IRS’s deficiency notice based on the preparer’s fraudulent conduct even though the taxpayer was not to blame for the fraud. In its analysis of the issue, the Tax Court concluded that the statute’s fraud exception contained no “express requirement that the fraud be the taxpayer’s” in order to extend the statute of limitations. The court stated that “the statute keys the assessment extension to the fraudulent nature of the return, not to the identity of the perpetrator of the fraud,” [emphasis added] and so chose to strictly construe the limitations periods in the government’s favor. An additional reason for letting the IRS go after the taxpayer is Congress’s intent to ensure that the IRS is not at a disadvantage in recovering unpaid taxes resulting from fraudulent tax returns, the court said. The court seemed concerned that an outcome against the government could allow a taxpayer to “hide behind an agent’s fraudulent preparation.”

However, an appeals court recently held for a taxpayer in dismissing the government’s argument that third-party fraud is relevant in applying the unlimited statute of limitations. In BASR Partnership v. United States, No. 2014-5037 (Fed. Cir., 7/29/15) the taxpayer relied on a law firm’s tax opinion in deciding how to report large capital gains arising from the sale of a business. When the lawyer was later convicted for fraud, he acknowledged that he acted with intent to evade the tax that the taxpayer would have otherwise owed on the transaction.  This allowed the government to claim the fraud exception in assessing tax against the partnership a decade after the returns had been filed.

The Federal Circuit, in an opinion issued in July 2015, held that IRC Section 6501(c) requires that the taxpayer be the one who has the intent to evade tax in order for the limitations period to stay open indefinitely.  This means that in situations where the taxpayer has clean hands (i.e., no fraudulent intent), fraud by a third-party that causes a taxpayer’s return to be false will generally not allow the IRS to go after the taxpayer for the unpaid taxes if the three-year assessment period has passed.  The circuit court maintained that the Tax Court had conducted only a limited analysis of IRC Section 6501’s text in Allen that was not necessarily congruent with Supreme Court precedents, and that even if the reasoning in Allen was persuasive, the particular facts of BASR further distinguished the case from Allen.

With different outcomes among federal courts, taxpayers facing this issue should be aware of the jurisdictional benefits and disadvantages of pursuing litigation in Tax Court versus the U.S. Court of Federal Claims.

Greenberg Traurig’s Diana Zeydel Featured In Forbes

Posted in Estate, Estate Planning, Trusts

zeydeldGreenberg Traurig attorney, Diana Zeydel, was recently quoted in Forbes where she discusses the new proposed regulations regarding the valuation of family limited partnerships. These new proposed regulations would likely make it more difficult for business owners and others to manage their estate tax exposure. To read the full article, click here.

Spousal Lifetime Access Trusts (SLATs)

Posted in Estate Planning, Insurance

Higher gift and generation-skipping transfer (GST) tax exemptions mean greater opportunities for individuals to make gifts to family members during life, when the donors can share in the joy these gifts bring to their families.  Individuals with a more modest net worth, however, will want to balance any desire to make lifetime gifts with their need to retain adequate funds to support their current and future lifestyle.  For married couples, a spousal lifetime access trust (a so-called SLAT) may provide the solution.

Overview.  For married individuals who want to make lifetime gifts to their descendants but have concerns about permanently giving away a large part of their estate and their ability to maintain their current lifestyle, a SLAT may be the solution.  With a SLAT, one spouse (donor-spouse) makes a gift to an irrevocable trust using the donor-spouse’s gift tax exemption.  The SLAT names the non-donor spouse (beneficiary-spouse) as a current beneficiary, which allows the trustee to make distribution of trust funds to the beneficiary-spouse during his or her life.

Potential Benefits.

The use of a SLAT offers a number of advantages, including:

  • The donor-spouse uses his or her exemption but may not feel a “permanent loss” as the beneficiary-spouse still has access to the funds, if needed, during life.
  • The beneficiary-spouse and/or descendant(s) can serve as trustee, subject to certain limitations (see below under “Planning Considerations”).
  • Descendants can be named as current and/or remainder beneficiaries, so the SLAT can continue as part of a legacy plan for future generations.
  • If the donor-spouse allocates GST tax exemption to the SLAT gifts, the trust can benefit multiple generations of descendants without incurring additional estate or GST taxes.
  • As an irrevocable trust, the SLAT can protect assets from the beneficiaries’ creditors.

