UBS Yacht Broker Client Pleads Guilty -

One of UBS's american clients, a Florida yacht broker, pleaded guilty to filing a false tax return today. According to government sources, the false tax return was filed on October 18, 2008, and failed to report his interest in a UBS account in Switzerland. He also failed to report the income he earned on his UBS bank accounts. The account was owned through a panamanian corporation. 

 

That means it took the government less than six-months to investigate and prosecute the case -

It also appears that this case may be related to the criminal complaint filed a couple of weeks ago against the Florida accounant (see prior posts) many of whose clients were in the yacht brokerage business. 

Federal Prosecution of UBS Client - Update

The Florida accountant who last week was charged with filing a false federal income tax return because he failed to disclosed his multimillion dollar account at UBS has been released from jail on a $12 million bond. 

Innocent Spouse Reg. Invalidated

The Tax Court has invalidated Reg. §1.6015-5(b)(1), which imposed a two year period to apply for Code Sec. 6015(f) innocent spouse equitable relief following commencement of collection action (Lantz 132 TC No. 8).

Is UBS Deferred Prosecution Agreement Paying Off?

On April 2, the DOJ announced that they had charged a Boca Raton, Fla, accountant with filing a false income tax return because he failed to disclose his ownership of a foreign financial account at, you guessed it, UBS. Coincidentally, he also failed to report the income he earned on the account.

The accountant set up his account in Switzerland in the name of a nominee British Virgin Islands corporation. This appears to be the standard ploy UBS used to avoid having to disclose accounts owned by American citizens. UBS bankers, operating in the U.S. apparently told customers to set up entities in offshore jurisdictions and transfer the money to UBS from those offshore accounts. In this way UBS could claim not to know that the offshore accounts were really owned by U.S. citizens and could avoid disclosing the accounts to the IRS.

UBS has admitted that it conspired to defraud the U.S. and agreed to cooperate with the ongoing criminal investigation but to date has disclosed only a few of its U.S. customers who participated in the scheme. UBS also agreed to pay a $780 million fine.

It looks like the U.S. is really serious about cracking down on Americans who hide their money abroad.

Related-Party 1031 Using QI KO'd

In only the second Tax Court decision to interpret the related party rules for like-kind exchanges using a qualified intermediary (QI), an exchange was deemed to have been structured to avoid the related party rules, and to have tax avoidance as one of its principal purposes (Ocmulgee Fileds v. Comm'r, 132 T.C. No. 6 (March 31, 2009)).

In Ocmulgee, a Georgia corporation owned several shopping centers and office buildings; it arranged to sell one low-basis appreciated shopping center to an unrelated party. The corporation intended to carry out the transaction as a like-kind exchange. It began hunting for sutiable replacement property, but was unable to locate an acceptable replacement other than a parcel (the "replacement property") which the corporation had previosuly sold to a related party (an LLC). The replacement property was part of three contiguous parcels; the corporation already owned the other two. Perhaps not coincidentally, the LLC had a relatively high basis in the replacement property.

To carry out the transaction, the corporation transferred the shopping center to a QI, which sold it, using the proceeds to purchase the replacement property from the LLC. The LLC reported the disposition of the replacement property as a sale, paying tax on the gain. The QI then transferred the replacement property to the corporation. Functionally this was no different from the related parties swapping properties, followed by the LLC immediately selling the property it received in the exchange. Had the transaction been structured without the use of a QI, it would have run afoul of Code Sec. 1031(f)(1).

Although this is not the first time a taxpayer has attempted to use a QI to in essence swap low basis property (“relinquished property”) for high basis property (“replacement property”) with a related party (see Teruya Brothers et. al. v. Comm’r, 124 TC 45 (2005)), what made this case interesting was that the taxpayer argued that there were important non-tax considerations for the exchange. This included the seemingly logical desire to reunite ownership of the replacement property with the two adjacent parcels the corporation already owned. Moreover, the corporation offered proof that an exchange with a related party didn't drive the transaction; the corporation intended to dispose of the shopping center and find suitable replacement property from an unrelated third party. It only entered into an exchange with the LLC when appropriate replacement property could not be located.

