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Abusive Welfare Benefit and Retirement Plans Can Lead to Severe Penalties for Accountants By Lance Wallach Accountants who are unaware of recent developments are likely to encounter a nightmarish scenario that may play out something like this: you sign a client’s tax return that claims a tax deduction for participation in a “welfare benefit plan”. A few years pass, and nothing happens. Then, on audit, the deductions are disallowed and your client is hit with back taxes, penalties, and interest. He discovers that he may be looking at a large penalty for not disclosing his participation in the plan to the IRS. Naturally, at this point, your client wants out of the plan. But he discovers that he cannot get the money that he has contributed out of the plan. He finds that the money is being used by the plan sponsor to fight the IRS; his money is being used to defend a plan that he no longer wants to be in. This is claimed to be legal. Or he may even find that the money is simply gone, that it has been stolen or otherwise misappropriated. And now you find that you are a “material advisor” with respect to your client’s participation in the plan. Like your client, you were supposed to disclose your role here; in your case, as a “material advisor”. You also may be looking at a large penalty for failing to disclose. If you think this could never happen to you, think again. Welfare benefit plans are a creation of and are sanctioned by Section 419 of the Internal Revenue Code. There are single employer plans and multiple employer plans; the latter rely mostly on IRC Section 419A (f) (6) (in the most common cases where there are ten or more employers as part of the same plan). The 419A(f)(6) plans are, and perhaps always were, generally regarde
conservation easement tax court Published on February 13, 2020 Edit article View stats call firstStatus is online call first Speaker, author expert witness at VEBA LLC 185 articles The recent case of Harbor Lofts Associates, Crowninshield Corporation, Tax Matters Partner v. Commissioner, 151 T.C. No. 3 (Aug. 27, 2018) teaches yet another lesson on the importance of the perpetuity requirements when claiming a charitable deduction for the donation of a conservation easement. Last October I blogged about another conservation easement case, Palmolive Building Investors v. Commissioner, 149 T.C. No. 18 (Oct. 10, 2017). I did not get into the substance of the law in that blog, but instead focused on the Golsen rule and why the Tax Court needed to put its best analytical foot forward. I referred readers to Peter Reilly’s great blog post on Palmolive for the substance.
I encourage readers who don't know the Golsen rule to review the Golsen post, because Harbor Lofts is a case that the taxpayers may appeal to the First Circuit Court of Appeals. That is important because it’s the First Circuit who disagreed with the Tax Court’s position regarding the subordination requirement at issue in Palmolive. While today’s case involves a different part of the perpetuity requirement (and so there is no First Circuit precedent to bind the Tax Court), the Tax Court is again agreeing with the IRS in reading the perpetuity requirement strictly, this time finding that a long-term lease is not sufficient to meet the perpetuity requirements. If the Tax Court’s opinion is appealed to the First Circuit, the First Circuit may decide to take the same liberal interpretation of the perpetuity requirement as it did in Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012), the case that was like Palmolive.
Today’s post will therefore comment on the Tax Court’s approach to interpreting the perpetuity requirements for conservation easements. Long story short, I agree with it. The First Circuit’s liberal approach, while understandable, is wrong. This post will explain why. To do so, I will have to dip into the substantive law with the caveat, as always, that what I say is subject to correction from alert readers who know this area better than I do. In particular, I will doubtless expose my ignorance by asking why the taxpayers did not structure the donation differently. It was likely for a reason that I
designated syndicated conservation easement arrangements Published on February 18, 2020 Edit article View stats call firstStatus is online call first Speaker, author expert witness at VEBA LLC 188 articles The Internal Revenue Service today urged taxpayers involved in designated syndicated conservation easement arrangements to consult with their tax advisors following a recent U.S. Tax Court decision and agency plans to continue enforcement efforts in this area.
In late 2016, the Internal Revenue Service designated certain syndicated conservation easement arrangements as "listed transactions" in Notice 2017-10 (PDF).
On Dec. 13, 2019, the U.S. Tax Court entered its first decision on a syndicated conservation easement transaction. In TOT Property Holdings, LLC v. Commissioner, Docket No. 005600-17, the Tax Court sustained in its entirety the IRS's determination that all tax benefits from a syndicated conservation easement transaction should be denied and that the 40% gross valuation misstatement and negligence penalties applied. The Tax Court found that the transaction failed the legal requirements applicable to donations of land easements and, in imposing the gross valuation misstatement penalty, found that the actual value of the easement donation was less than 10 percent of what was originally reported on the tax return.
"In denying the deductions and upholding the 40% gross valuation misstatement penalty, the Tax Court confirmed that aggressive syndicated easement transactions simply will not survive scrutiny," said IRS Commissioner Chuck Rettig. "We will not stop in our coordinated pursuit of these abusive transactions while seeking the imposition of all available civil penalties and, when appropriate, various criminal options for those involved."
"If you engaged in any questionable syndicated conservation easement transaction, you should immediately consult an independent, competent tax advisor to consider your best available options," Rettig added.
Tax Court trials in four other syndicated easement cases were conducted earlier this year and more than 50 cases are pending. In other recent cases, the Tax Court has rejected arguments that various regulations taxpayers failed to comply with are invalid, essentially negating one of these taxpayers' main defenses.
"We are prepared to take each of these and all other cases being developed by the IRS to trial, although the substance of most cases can be resolved without trial because the transactions do not meet the basic requirements to claim the charitable contribution deduction," said IRS Chief Counsel Mike Desmond. "We encourage taxpayers and their advisors to see the writing on the wall and take immediate steps to resolve these matters."
