Should Banks Be Entitled To Tax Deductions For “Dividends” On TARP Stock?

Posted January 30, 2012 by Jonathan Prokup
Categories: Corporate, Financial Products
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By Jonathan Prokup & Dustin Covello

Four years have passed since Congress enacted the Troubled Assets Relief Program, better known as TARP.  After Treasury determined that frozen credit markets were threatening the U.S. financial industry and even the entire economy, it asked Congress to authorize the purchase of illiquid mortgages from banks.  Congress obliged, authorizing Treasury to purchase up to $700 billion of these so-called “toxic assets.”

Soon after the enactment of TARP, Treasury Secretary Henry Paulson changed course and decided that investing directly in the banks would better serve TARP’s goals than would buying illiquid mortgages.  Readers may remember Paulson’s next extraordinary and unprecedented move: summoning the CEOs of our country’s nine largest banks to Washington, the Secretary informed each of them that they must accept $25 billion worth of TARP investments—no questions asked.  As one observer told the New York Times, Paulson’s “was a take it or take it offer. . . . Everyone knew there was only one answer.” Read the rest of this post »

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The Romneys’ Tax Returns: Have FBARs Been Filed, Or Is Romney An OVDI “Candidate”?

Posted January 25, 2012 by Jonathan Prokup
Categories: Administrative, Individual, International
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By Jonathan Prokup and Dustin Covello

Following the release of Ann and Mitt Romney’s tax returns, the news media and political commentators of all stripes have – to paraphrase Arlo Guthrie – detected, neglected, selected, rejected, and inspected those returns for a variety of commercial and political purposes.  As expected, the return shows substantial income, largely from passive investments.

One of the most interesting aspects of the Romneys’ returns – from a tax practitioner’s perspective – is the geographic location of a significant portion of their investments.  As MSNBC reported:

His 2010 return shows a number of foreign investments, including funds in Ireland, Switzerland, Germany and Luxembourg. Most of Romney’s vast fortune is held in a blind trust that he doesn’t control. A portion is held in a retirement account.

Romney’s advisers acknowledged Tuesday that Romney and his wife, Ann, had a bank account in Switzerland as part of her trust. The account was worth $3 million and was held in the United Bank of Switzerland, said R. Bradford Malt, a Boston lawyer who makes investments for the Romneys and oversees their blind trust, which was set up to avoid any conflicts of interest in investments during his run for the presidency.

For tax practitioners, this excerpt poses the natural question: have the Romneys filed foreign bank account reports (“FBARs”), which have been the subject of much media attention in recent weeks?  The answer might not be as straightforward as it would initially seem. Read the rest of this post »

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Silence Is Golden: Can Treasury Offer Guidance About The Tax Consequences Of A Euro Breakup?

Posted January 23, 2012 by Jonathan Prokup
Categories: Administrative, International
Tags: , , , ,

By Jonathan Prokup

In this morning’s Tax Notes (subscription required), Jeremiah Coder addresses a topic that we at the Tax Blawg have discussed a couple of times over the past two years: the tax consequences of a potential breakup of the euro.  For our prior coverage, see here and here.  As the currency lurches towards and away from a potential dissolution (in part or in whole), the tax fallout of such an event lurks in the background.

The Tax Notes article generally covers the major tax issue (e.g., currency gain/loss recognition) associated with a potential breakup of the euro.  As the article seemed to suggest, though, the uncertainty about how Treasury would respond to a breakup is probably just as great as the uncertainty about whether the currency itself will survive, at least with its current composition. Read the rest of this post »

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Fox Business Interview: OVDI, FBARs, And The Economic Benefits Of A Repatriation Holiday

Posted January 17, 2012 by Jonathan Prokup
Categories: Administrative, International
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By Jonathan Prokup

Fox Business invited me to appear yesterday on “After The Bell” with Liz Claman and David Asman to discuss (i) the IRS reopening the disclosure initiative for offshore bank accounts and (ii) the ongoing debate about whether Congress should implement a corporate repatriation holiday.  A link to the video is below the fold. Read the rest of this post »

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IRS Reopens Offshore Voluntary Disclosure Initiative (OVDI) For Delinquent FBAR Filers: 27.5 Percent Penalty

Posted January 10, 2012 by Jonathan Prokup
Categories: Administrative, Individual, International
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By Jonathan Prokup and Dustin Covello

The IRS announced yesterday a reopening of its 2011 offshore voluntary disclosure initiative (“OVDI”).  This program will have essentially the same terms as the 2011 OVDI, but with a penalty rate of 27.5 percent (rather than 25 percent) of the highest account balance during the period covered by the initiative.  The program requires filing eight years of amended tax returns and unfiled FBARs and the payment of tax, interest and a possible accuracy-related penalty on unreported income as well as the above-mentioned lump-sum penalty.  In certain cases, a reduced penalty for failure to file FBARs is available.  Unlike the prior initiatives, the reopened OVDI has no deadline; however, the government can always choose to impose a deadline or terminate the program at its discretion.

See the announcement at the IRS website here and “How to Make an Offshore Voluntary Disclosure” here.  The IRS’ Frequently Asked Questions page provides significant guidance to determine whether individuals are eligible for OVDI. Read the rest of this post »

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Treasury Finalizes Conduit Financing Regulations Under Section 881

Posted January 9, 2012 by Jonathan Prokup
Categories: Administrative, Financial Products, International, Withholding
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By Jonathan Prokup

On December 9th, the IRS issued final regulations under Code section 881 that treat a disregarded entity as a person to determine whether a “financing arrangement” exists for purposes of applying the conduit financing regulations.  The finalized regulations may deny tax benefits otherwise available from U.S. tax treaties when a multi-party financing transaction is executed with a disregarded entity serving as an intermediary. Read the rest of this post »

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The Tax Story Behind The Big Story: The Taxation Of Carried Interests In ‘Buyout Profits Keep Flowing To Romney’

Posted December 20, 2011 by Dustin Covello
Categories: Partnerships
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By Dustin Covello

Editors’ note.  This is the first of a new periodic series on the Tax Blawg.  Mainstream press articles often implicate complex, technical tax issues.  Admirably, the press attempts to simplify the tax issues to make them more interesting and digestible for the general public, but sometimes simplification can leave readers with an incomplete or misleading understanding of the big tax picture.  For that portion of the audience who wants a little more background than the mainstream press can realistically provide, this series will unwind the tax issues discussed in prominent news articles.   