While the Tax Court questioned the factual and logical integrity of some of the corporation’s arguments, the following language from the decision confirms that even being able to prove an independent business motive is inadequate to circumvent Code Sec. 1031 (f)(2) and (4) when a principal purpose is tax avoidance:

“ [E]ven had petitioner shown a legitimate business purpose for the acquisition of the replacement property], that would not necessarily preclude a finding that either the deemed exchange of [the relinquished property] for the [replacement property] or [the related party’s] deemed sale of [the relinquished property] had as a principal purpose the avoidance of Federal income tax."

The language shows that the standard is “a” principal purpose, not “the” principal purpose. When a taxpayer has dual motives or objectives, any one of which is tax avoidance, the like-kind related party rules will be invoked, and use of a QI will not cure the problem.

As to the issue of intent at the time that an agreement is reached to dispose of the relinquished property, Ocmulgee provides a judicial explication of the analysis in Letter Ruling 9748006, issued in 1997. In the PLR the Service concluded that not having an intent to engage in a related-party exchange from the outset did not negate the transaction from being deemed to have tax avoidance as a principal purpose; the use of a QI in the PLR, as in Ocmulgee and Teruya, failed to save the day.

Is the First Circuit Backing Off its Taxpayer-Friendly Stance

Workpapers Privileged Ren't They–

Back in January, the First Circuit Court of Appeals dealt the IRS a blow when it decided that Textron did not have to disclose documents it used to calculate its tax reserve. Now, the Appeals Court has agreed to rehear the issue.

The IRS had subpoenaed the documents because it discovered that Textron had participated in several Sale in/Lease out (SILO) transactions. The documents listed the various controversial positions that the company had taken on its tax returns and calculated the amount of additional tax that would result if the positions were disallowed after an audit and/or litigation. The documents also rated the different positions’ likelihood of success (that would tell a litigator which positions to give up on and which positions to hold on to when negotiating a settlement).

Despite establishing its case for enforcing the summonses, the IRS was denied access to the corporation's tax accrual work papers because they were protected by the work product privilege. The First Circuit concluded that documents prepared for alternative dispute resolution purposes (such as an audit or administrative appeal) could qualify for the work product privilege because they were prepared “because of litigation” and the company’s use of the documents for other purposes did not vitiate the privilege. However, since the company had shown the documents to its outside auditor, the case was remanded to see if the auditor’s work papers could be obtained and if those documents would disclose the company’s tax accrual positions.

The District Court had found that disclosing the documents to an outside auditor did not vitiate the privilege either, since it did not make their disclosure to the IRS more likely. However, some would argue that any disclosure would vitiate the privilege – More to come-

Who Profits from New Markets?

The new markets tax credit (NMTC) was introduced in 2000 as a vehicle to stimulate investment in qualified low-income communities. It’s a credit on equity investment claimed over a 7-year period (5 percent over the first 3 years and 6 percent over the next 4 ). A "low-income community" is basically a census tract with a poverty rate of at least 20%, or with median income of up to 80% of the area or statewide median, whichever is greater.

The NMTC is allowed for a percentage of a qualified equity investment in a qualified community development entity (CDE). A CDE is a domestic corporation of partnership, certified by the Dept. of Treasury, which is organized to provide investment capital for low-income communities or persons and which allows residents of the community to be represented on the entity’s governing board.

At its best, NMTC provides an important tool in the development of low-income housing and retail facilities in areas where both are needed. But as with every deduction or credit, the potential for abuse exists. And so it is perhaps no surprise that with a minimal investment of time, we found some NMTC projects which raised our (high-arched, well tweezed) eyebrows. We’re not saying these projects are abusing NMTCs, but we are wondering if this is what was really intended. We’ve also come up with a few suggestions which might help to curb any potential abuses.

