Tax Notes Quotes Christopher Rizek and Melissa Wiley on Tax Shelters

The IRS has been transparent in letting tax professionals know what it considers to be abusive microcaptive arrangements or syndicated easement deals, several agency officials said in a heated discussion.

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Christopher S. Rizek of Caplin & Drysdale said taxpayers and their advisers have some guidance from court decisions holding that a microcaptive insurance company didn’t qualify as an insurance company for federal tax purposes, or that a conservation easement donation didn’t qualify as a charitable contribution.

But tax professionals still don’t have any guidance from Treasury or the IRS on what kinds of microcaptive arrangements or easement donations are considered valid, according to Rizek. He added that he had been hoping that a Tax Court microcaptive case in which he represented the taxpayers (Puglisi v. Commissioner) would proceed to trial because he thinks the court would have found that the arrangement was valid under section 831(b).

The IRS instead conceded the case, and the Tax Court, over the taxpayers’ objections, on November 5 entered an order accepting the IRS’s concessions and resolving the dispute without an opinion. According to Rizek, the taxpayers wanted an opinion “precisely for this reason of there being a lack of guidance as to what does work as opposed to what doesn’t, and I can say very confidently that taxpayers are still waiting for that guidance out there and would love to know the answer to that question.”

Melissa L. Wiley, also with Caplin & Drysdale, said uncertainty on what the IRS considers to be valid microcaptives or easement donations has many tax return preparers and tax attorneys worried about how they can give advice without subjecting their clients or themselves to possible IRS scrutiny and onerous penalties.

Some taxpayers have microcaptive arrangements that appear to pass muster, but with no IRS guidance spelling out what works under the law, return preparers and attorneys want to make sure they are giving appropriate advice, Wiley said.

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Schenck also disputed Rizek’s contention that IRS exam agents in easement and microcaptive cases are being told to issue administrative summonses for information even if taxpayers have already provided that information via disclosure forms or in response to information document requests (IDRs).

According to Rizek, having to tell clients that they must comply with a summons for information the IRS already has puts him in a difficult position. “I think you’re undercutting the IDR process and/or issuing unenforceable summonses, but it’s really tough on the taxpayers and the practitioners to sort out what to do there,” he said.

For the full article, please visit Tax Notes’ website (subscription required).