SLATs & Life Insurance.  SLATs are often combined with life insurance planning, with the SLAT using the donor’s gift to buy life insurance on the donor-spouse.  If appropriate, the trustee can choose to take policy loans or withdrawals to supplement or support distributions to the beneficiary-spouse, potentially income tax-free (depending on the type of policy and the amount of loan/withdrawal).  Further, on the donor-spouse’s death, the death benefit should pass to the SLAT beneficiaries free of income and estate taxes.

  • Example: John creates a SLAT benefiting his wife, Jane, during her life, with the remainder passing to his descendants.  John funds the trust with $3 million, using his gift and GST tax exemptions.  The SLAT buys a cash value life insurance policy on John with a $5 million death benefit.  The death benefit is protected from estate tax, at a potential maximum savings of up to $2 million, assuming a 40 percent estate tax rate.

Planning Considerations.

To achieve the potential benefits offered by a SLAT, the following questions should be carefully considered.

  • How will the SLAT be funded? The donor-spouse should consider funding the SLAT using only his or her own assets (not joint assets).  If the beneficiary-spouse is deemed to make a gift to the SLAT, it could result in inclusion of the trust assets in his or her estate.
  • The SLAT must be irrevocable.
  • Will the SLAT acquire life insurance on the donor spouse? If so, it may affect who should have control over or rights to the SLAT-owned policies (e.g., ability to name or change beneficiaries, to make policy withdrawals, etc.).
  • Who will serve as trustee? The beneficiary-spouse or another beneficiary may serve as a trustee of the SLAT, provided that the beneficiary’s power to make distributions to him or herself is limited by something called an “ascertainable standard” (e.g., distributions can only be made for health, education, maintenance, and support). The donor-spouse should not serve as a trustee of the SLAT.
  • How will you provide for planning flexibility? To provide planning flexibility, the beneficiary-spouse can be given a limited power of appointment, effective at his or her death, which allows him or her to change how the SLAT assets will be distributed among the couple’s descendants after the beneficiary-spouse’s death.
  • Who will have access to the SLAT funds? Divorce or the premature death of the beneficiary-spouse will cut off the donor-spouse’s access to the SLAT funds.

Portability of the Estate and Gift Tax Exclusion – How Does it Work?

Posted in Estate Planning, Tax Planning

Portability refers to the ability of a surviving spouse, to make use of a deceased spouse’s unused estate tax exclusion amount (DSUE amount).  Portability was intended to simplify estate planning for married couples by eliminating the need for a bypass trust.  However, in order to preserve the DSUE amount the surviving spouse must comply with a complex set of rules, including filing a federal estate tax return for the decedent even though one would not otherwise be required.  Portability is not a substitute for traditional estate planning, particularly for high net worth individuals. However, it may prevent an otherwise unused DSUE amount from being completely lost.

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Bill to Bar Air Excise Tax on Aircraft Management Fees Clears House Ways and Means Committee

Posted in IRS, Sales Tax, Tax Planning

A bill that would exempt aircraft management fees from the federal air transportation excise tax is advancing in the House — good news for aircraft owners who use a leasing company structure to save on state sales tax when purchasing aircraft.

The bill (H.R. 3608) clarifies that fees paid to an aircraft services company to provide pilots, flight services and to manage maintenance for a company that is leasing an aircraft are not subject to the 7.5 percent federal excise tax on air transportation. This bill arises out of a case where the IRS said that NetJets was subject to the excise tax for the fees it received for such flight management services. NetJets won this case in federal court, because the court found that the IRS did not give adequate notice that the tax was applicable to such aircraft management services fees. So without Congressional approval or further action, the IRS could decide to give proper notice to aircraft services companies, which would then be legally require them to collect the federal excise tax on their fees.