Report this Published by call firstStatus is online call first Speaker, author expert witness at VEBA LLC Published • now
Abusive Welfare Benefit and
ReplyDeleteRetirement Plans Can Lead to
Severe Penalties for Accountants
By Lance Wallach
Accountants who are unaware of recent developments are likely to encounter a nightmarish
scenario that may play out something like this: you sign a client’s tax return that claims a tax
deduction for participation in a “welfare benefit plan”. A few years pass, and nothing happens.
Then, on audit, the deductions are disallowed and your client is hit with back taxes, penalties, and
interest. He discovers that he may be looking at a large penalty for not disclosing his participation
in the plan to the IRS.
Naturally, at this point, your client wants out of the plan. But he discovers that he cannot get the
money that he has contributed out of the plan. He finds that the money is being used by the plan
sponsor to fight the IRS; his money is being used to defend a plan that he no longer wants to be
in. This is claimed to be legal. Or he may even find that the money is simply gone, that it has
been stolen or otherwise misappropriated.
And now you find that you are a “material advisor” with respect to your client’s participation in
the plan. Like your client, you were supposed to disclose your role here; in your case, as a
“material advisor”. You also may be looking at a large penalty for failing to disclose.
If you think this could never happen to you, think again.
Welfare benefit plans are a creation of and are sanctioned by Section 419 of the Internal Revenue
Code. There are single employer plans and multiple employer plans; the latter rely mostly on IRC
Section 419A (f) (6) (in the most common cases where there are ten or more employers as part
of the same plan). The 419A(f)(6) plans are, and perhaps always were, generally regarde
conservation easement tax court
ReplyDeletePublished on February 13, 2020
Edit article
View stats
call firstStatus is online
call first
Speaker, author expert witness at VEBA LLC
185 articles
The recent case of Harbor Lofts Associates, Crowninshield Corporation, Tax Matters Partner v. Commissioner, 151 T.C. No. 3 (Aug. 27, 2018) teaches yet another lesson on the importance of the perpetuity requirements when claiming a charitable deduction for the donation of a conservation easement. Last October I blogged about another conservation easement case, Palmolive Building Investors v. Commissioner, 149 T.C. No. 18 (Oct. 10, 2017). I did not get into the substance of the law in that blog, but instead focused on the Golsen rule and why the Tax Court needed to put its best analytical foot forward. I referred readers to Peter Reilly’s great blog post on Palmolive for the substance.
I encourage readers who don't know the Golsen rule to review the Golsen post, because Harbor Lofts is a case that the taxpayers may appeal to the First Circuit Court of Appeals. That is important because it’s the First Circuit who disagreed with the Tax Court’s position regarding the subordination requirement at issue in Palmolive. While today’s case involves a different part of the perpetuity requirement (and so there is no First Circuit precedent to bind the Tax Court), the Tax Court is again agreeing with the IRS in reading the perpetuity requirement strictly, this time finding that a long-term lease is not sufficient to meet the perpetuity requirements. If the Tax Court’s opinion is appealed to the First Circuit, the First Circuit may decide to take the same liberal interpretation of the perpetuity requirement as it did in Kaufman v. Shulman, 687 F.3d 21 (1st Cir. 2012), the case that was like Palmolive.
Today’s post will therefore comment on the Tax Court’s approach to interpreting the perpetuity requirements for conservation easements. Long story short, I agree with it. The First Circuit’s liberal approach, while understandable, is wrong. This post will explain why. To do so, I will have to dip into the substantive law with the caveat, as always, that what I say is subject to correction from alert readers who know this area better than I do. In particular, I will doubtless expose my ignorance by asking why the taxpayers did not structure the donation differently. It was likely for a reason that I
designated syndicated conservation easement arrangements
ReplyDeletePublished on February 18, 2020
Edit article
View stats
call firstStatus is online
call first
Speaker, author expert witness at VEBA LLC
188 articles
The Internal Revenue Service today urged taxpayers involved in designated syndicated conservation easement arrangements to consult with their tax advisors following a recent U.S. Tax Court decision and agency plans to continue enforcement efforts in this area.
In late 2016, the Internal Revenue Service designated certain syndicated conservation easement arrangements as "listed transactions" in Notice 2017-10 (PDF).
On Dec. 13, 2019, the U.S. Tax Court entered its first decision on a syndicated conservation easement transaction. In TOT Property Holdings, LLC v. Commissioner, Docket No. 005600-17, the Tax Court sustained in its entirety the IRS's determination that all tax benefits from a syndicated conservation easement transaction should be denied and that the 40% gross valuation misstatement and negligence penalties applied. The Tax Court found that the transaction failed the legal requirements applicable to donations of land easements and, in imposing the gross valuation misstatement penalty, found that the actual value of the easement donation was less than 10 percent of what was originally reported on the tax return.
"In denying the deductions and upholding the 40% gross valuation misstatement penalty, the Tax Court confirmed that aggressive syndicated easement transactions simply will not survive scrutiny," said IRS Commissioner Chuck Rettig. "We will not stop in our coordinated pursuit of these abusive transactions while seeking the imposition of all available civil penalties and, when appropriate, various criminal options for those involved."
"If you engaged in any questionable syndicated conservation easement transaction, you should immediately consult an independent, competent tax advisor to consider your best available options," Rettig added.
Tax Court trials in four other syndicated easement cases were conducted earlier this year and more than 50 cases are pending. In other recent cases, the Tax Court has rejected arguments that various regulations taxpayers failed to comply with are invalid, essentially negating one of these taxpayers' main defenses.
"We are prepared to take each of these and all other cases being developed by the IRS to trial, although the substance of most cases can be resolved without trial because the transactions do not meet the basic requirements to claim the charitable contribution deduction," said IRS Chief Counsel Mike Desmond. "We encourage taxpayers and their advisors to see the writing on the wall and take immediate steps to resolve these matters."
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