SHORT-FORM FORM 1023 OUT BY SUMMER

Most organizations seeking Code §501(c)(3) tax-exempt status must file a 25+ page Form 1023 application. In a major change to this time-consuming procedure, the IRS will soon be issuing a short form three page Form 1023-EZ for smaller applicants to use.

The short form can be used by organizations that do not expect to have annual gross receipts of more than $200,000 in the next 3 years or in the prior 2 years, and do not have total assets in excess of $500,000. Some organizations that meet this criteria will still not be allowed to use the form, including foreign organizations, limited liability companies, successors to for-profit entities, churches, schools seeking public charity status, and hospital and medical research organizations seeking public charity status.

The apparent idea is to relieve smaller organizations from submitting an application that is based mostly on future projections anyway.Rather than using IRS resources to examine these applications, the IRS will instead employ a robust compliance process later, either through compliance checks or full examinations.

The IRS draft of April 23, 2014 of the Form 1023-EZ can be viewed here.

ARTICLE ABSTRACT - The Baucus International Business Tax Reform Discussion Draft: Key Design Issues

TITLE	The Baucus International Business Tax Reform Discussion Draft: Key Design Issues
AUTHOR(S)	David G. Noren, Esq.
PUBLICATION	43 TM International Journal 199 (April 2014)
PUBLISHER	BNA
ABSTRACT (Key Points & Discussions)	General discussion of terms and relevance of Max Baucus November 19, 2013 staff discussion draft of reform of U.S. international tax rules. Option Y proposal - minimum tax of 80% of U.S. statutory rate on CFC income on low taxed income. Option Z proposal - all CFC income subject to minimum tax regardless of foreign rates, with differences between active and passive income. The proposals impose high levels of minimum tax on a broad base, trying to avoid income-shifting at the risk of burdening U.S.-based multinationals. Author discussion of suggested modifications to these options. Proposal singles out CFC income from serving U.S. markets for adverse treatment. Proposal to override check-the-box regulations for entities owned by CFCs. Proposal for a current-year item-by-item foreign tax credit for taxes attributable to taxable Subpart F income, and creates new separate baskets and complexity. 20% transition tax on mandatory deemed repatriation of pre-effective-date earnings accumulated by CFC's. Proposal to expand disallowance of deductions for related-party base erosion payments for inbound structures, including hybrid instruments/transactions, hybrid entities, conduit financing arrangements, or preferential taxation in hands of the recipient. Overall, the Baucus proposal is too harsh, but does advance the debate on these issues.
RESEARCH TAGS	Baucus proposed reforms; territorial taxation; anti-base erosion proposals; CFC proposed modifications

 

These abstracts are provided as a service to the readers of Rubin on Tax to advise them of articles that may be of interest to them, both as they are published and as a research tool using the blog's Search function. Note that many of these articles are available by subscription only.

ASSERTION OF REASONABLE CAUSE DEFENSE TO PENALTY RESULTS IN LOSS OF ATTORNEY-CLIENT PRIVILEGE

Written and oral communications between a client and his or her attorney are generally privileged. This includes communications regarding taxes.

In a recent Tax Court case, an example of “the exception swallowing up the rule” arose. The case threatens to void the attorney-client privilege in a great swath of tax cases that are litigated where the taxpayer asserts a reasonable cause defense to a penalty.

In the subject case, the taxpayer was threatened with a substantial underpayment of income tax penalty. In defense of that threat, the taxpayer claimed the reasonable cause exception for the penalty under Code §6664(c). That Section applies to the portion of an underpayment “if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion (emphasis added).”

By asserting that defense, the government claimed that that taxpayer had waived the attorney-client privilege. The government could thus access communications between the taxpayer and his attorney that related to the tax issue, because that is relevant to whether the taxpayer acted in ‘good faith.’ More specifically, the government was seeking access to written tax opinions that would otherwise have been privileged.

The Tax Court agreed with the government, finding that the required inquiry into ‘good faith’ makes the reasonable cause exception a ‘state-of-mind’ exception. Thus, a review of the knowledge and thinking of the taxpayer as to the law is relevant. Further, knowledge and statements communicated by the attorneys to the taxpayer relating to the reporting of the tax item are directly relevant to such an inquiry. Thus, by asserting the penalty exception, the taxpayer waived the attorney-client privilege.

The reach of this exception is broad, since it presumably will apply to all accuracy related penalties, including fraud penalties, when the reasonable cause exception is asserted by the taxpayer. Thus, taxpayers and their tax attorneys do have the benefit of the attorney-client privilege, but a taxpayer that wants to assert the privilege may have to sacrifice any claim to any state-of-mind penalty exception, including the reasonable cause exception, if it wants to maintain the privilege. Since reasonable cause is a common and important penalty defense, the impact of this case will be very significant (forcing a choice between an exception to penalty argument vs. protecting privileged communications).

The exception should not result in a waiver of all attorney-client communications – only those relevant to the taxpayer’s state of mind and knowledge of the applicable law when filing its tax return.

A similar case and result occurred in a District Court bankruptcy proceeding relating to tax issues, in In Re: G-I Holdings, et al., 92 AFTR2d 2003-6451 (DC NJ), 07/17/2003. See also New Phoenix Sunrise Corp. v. Comm., 106 AFTR 2d 2010-7116 (CA6 2010) for another similar result.

I leave it to the litigators whether there is any method to bifurcate the tax determination phase of a proceeding from the penalty phase, so that the privileged items need not be disclosed unless the taxpayer lost the tax determination phase. This was attempted in the In Re: G-I Holdings case cited above. It was not rejected out-of-hand, but was ultimately denied because the court determined that the taxpayer had already waived the privilege by asserting the reasonable cause defense to penalties in discovery responses and thus it was too late to salvage it.

AD Investment 2000 Fund LLC, Community Media, Inc., 142 TC No. 13 (2014)