If this bill becomes law, it would be good news for a common  sales tax planning technique involving aircraft purchases that is accepted in many states. This technique involves setting up a separate aircraft leasing company (ALC) that is owned 100 percent by the person or company (end-user) acquiring the aircraft. The ALC then leases the aircraft to the end-user on a dry-lease basis.  The advantage of an ALC structure is that in many states, the ALC can purchase the aircraft exempt from sales and use tax, because it is purchasing the aircraft solely for the purpose of leasing it to the end-user and others. Sales tax would be due on the monthly dry-lease payments, so this technique trades off the big upfront sales tax payment on the purchase of the aircraft for the much smaller sales tax due on the monthly lease payments, resulting in a sales tax deferral.

However, in order to use the ALC structuring technique properly, the end-user must ensure that it enters into a dry lease in respect of the aircraft – meaning that such end-user (as lessee) will be responsible for, among other things, the operation and maintenance of the aircraft, If the lease does not qualify as a dry lease, then the entire lease payment could be subject to the 7.5 percent federal transportation excise tax under existing law if the IRS provides notice of application of the tax. End-users routinely enter into management agreements regarding operation and maintenance support in connection with their entry into dry leases. If H.R 3608 becomes law, this would assure that the fees paid to an aircraft services company will not become subject to the federal excise tax, resulting in complete excise tax savings on both the dry lease payments and the management services fees.

The House Ways and Means Committee cleared this bill on July 13. A companion bill has been introduced in the Senate. Those involved in the aviation industry should be interested in the progress of this legislation.

To see the text of H.R. 3608, click here.

To the see the Joint Committee on Taxation’s explanation of this bill, click here.

GT’s Quick Guide to Section 338(h)(10) Elections

Posted in Internal Revenue Code, Section 338(h)(10) Elections

Section 338(h)(10) of the Internal Revenue Code can provide significant tax benefits to a buyer of 80% or more of a target corporation.  A 338(h)(10) election allows a buyer of stock of an S corporation or a corporation within a consolidated group to treat the transaction as an acquisition of 100% of the assets of the target for tax purposes.  The deemed asset sale for tax purposes increases the tax basis of the target’s assets which can significantly reduce the buyer’s future taxable income.

To read the full GT Alert, click here.

GTM Alert – Brexit: The Timeline

Posted in Brexit

This note addresses the timeline for the UK’s exit from the EU. It is one of a series of GTM Alerts designed to assist businesses in identifying the legal issues to consider and address in response to the UK’s referendum vote of 23 June 2016 to withdraw from the European Union.

The UK has not left the EU. It will remain a member of the EU, and EU law will continue to apply in its territory, until it formally exits.

Exit is likely to take some time. Nearly two weeks after the UK referendum vote, a number of practical, political, and legal issues are emerging that may affect the start and timing of the procedure leading up to exit.

This exit procedure is set out in Article 50 of one of the two main EU Treaties, the Treaty on European Union. It involves three main steps before exit – notification, negotiation, and approval. These steps are illustrated in a notional timeline at the end of this note and are described in more detail below, together with the issues that may affect the UK’s exit date.

To read the full GTM Alert, click here.

 

Greenberg Traurig Hosts Washington Women’s Leadership Event

Posted in Event

Greenberg Traurig’s Northern Virginia Women’s Initiative and the Washington Women’s Leadership Initiative recently hosted a lively discussion with Kim K. Azzarelli on how women can find greater power and purpose in their lives. Greenberg Traurig Business Immigration and Compliance Co-Chair, Laura Reiff, moderated the discussion with Ms. Azzarelli as she discussed her new book, Fast Forward: How Women Can Achieve Power and Purpose.

womens initiative 1

Rebecca Manicone, Laura Reiff, Ashley Sawyer, and Michelle Soto.

womens initiative 2

Greenberg Traurig’s Business Immigration and Compliance Co-Chair, Laura Reiff, with keynote speaker Kim K. Azzarelli

Minimize the Pain of Estate Planning in Five Steps

Posted in Estate Planning

Estate plans are essential to minimizing conflict, protecting families, and providing financial security during incapacity or after death. While many find estate planning an unpleasant topic, taking the following steps can help minimize the pain of the process.

STEP 1:  OUTLINE YOUR PLAN

At a basic level, every estate plan should consider the following fundamental questions.  Outlining your general responses to these questions can help kick-start your planning.

