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Friday December 2, 2016

Washington News

Washington Hotline

Tax Refund Scam Calls Down 90%

The Treasury Inspector General for Tax Administration (TIGTA) reported good news on the federal government's efforts to combat tax fraud.

On October 27, the US published indictments for more than 50 persons operating five call centers in Ahmedabad, India. The US government claimed that these call centers were a massive effort to engage in fraud by impersonating IRS agents.

TIGTA Deputy Inspector General for Investigations Timothy Camus reported an October 4 raid by Indian police on another call center in Mumbai, India. As a result of the actions in both Ahmedabad and Mumbai, there has been a dramatic decline in reports of attempted tax refund fraud.

Prior to the October indictment, TIGTA was receiving 38,000 reports of IRS impersonation calls each week. Since the indictment, the calls have declined over 90% and last week taxpayers reported 2,000 IRS impersonation calls.

Since 2013, TIGTA has received over 1.8 million reports of scams attempting to fleece American taxpayers. There have been nearly 10,000 victims of these scams. The total losses of these taxpayers are in excess of $53 million.

Editor's Note: The IRS and Treasury Department have been working diligently to reduce the number of victims of IRS impersonators. With the closure of the major call centers in India, the numbers are reduced, but taxpayers should still be on guard. The IRS does not call people and demand immediate payment.

UBI Fractions Rule Proposed Regulations


In REG-136978-12, 81-F.R. 84518-84526 (23 Nov 2016), the IRS published proposed regulations under Sec. 514(c)(9)(E).

The basic purpose of Sec. 514(c) is to preclude nonprofits from acquiring debt-encumbered property by requiring certain assets that produce income to be reported as unrelated business taxable income (UBTI). However, Sec. 514(c) also includes multiple exceptions that allow charities to own property subject to debt without generating UBTI.

Many real estate transactions involve both debt and a partnership of for-profit and nonprofit entities. Sec. 514(c)(9)(E) creates a UBTI exception for nonprofit partners. The goal of this "fractions rule" is to prevent improper allocation of income to tax-exempt partners (such as foundations or university endowments) and losses to a taxable partner.

The IRS stated, "A partnership allocation satisfies that rule if the allocation of items to any partner that is a qualified organization does not result in that partner having a share of overall partnership income for any tax tier greater than the partner's fractions rule percentage (the partner's share of overall partnership loss for the tax year for which its loss share is the smallest)."

There also is a rule designed to create a safe harbor floor for small transactions. The IRS continued, "The regs also increase the threshold from $50,000 to $1 million for de minimis allocations away from qualified organization partners."

CAM/ALOT Gift Tax Case Remanded


In William Cavallaro et ux. v. Commissioner; Nos. 15-1368, 15-1376 (1st Cir. 2016), the First Circuit affirmed a Tax Court decision that determined a deficiency was not arbitrary and excessive and the Cavallaros had the burden of proof. The Tax Court had determined a business transaction resulted in each parent making a taxable gift of $29.67 million to three sons. However, with respect to the valuation accomplished by accountant Marc Bello, the First Circuit held that the Tax Court must permit taxpayers an opportunity to show errors in the appraised value.

William and Patricia Cavallaro founded Knight Tool Co. ("Knight") in 1979. The company developed a new technology for adhesives called CAM/ALOT. In May of 1995, the company restructured and a new corporation, Camalot Systems, Inc. ("Camalot"), was created. After the restructuring, their three sons owned the majority of Camalot and it was sold in 1996 for $57 million.

The IRS audited the Cavallaros' Form 709 Gift Tax Returns and claimed that each parent had made gifts of $23,085,000 to the three sons. The Tax Court determined that there was a taxable gift and assessed deficiencies for William of $7,652,980 and Patricia for $8,009,020.

The taxpayers claimed that the determination was arbitrary and capricious and that the Court erred by not considering the mistakes in the Bello appraisal.

The First Circuit held that the IRS was not arbitrary and capricious in assessing the deficiency. Their tax attorney stated that he could "squeeze a few embarrassing facts into the suitcase by force" in order to create the restructuring.

However, while the First Circuit affirmed in part, it ordered the case remanded to the Tax Court so the taxpayers could have "the opportunity to rebut the Bello report and to show that the Commissioner's assessment was arbitrary and excessive."

Applicable Federal Rate of 1.8% for December -- Rev. Rul. 2016-27; 2016-47 IRB 1 (18 Nov 2016)


The IRS has announced the Applicable Federal Rate (AFR) for December of 2016. The AFR under Section 7520 for the month of December will be 1.8%. The rates for November of 1.6% or October of 1.6% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2016, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.

Published November 25, 2016
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