Yesterday, the New York Times published a thorough investigative report about the compensation that Mitt Romney continues to receive thirteen years after he left Bain Capital.  The report suggests that the tax law provides private equity managers like Mr. Romney favorable tax treatment not available to the rest of us:

But since Mr. Romney’s payouts from Bain have come partly from the firm’s share of profits on its customers’ investments, that income probably qualifies for the 15 percent tax rate reserved for capital gains, rather than the 35 percent that wealthy taxpayers pay on ordinary income. The Internal Revenue Service allows investment managers to pay the lower rate on the share of profits, known in the industry as “carried interest,” that they receive for running funds for investors.

“These are options that are not available to the ordinary taxpayer,” said Victor Fleischer, a law professor at the University of Colorado who studies financial firms. “You continue to take your carried interest — a return on labor, not capital invested — and you’re paying 15 percent on it instead of high marginal income rates.”

In a vacuum, the Times’ assertion appears scandalous.  Is it true that private equity managers receive preferential tax treatment on their labor income compared to the middle class?  Well, yes and no. Read the rest of this post »

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The IRS Can Summons California For Property Transfer Records

Posted December 20, 2011 by Jonathan Prokup
Categories: Administrative, Corporate, Tax Procedure
Tags: , ,

As noted by Janet Novack at forbes.com, Judge England of the District Court for the Eastern District of California last week issued an order permitting the IRS to serve a “John Doe” summons on the California State Board of Equalization.  The summons seeks the names of residents who transferred property to relatives for little or no considerations.  The IRS hopes that the information it receives will identify individuals who should have, but did not, file Forms 709 – Gift Tax Returns. Read the rest of this post »

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IRS Records Retention Requirements In The Age Of Metadata

Posted December 16, 2011 by Phil Karter
Categories: Administrative, Audit, Corporate, Litigation, Tax Procedure
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By Phil Karter

In a recent TaxBlawg post, my colleague Jonathan Prokup discussed the IRS’ intention to begin requesting electronic files as part of taxpayer examinations so that it can analyze the “metadata” contained in those files.  One of the concerns raised in the post, as announced in Chief Counsel Advice 201146017, was the possibility that such data in the hands of the IRS may be insecure and therefore potentially susceptible to theft by third-party hackers (which, by the way, could conceivably expose the IRS to damages for disclosure of taxpayer information under IRC § 6103). Concerns about metadata security, as highlighted in the post, are but one of a number of provocative issues arising from the explosive growth in electronic data (commonly referred to as “electronically stored information” or “ESI” in the parlance of the Federal Rules of Civil Procedure).  Aldous Huxley’s Brave New Worldis upon us, and if your legal and IT departments are not already addressing these issues, tax executives should not be deterred from doing so.  Among the issues implicated

  • Does your company have a comprehensive records retention policy in place and, even assuming that it does, can the company adequately prove its compliance with such policies if ever challenged?
  • Is that policy consistent with the requirements of IRC § 6001 and Treas. Reg. § 1.6001-1 to maintain and retain books and records “so long as the contents thereof may become material in the administration of any internal revenue law.”  See Reg. § 1.6001-1(e).
  • Should your company attempt to negotiate a records retention limitation agreement with the IRS?
  • As part of its records retention policy, can and should your company institute a corporate policy of routine metadata scrubbing for certain types of corporate documents, and would such a policy be consistent with the requirements of Sarbanes-Oxley? Read the rest of this post »

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If MF Global Lost My Money, Do I At Least Get A Tax Deduction?

Posted December 14, 2011 by Dustin Covello
Categories: Uncategorized
Tags: , , ,

By:  Jonathan Prokup & Dustin Covello

After MF Global filed for bankruptcy protection just over a month ago, investigators discovered that approximately $1.2 billion of assets in customers’ accounts had somehow disappeared.  Although no one at the firm has confirmed where the money went, news reports have suggested that the money may have been used to cover bad trades and debts to other financial institutions.  For example, the New York Times recently reported that investigators believe MF Global, in a frantic attempt to remain solvent, may have paid at least $200 million in customer funds to JPMorgan Chase.  Also, late yesterday afternoon on Capitol Hill, after the firm’s top executives repeatedly and unequivocally denied knowing where the money went, murky allegations arose that the executives knew that the firm was loaning customer money to related parties.

It remains to be seen whether and to what extent MF Global’s customers will receive a return of their accounts.  Although only a full recovery of the missing $1.2 billion would make the customers whole, tax planning may help ameliorate their financial losses.  Section 165 of the Internal Revenue Code provides taxpayers relief to deduct casualty or theft losses that are not compensated by insurance.  Revenue Ruling 2009-9, issued to clarify section 165 issues related to the Bernie Madoff Ponzi scheme, offers useful guidance regarding the timing and character of deductions for losses that are due to theft or fraudulent investments (should MF Global’s actions turn out to meet either of those conditions).  The Ruling, however, reflects a trap for the unwary buried in section 165:  in which year does the deduction arise?     Read the rest of this post »

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