  • Who Should Receive My Estate?  Decide who you want to receive your estate, especially if you wish to make bequests of cash or certain assets to specific individuals. Without a will, your estate (other than assets that pass by a beneficiary designation or based on title (see below)) will be distributed according to state intestacy laws, which provide no direction on the distribution of specific assets and may run counter to your wishes. A will also can facilitate any required court administration of your estate (so-called “probate”). You may avoid probate all together by using a combination of a will and revocable trust.
  • Who Should Be in Charge of My Estate?  Identify the persons who you want to serve as (a) personal representatives to handle the administration and distribution of your estate, (b) guardians for any minor children, and (3) trustees to administer any trusts you may want created for your family.  Being clear on these choices can minimize family conflict and streamline estate matters after your passing.
  • What Happens if I’m Incapacitated? Your estate plan should address what happens if you become incapacitated, through the execution of financial and medical powers of attorney, living wills or advanced directives, and HIPAA authorizations.  You should identify the individuals you want to name as your agents to make your financial and medical decisions if you are unable to do so, as well as clearly specify your preferences for health and medical care. If you become incapacitated, these documents will ensure continued access to your assets for you and your family and the provision of medical care in accordance with your wishes without the need for court proceedings to appoint a guardian or conservator.

Covering these basic questions should take you most of the way to creating a core estate plan. But if you have a larger estate (e.g., a net worth near or over the federal estate tax exemption of ($5.45 million in 2016), if you live in a state with state estate taxes, or if you have questions or need more information, make sure to consult with counsel or work with your estate planning advisor to address and minimize any potential estate tax exposure.

Step 2: CHECK BENEFICIARY DESIGNATIONS & ASSET OWNERSHIP

At your passing, assets with beneficiary designations, like IRAs and retirement accounts, deferred compensation plans, life insurance policies, etc., and assets held in trust or titled jointly with rights of survivorship (so-called “non-probate assets”) will be distributed directly to the named beneficiary or surviving owner, regardless of what your will says. For instance, property held jointly with your spouse with rights of survivorship will pass to your surviving spouse, even if your will directs the property to someone else.  As non-probate assets may make up a large part of your net worth, carefully review the titling of your assets and your beneficiary designations to ensure they work with your desired estate distribution plan.

STEP #3:  AVOID “DO-IT-YOURSELF” PLANNING

State probate and intestacy laws are complicated, and DIY plans can often wreak havoc on families, resulting in conflict and lost time and money in fixing errors.  Consider working with an experienced attorney who will coordinate with your other financial and/or tax advisors to establish a solid and state-law compliant estate plan.

STEP #4:  COLLECT INFORMATION BEFOREHAND

To save time and money, consider gathering the following information before meeting with your estate planning advisor so you will have it on hand for his or her review:

  • Current Financial Statement.  A list of all assets and liabilities, estimated values, and how owned (individual, jointly, etc.).
  • Family Contact Information.  Information on family members, estate beneficiaries, designated personal representatives, guardians, trustees and agents, including their names, relationships, dates of birth (for family and beneficiaries), and contact information.
  • Tax Returns. Copies of income, gift or other recently-filed tax returns.
  • Current Planning Documents.  Copies of any existing wills, trusts, powers of attorney, etc.
  • Beneficiary Designations. For all retirement accounts, life insurance policies, etc.
  • List of Advisors. Contact information for current legal, accounting, and financial advisors.

STEP #5: KEEP THE PLAN ORGANIZED & ACCESSIBLE

Consider keeping copies of all your current estate planning documents, your financial information (bank, brokerage, and retirement accounts, life insurance policies, etc.), and contact information for your estate planning and other advisors in a safe, fire/weather proof location, but one that is accessible by those who will need this information, such as family members or your agents.  Note that safe deposit boxes generally are not the best way to keep your documents safe, as you may be unable to provide the necessary consent to allow access when needed.  You also could save the information in a secure electronic form to facilitate access and transmission to authorized persons.  Finally, you may wish to provide copies of your powers of attorney and other authorization forms to the applicable parties (financial institutions, agents, doctors, etc.), so these documents are already on file in the event you become incapacitated.

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