Tax Strategies

The Supreme Court ruled in a 7-2 decision that the Tax Court may not exclude from the record on appeal Rule 183(b) reports submitted by special trial judges. The Tax Court's chief judge appoints special trial judges to hear certain cases, but the ultimate decision, when tax deficiencies are greater than $50,000, is reserved for the court itself. Tax Court Rule 183(b) directs the special trial judge to submit a report to the chief judge, who assigns the case to a judge of the court. The Tax Court judge is to give due regard to the report and presume fact-findings contained in the report to be correct. The Tax Court judge may then adopt the report "or may modify it or reject it in whole or in part." After a rule revision in 1983, the reports were no longer included in the record or made public. The taxpayers in the case before the Supreme Court had failed in Tax Court, and believed that the decision -- which said that it agreed with and adopted the opinion of the special trial judge -- did not, in fact, comport with the report of the special trial judge. The appeals court ruled against the taxpayers, holding that the report is protected as part of the court's confidential deliberative process. The Supreme Court reversed, finding that the practice of not disclosing the special trial judge's original report "impedes fully informed appellate review," and ignores the principle that the officer who hears witnesses and sifts through evidence "will have a comprehensive view of the case that cannot be conveyed full-strength by a paper record."

Facing charges of tax evasion, original "Survivor" winner Richard Hatch last week decided to take his chances with a grand jury, pulling out of a plea bargain that had been arranged with the U.S. Attorney in Rhode Island. In January, the government charged that Hatch had filed a false income tax return that omitted the more than $1 million in prize money that he received for winning the popular reality show. He also was charged with failing to report approximately $321,000 paid to him by a Boston radio station for co-hosting a program. Hatch, who lives in Newport, had agreed to plead guilty in return for a lighter sentence. Last Wednesday, however, prosecutors said that he had backed out of the plea deal, and so they dismissed the original charges and said that they would present their case to a grand jury. "The government will not pursue the information filed against Mr. Hatch in January," said Tom Connell, a spokesman for the U.S. Attorney in Rhode Island, "and will instead present the case to a grand jury for consideration of all possible charges."

The President's Advisory Panel on Federal Tax Reform holds its third meeting Tuesday, March 8 at Sago Networks, here. The witnesses invited are expected to provide the panel with perspective on corporate tax reform and how the tax system affects businesses and entrepreneurs. They include Jack Levin, senior partner in the international law firm of Kirkland & Ellis LLP; Douglas Shackelford, a CPA and professor of taxation at the University of North Carolina's Kenan-Flagler Business School; William Gentry, associate professor of Economics at Williams College; Sam Gibbons, chairman of Gibbons & Co., a former congressman and chairman of the Ways and Means Committee; Roger Harris, president and chief executive of Padgett Business Services; Todd Flemming, chief executive of Infrasafe Inc.; David Hurley, owner and principal of Landmark Engineering and Surveying Corp.; and Donald Bruce, assistant professor in the Center for Business and Economic Research and the Department of Economics at the University of Tennessee, Knoxville. Sago Networks is a technology services company that provides solutions for all of its customers' bandwidth and custom telecommunications needs.

Electronic forms provider STF Services Corp. has entered into a marketing pact with online sales and use tax concern Avalara, to license STF's flagship SuperForm product. Terms were not disclosed. Avalara's AvaTaxST --which automatically calculates and reports sales tax -- will now include a forms utility that would create automated returns. Currently, AvaTax ST has four functional components: o Customer address validation; o Tax jurisdiction research; o Sales and use tax calculation; and, o Secure reporting for tax filing and audit purposes. "STF's interactive forms technology and years of experience in dealing with the myriad taxing jurisdictions will streamline the sales tax compliance burden with Avalara's system, and help deliver value to customers," remarked STF's president, Charlie Ter Bush, in a statement.

A federal district court has permanently barred St. Louis truck driver Charles Eden from preparing federal income tax returns for customers. In entering the civil injunction order, Judge Stephen Limbaugh found that Eden "continually and repeatedly" understated customers' tax liabilities "by fabricating or grossly inflating their tax deduction." The order states that Eden's activities over the last five years have cost the government nearly $3.5 million. The court ordered Eden to notify his customers of the injunction and to provide the Justice Department with his customers' names, mailing and e-mail addresses, and phone and Social Security numbers. "People who prepare false or fraudulent tax returns are cheating not just the federal treasury, but all law-abiding taxpayers," said Eileen J. O'Connor, assistant attorney general for the Justice Department's Tax Division. "The Department of Justice and the Internal Revenue Service are working vigorously to stop these systematic abuses of the tax system."

Sidney I. Roberts, one of the country's foremost authorities on the complexities of international tax law, died at his home here following a bout with pneumonia. He was 91. Roberts authored some 10 books and countless articles on the tax implications in such areas as overseas stock ownership and dual residences. Roberts & Holland -- the firm he co-founded in 1957 -- evolved into one of the largest international tax firms in the country. He retired as a partner in 1986. In 1967, he co-authored "U.S. Income Taxation of Foreign Corporations and Nonresident Aliens." Roberts also was an adjunct professor at Columbia Law School.