White Stag Building Redevelopment is a project in the Old Town China Town part of downtown Portland, OR built with a $28.5 million NMTC allocation. It consists of three historic buildings, all of which were built before 1910. The White Stag building, named for former tenant White Stag clothing, had been vacant for many years. It’s connected to the Bickel and Skidmore buildings which now form a single complex. It houses several University of Oregon programs, as well as United Fund Advisors, which describes itself as providing “a broad suite of traditional and innovative investment banking services that provide triple bottom line returns to our client partners.” United Fund Advisors is involved with 10 NMTC projects.

What White Stag doesn’t house are low-income families, retail operations at which low income families shop, or significant employment for low income workers. The Univeristy describes the space it is occupying in the building as including “six classrooms, new event space for up to 250 people, a new library for architecture and journalism programs, a shared computer laboratory, and a new university book store and Duck Shop, which will also feature a café.” Yes, the building is green (it has a Leadership in Energy and Environmental Design Gold Certifcation), has won design awards and certainly spiffs up a blighted part of the city, but are we convinced that this really meshes with the true objectives of the NMTC?

Liberty Station is a mixed-use residential and commerical project located at the former Naval Training Center in San Diego built with a more than $14 million NMTC allocation. Even in the current economic climate, prices of Liberty Station townhomes and single family homes generally range from $500,000 (for approximately 1,000 sf of living space) to in excess of $1 million. Liberty Station has more than 170,000 square feet of retail shops, grocery stores (Trader Joe’s, Vons), no fewer than 11 beauty and wellness merchants, 19 fast food and fine dining restaurants, and office space. It has two hotels, a golf course, and a waterfront park. It may provide some employment to displaced workers, but what it doesn’t have is low income housing or retail establishments geared to low income individuals.

Indeed, the city of San Diego requires redevelopment areas to reserve 15 percent of homes for people of low and moderate in­comes, or else provide twice that amount of affordable housing elsewhere. However, Liberty Station contains no afford­ably priced homes, so the redevelopment agency was required to set aside tax revenue to provide housing elsewhere in the city for the kinds of people the NMTC was supposed to be assisting. (see: www.sandiego.gov/ntc/housing/affordable.shtml).

It would appear that the only way this sort of project, located in an otherwise upscale neighborhood of prime real estate, would qualify for NMTC would be based on census figures which used the former military base residents in computing income for the area. We’re not aware of anything which requires that census figures be modified for redevelopment on former army and navy bases, and that may be a rather disturbing blind spot in the law. Excluding the median income of former military personnel from closed army bases would certainly seemed to be called for in light of the desirable locations of several of these closed bases.

The Sheraton Duluth Hotel in Duluth, MN was built with a $16.5 million NMTC allocation. It includes a 147 guest room hotel on 6 floors, on top of which the plans call for 35 market rate condominiums, and an adjoining Plaza ballroom for the hotel adjacent to the Greysolon Plaza senior housing project. So what exactly did the community gain for the $16.5 million? Well, a pretty hotel which will form part of a larger complex which may revitalize a part of downtown, arguably 83 permanent jobs (though there’s no indication these are only going to low income workers) and renovation of 150 existing units of senior housing. Oh, and the hotel will offer discount rooms for visiting doctors. But there appears to be no non-senior low income housing, and no low income community retail.

Without some demonstrable enhancement of housing or retail for low income communities it is questionable whether this kind of project should be authorized. Overall, NMTCs should require something beyond general revitalization, and its potential handmaiden—gentrification-- of downtown areas.

We’d like to identify other projects which are benefiting from NMTC allocations, particularly closed bases, to gain a better understanding of, and insight into, the issues before recommending concrete action. And if we’re wrong about all this, or missing some important benefits which projects like the ones described above provide- we want to hear that too!