Financial institutions that bought assets and liabilities of failed thrifts have lost a suit charging that the government reneged on its promise of tax deductions.
In 1988, the institutions entered into agreements with the Federal Savings and Loan Insurance Corp. that helped the institutions buy the thrift properties.
The institutions later brought suit, charging the agreements with the FSLIC had been violated.
They claimed that the government broke its promise to allow tax deductions for covered asset losses as a result of Congress' enactment of Section 13224 of the Omnibus Budget Reconciliation Act of 1993.
The financial institutions alleged that, under the court case Wood v. Lovett [313 U.S. 362 (1941)] and similar cases, certain provisions of the Internal Revenue Code as it existed at the time were incorporated into the institutions' Dec. 29, 1988, assistance agreement with the FSLIC.
The U.S. Court of Federal Claims ruled that the suit was not barred by the doctrine of accord and satisfaction and that the FSLIC did not promise the financial institutions that a covered asset loss deduction would continue to be available.
The court also ruled that the FSLIC was not authorized to make a promise of continuing deductibility to the financial institutions, and a tax deduction for covered asset losses was available when the taxpayers acquired the failing thrifts.
Cite: Centrex Corp. v. U.S., No. 96-494C, Fed. Cl.
Audit rate shows big drop again
* Last week the IRS issued the most dramatic figures so far showing the continuing drop in the percentage of tax return audits.
In fiscal 2000, IRS audits - in-person audits at an IRS office or a taxpayer's business and Service Center examinations via correspondence - dropped nearly 50% to a paltry 0.49%, from 0.89% in 1999, of tax returns filed. The audit rate dropped to less than 1% in 1998, from 1.68% in 1995. In fiscal 2000, the number of individual returns examined fell to about 618,000.
So the chances of an IRS audit are becoming almost nonexistent, which can only lead to compliance problems in a system that relies on "voluntary compliance."
In a statement, IRS Commissioner Charles O. Rossotti said that the agency is "deeply concerned" about the new figures.
"Clearly, the declines we've seen in the past few years need to stop or the fairness and effectiveness of our tax system will be undermined."
Mr. Rossotti is aware of the potential effects of the appearance of having few cops on the beat. "People should not misinterpret this drop in enforcement action," he warned.
Cite: Announcement and Statement, IRS Public Affairs Office
GAO gives approval to IRS accounting
* The Internal Revenue Service recently announced that, for the first time, the General Accounting Office had audited all the financial statements of the IRS. The statements include the tax revenue (custodial) and the administrative accounts for fiscal 2000.
As a result of the audit, the GAO can attest that the statements fairly account for IRS total revenue collections of more than $2 trillion, refunds of more than $190 billion and total IRS appropriations of more than $8.3 billion.
The IRS announced that it generally agrees with the GAO's concerns regarding weaknesses in the agency's internal controls.
The IRS says it is committed to addressing its weaknesses by replacing outdated systems.
Cite: IR-2001-30
Tax-exempt status ends retroactively
* What happens when the IRS retroactively revokes a public charity's tax-exempt status?
More important, how can an issuer of tax-exempt bonds for that public charity get relief when the tax-exempt status is retroactively revoked?
In this situation, a charity wanted to buy office space and a parking garage using the proceeds of tax-exempt bonds. The issuer brought out the bonds and lent the proceeds to the charity, which in turn used those funds to purchase several floors of a building.
The seller was a limited partnership comprising an individual who was the general partner and various trusts for his children, who were the limited partners.
The parking garage was purchased from another seller. However, both sellers purchased portions of the bonds. The seller of the space retained ownership of the remaining floors of the building. Thus, for all practical purposes, the sellers of the facilities were the same parties as the bondholders.
About three years after the bonds were issued, the IRS began an audit of the charity. It concluded that there had been private benefit and inurement to the sellers. Nearly four years after they were issued, the bonds were canceled and the facilities returned to the sellers. The organization ceased its corporate existence several months later.
The IRS subsequently revoked the organization's exempt status, effective at the beginning of the tax year that the office space and garage were purchased, ruling that the organization no longer operated exclusively for exempt purposes but rather for the private benefit and inurement of individuals.
In a 1999 technical advice memorandum (TAM 200006049), the IRS said that absent an effective remedial action, the revocation would cause interest on the bonds to be includable in the gross income of the bondholders - retroactive to the issue date of those bonds.
That TAM also stated that there was no effective remedial action because the time for such action started when the acts that led to the revocation took place. And those acts occurred more than 90 days before the bonds were canceled.
Because of its lack of knowledge about the legal effect of the charity's actions, the issuer argued that any actions before the revocation should have been covered by the charity's tax-exempt status.
Cite: TAM 2000107020
Broker-to-broker data is approved
* The IRS has ruled that a securities clearing broker that deals with the bulk transfers of accounts may rely on notification from the introducing broker on whether a payee has properly completed and signed Form W-9. In this situation, the account is a pre-1984 account, the owner's information for filing returns is correct, and backup withholding is required.
The clearing broker and the introducing broker have a clearing agreement in which the introducing broker agrees to provide the account owner's tax information, including the taxpayer identification number and backup withholding certifications. The clearing broker safeguards each account owner's funds and securities.
The clearing broker holds the securities in its own street name and credits the owner's account with dividends, interest and gross sale proceeds from the sale of securities.
The clearing broker also receives bulk account transfers from other brokers but relies on notifications from the introducing broker that W-9 forms have been completed and executed properly. The clearing broker prepares and files all 1099 forms for the account owners.
The IRS concluded that, under the backup withholding rules, the clearing broker may rely on the notifications from the introducing broker. The clearing broker may also rely on the introducing broker's representations on the account owner's name, address and taxpayer ID number and whether backup withholding is required.
Cite: LTR 200107027