Federal Reserve Chairman Alan Greenspan told the President's Advisory Panel on Federal Tax Reform that a consumption tax, such as a national sales tax or value added tax, would spur economic growth because it would encourage saving and capital formation. However, Greenspan cautioned that moving to a different system than the current one would raise a challenging set of transition issues. Joining Greenspan at the panel's second meeting were former Secretary of State and Secretary of the Treasury James Baker, and Commissioner of Internal Revenue Mark Everson. The panel is charged with examining the existing system and formulating options for reform, which will presented to the Secretary of the Treasury by July 31, 2005. The third meeting will be held March 8 in Tampa, Fla., and will focus on how the tax system affects businesses and entrepreneurs.

At the mid-point of tax filing season, taxpayers have used e-filing at a record rate, according to the Internal Revenue Service. Out of 47 million returns filed through Feb. 25, 74 percent of them were e-filed -- up from 69 percent last year. While this percentage traditionally declines as April 15 approaches, the IRS expects for the first time to have more than half of all individual tax returns filed electronically. Of the 35 million returns that have been e-filed so far this year, the biggest jump comes from self-prepared tax returns filed with a computer, which have increased nearly 14 percent to 8.7 million returns. The jump in computer use coincides with another strong year for the Free File program. More than 2.77 million returns came in through Free File through Feb. 23, which is a 42.6 percent increase from last year's 1.94 million returns. "E-filing is making a strong start," said IRS Commissioner Mark W. Everson. "Taxpayers and tax professionals are becoming increasingly comfortable with e-filing." The growth in e-filing comes as record tax refunds are being sent to taxpayers. The average refund so far is $2,436 -- a record amount and more than $200 more than last year. So far this year, three out of four taxpayers receiving refunds have used direct deposit.

The Internal Revenue Service has finalized a regulation that would limit the use of life insurance and annuity contracts as a way to avoid current taxation of investment earnings. The regulation will prevent taxpayers from turning otherwise taxable investments in hedge funds and other entities into tax-deferred or tax-free investments by purchasing the investments through a life insurance or annuity contract. Life insurance and annuity contracts receive favorable tax treatment in recognition of the importance of protecting loved ones against the potentially devastating financial consequences of death or the risk of exhausting savings while in retirement. The new regulation will help taxpayers purchasing a life insurance or annuity contract to be secure in the knowledge that the contract complies with the tax laws, according to the IRS.This regulation is part of the effort to modernize the rules for these contracts, in recognition of the developments that have occurred in the financial markets in recent years.

Federal penalties for taxpayers accused of tax evasion, failure to file a return, or making false statements to the Internal Revenue Service could increase dramatically later this year if Congress approves legislation being pushed by Sen. Russ Feingold, D-Wis., to sweeten tax deductions for charitable volunteers. Under the bill, the current $100,000 fine for attempting to "evade or defeat tax" liabilities would jump to $250,000, penalties for more serious violations would double to $1 million per offense, and the maximum of prison terms facing taxpayers would rise from five years to 10 years. At the same time, taxpayers charged with "willful failure to file returns, supply information or pay tax" would face felony rather than misdemeanor charges, with maximum penalties climbing to 10 years, up from 12 months currently. Feingold's bill would also double the federal penalties for making false statements to IRS to as much as $1 million and/or five years in prison. These sharply increased penalties are buried in the fine print of a bill that Feingold said is needed to provide equitable tax treatment for volunteers who use their cars for charitable activities. Under current law, these volunteers may be reimbursed up to 14 cents per mile for their donated services without triggering a tax consequence for either the organization or the volunteers. If the charitable organization reimburses any more than that, they are required to file an information return indicating the amount, and the volunteers must include the amount over 14 cents per mile in their taxable income. According to Feingold, this is inequitable because the mileage reimbursement level currently permitted for businesses is a more liberal 40.5 cents per mile. In proposing legislation to eliminate this "disparity," Feingold told the Senate that his new bill "today is identical to a measure I introduced in the 107th Congress and the 108th Congress in nearly every respect." Significantly, however, neither of those earlier Senate bills, nor separate legislation introduced in the House earlier this year by Rep. Todd Platts, R-Pa., to increase charitable mileage deductions, contain the tax penalty increases included in Feingold's current measure. In explaining the new bill's tax sanction provisions, the Wisconsin Democrat said that the sharply increased monetary penalties for taxpayers would offset the cost of raising the mileage deduction for charitable volunteers. That represents a tax break that the Congressional Joint Committee on Taxation has estimated would result in a net federal revenue loss of no more than $1 million over five years. "Though the revenue loss is small," Feingold explained, "it is vital that we do everything we can to move toward a balanced budget, and to that end I have included a provision to fully offset the cost of the measure and make it deficit-neutral."