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NewsNotes Lesli S. Laffie, J.D., LL.M. Tax
Fraud • Tax Shelters • Education
IRAs • Estate
Tax Filing Extension •
From the IRS According to IR-2001-61, the IRS Website now contains a special section designed to alert taxpayers and tax advisers to tax scams and fraud schemes. The site highlights priorities for IRS Criminal Investigation (CI). Currently, CI is focusing on abusive foreign and domestic trusts, employment tax evasion and nonfilers. Case summaries of individuals recently convicted of committing those crimes are included. The Website puts information on a variety of tax scams and fraud schemes into one location. The new Web pages are part of a larger effort by the IRS to educate the public on these issues. The IRS reminds taxpayers to take special precautions not to fall victim to tax scams. These schemes can take several shapes, ranging from promises of "secret" refunds to committing illegal acts to evade tax. Suspected tax fraud should be reported to the IRS at (800) 829-0433.
Notice 2001-45 alerts taxpayers and tax advisers that the tax benefits allegedly generated by a "basis-shifting tax shelter" transaction, used to generate losses or reduce income or gains, are not allowed for Federal income tax purposes. The transaction involves the use of the Sec. 318 attribution rules and Regs. Sec. 1.302-2(c) to increase the basis of stock owned by a taxpayer who claims a loss on disposition of the stock. The transaction involves a redemption of stock owned by a person other than the taxpayer who is not subject to U.S. tax or is otherwise indifferent to the redemption's Federal income tax consequences. As a result of the application of the attribution rules, the redemption is claimed to be a dividend (rather than a sale). A variety of devices, often including options, are employed to treat the redeeming shareholder as owning stock in the redeeming corporation owned (or treated as owned) by the taxpayer. The ownership attribution of the shares allegedly prevents the stock redemption from reducing the redeeming shareholder's ownership interest in the redeeming corporation, thereby causing the redemption to be treated as a dividend. As a result, the taxpayer takes the position that all or a portion of the redeemed stock's basis is added to the basis of stock in the redeeming corporation that the taxpayer owns. The taxpayer then sells the stock and claims a loss. The IRS intends to disallow losses claimed (or to increase taxable income or gain) in these transactions, to the extent a taxpayer derives a tax benefit attributable to stock basis supposedly shifted from the redeemed shares. The reasons for disallowance may include, but are not limited to: (1) the redemption does not result in a dividend (and there is no basis shift) because, viewing the transaction as a whole, the redemption results in a reduction of interest in the redeeming corporation to which Sec. 302(b) applies; (2) the basis shift is not a "proper adjustment" under Regs. Sec. 1.302-2(c); and (3) there is no ownership attribution or basis shift, because the steps taken to achieve those results are transitory and serve no purpose other than tax avoidance. In addition, the Service may impose penalties on participants in these transactions or on persons who participate in the promotion or reporting of these transactions, including the accuracy-related penalty, the return-preparer penalty, the promoter penalty and the aiding-and-abetting penalty.
Legislation On July 26, 2001, President Bush signed into law a measure (P.L. 107-22) that renames Education IRAs as Coverdell Education Savings Accounts to honor the late Paul Coverdell, who served as senator from Georgia from January 1993 until his death in July 2000. The legislation makes no substantive changes to the savings account provisions that allow taxpayers to invest up to $2,000 tax-free for a child's education.
Regulations The IRS has finalized regulations (TD 8957) on filing an application for an automatic six-month extension to file an estate tax return, applicable to returns due after July 25, 2001. Under the regulations, an automatic six-month extension will be allowed to file Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return, under the following circumstances: (1) Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, must be filed on or before the due date prescribed in Sec. 6075(a) (generally, nine months after the decedent's death); (2) the application must be filed with the IRS office designated in the application's instructions (excepting hand-carried documents); and (3) the application must include an estimate of the amount of estate and generation-skipping transfer tax liability for the estate. The regulations clarify that a filing extension does not extend to paying the tax. If a filing extension is granted, but not a payment extension, interest will be due on the amount of tax unpaid by the due date; further, the estate will be subject to all applicable late-payment penalties.
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