Recent Tax Developments — October 2003

The IRS announced on 9/15 that it had reached agreements with 40 states to trade information on unlawful tax shelters. Arthur Roth, Commissioner of the NYS-DTF, said the potential revenue loss was in the “tens of millions.”

The IRS is also exploring ways to share taxpayer information with law-enforcement agencies, including the Justice Department, the FBI, the INS and the SEC. Currently, the IRS must get a court order before it can share information with another governmental agency.  However, any such action could violate IRC provisions enacted in the mid-1970s after the Nixon administration used IRS records to intimidate enemies.

The 7th Circuit affirmed the Tax Court’s holding that gifts of LLC membership interests do not qualify for the annual exclusion where the operating agreement contained restrictions preventing the donees from realizing any substantial economic benefit. Hackl v. Comr, 9/22, 92 AFTR 2003-5254.

The IRC § 179 expensing limitation will be $102,000 in 2004. The gift tax exclusion will remain at $11,000, but the GST tax exemption amount will rise to $1.5 million in 2004.

Effective in 2004, a person over age 70½ can make tax-free gifts from an IRS to any U.S. charity. Although no charitable deduction will be allowed, the donor will not be requried to the IRS distribution as taxable income. The charitable IRA rollover law would permit an individual to fund a charitable remainder trust to provide retirement income, without paying any income tax on the IRA distribution used to fund the CRT.  Taxpayers who do not itemize, and who wish to make outright gifts to charities with IRA funds would also benefit under the new tax law.

Under a Senate bill marked up in Committee on 9/17 whose objective is protect employee pensions, publicly held companies would be required to allow workers to divest themselves of company stock attributable to employer contributions once they had completed 3 years of service.

Robert E McKenzie, Esq., of the ABA Tax Section, in a letter to the IRS Oversight Board Hearing, criticized the centralized administrative processing of offers in compromise in recent years. Noting that while “the aim of the OIC program is to collect the maximum, reasonably collectable amount from the taxpayer . . . the IRS in recent years has tended to process OICs restrictively with the result that taxpayers are not only left with tax debts they are not reasonably able to pay but also are strained to meet their current tax obligations.” To realize the objectives of the OIC program, he urged that (i) a local system of processing offers be reinstated and (ii)  IRS employees be directed to follow statutory directives to consider individual facts and circumstances.

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