Daily Tax Update - March 17, 2009

IRS ISSUES GUIDANCE ON "PONZI" SCHEMES":  Today, the IRS issued guidance, in Rev. Rul. 2009-9 and Rev. Proc. 2009-20, allowing taxpayers to deduct losses from criminally fraudulent arrangements, such as Ponzi schemes, as theft losses. Rev. Rul. 2009-9 discussed the tax treatment of losses from criminally fraudulent investment schemes, such as Ponzi schemes, and determined that losses from such schemes are theft losses. Rev. Proc. 2009-20 provides an optional safe harbor for taxpayers who have experienced losses from such criminally fraudulent arrangements to treat their losses as theft losses. 

  • In addressing the deductibility of the investors' theft losses, the IRS found that those losses were itemized deductions deductible under I.R.C. § 165(c)(2) and not subject to the limitations under either §§ 67, 68 or 165(h). The amount of the loss is equal to the sum of the initial investment, any additional investments, and any amounts included in gross income with respect to the investment, less any amounts withdrawn, reimbursements, or claims for which there is a reasonable prospect of recovery.
  • With respect to NOLs, Rev. Rul. 2009-9 concluded that investors could carry back up to three years, and carry forward up to 20 years, the part of the NOL attributable to the investment theft losses. The IRS further noted that certain investors may be able to elect either a three-, four-, or five-year NOL carryback for a 2008 NOL pursuant to Rev. Proc. 2009-19.
  • Rev. Proc. 2009-20 includes a statement to be executed by the taxpayer in which the taxpayer agrees:

(1) not to claim deductions in excess of the amount provided in Rev. Proc. 2009-20 (i.e., 95% of the qualified investment if the investor does not pursue any potential third-party recovery or 75% if the investor intends to pursue recovery, less any actual recovery or potential insurance/SIPC recovery);
(2) not to file returns or amended returns to exclude or recharacterize income reported with respect to the investment arrangement in taxable years preceding the discovery year;
(3) not to apply the alternative computation in I.R.C. § 1341 with respect to the theft loss deduction allowed by Rev. Proc. 2009-20; and
(4) not to apply the doctrine of equitable recoupment or the mitigation provisions in I.R.C. §§ 1311-1314 with respect to income from the investment arrangement that was reported in taxable years that are otherwise barred by the period of limitations on filing a claim for refund under I.R.C. § 6511. 

  • Rev. Proc. 2009-20 applies to losses for which the discovery year is a taxable year beginning after 2007. Rev. Proc. 2009-20 also describes how it will treat claims for deductions of theft losses that do not use the safe harbor treatment described in the guidance. 
  • For additional information, contact Mark J. Silverman - msilverman@steptoe.com or Matthew D. Lerner - mlerner@steptoe.com 
  • The revenue procedures can be accessed here and here.   

SENATE FINANCE COMMITTEE HOLDS HEARING ON “PONZI” SCHEMES AS IRS ISSUES GUIDANCE:  Today, the Senate Finance Committee held a hearing on “Ponzi” schemes and offshore tax haven legislation. 

  • In his opening remarks, Committee Chairman Max Baucus said, “Today, we will begin the discussion of legislative proposals intended to enhance the transparency of offshore activity. We will consider how we can give the IRS better tools to deter, detect, and stop offshore noncompliance. Among others, we will review three proposals today. The first proposal would require entities transferring funds offshore, other than on behalf of publicly traded companies, to report to the IRS the amount and destination or account information of the funds transferred. This will give the IRS a trail of funds going offshore. And that would help the IRS to deter and detect offshore noncompliance. The second proposal would extend the statute of limitations for tax returns with certain international transactions from three years to six years. This change would give the IRS more time to detect and examine often complicated offshore activity. And the third proposal would facilitate the IRS’s ability to enforce compliance with the law’s requirement for reports of foreign bank and financial accounts. The proposal would require entities to file these reports along with their tax returns.”
  • IRS Commissioner Shulman said, “To help provide clarity in this very complicated and tangled matter and to assist taxpayers, the IRS is today issuing guidance articulating the tax rules that apply and providing ‘safe harbor’ procedures for taxpayers who sustained losses in certain investment arrangements discovered to be criminally fraudulent.” 
  • Shulman continued, “Mr. Chairman, turning to the second subject of today’s hearing, international issues are a major strategic focus of the IRS. It is of paramount importance to our system of voluntary compliance with the tax law that citizens of this country have confidence that the system is fair. We cannot allow an environment to develop where wealthy individuals can go offshore and avoid paying taxes with impunity. As you will hear from my testimony today, the IRS is aggressively pursuing these individuals and institutions that facilitate unlawful tax avoidance.” Shulman said that there is “an unprecedented focus that the Internal Revenue Service has placed on detecting and bringing to justice those who unlawfully hide assets overseas to avoid paying tax.” Shulman said that “there is no ‘silver bullet’ or one strategy that will alone solve the problems of offshore tax avoidance. Rather, an integrated approach is needed, made up of separate but complementary programs that will tighten the net around these tax cheats.” Shulman said that the Administration’s budget “includes funding for a robust portfolio of IRS international tax compliance initiatives.” Shulman also said that it has increased the number of audits and Treasury and the IRS are considering “enhancements to strengthen the QI program.”
  • Testimony and a new GAO report released today can be accessed here.

FINANCE COMMITTEE REVIEWING OPTIONS TO RECLAIM AIG BONUSES:  Today, Senate Finance Chairman Max Baucus said that he is reviewing ways to reclaim the AIG bonuses.  Baucus said, “I am looking very closely at tax options that will reclaim these outrageous bonuses at AIG. The country is angry. I am angry. Four and a half million Americans have lost their jobs. And these people are getting multi-million dollar bonuses. It is unfair.” Baucus asked IRS Commissioner Shulman, “What's the highest excise tax we can impose that will stand up in court?” Ranking member Charles Grassley added, “I want to back you up in looking at that.” Shulman said the IRS will assist Baucus and the Treasury Department as they examine AIG's bonuses.

  • Today, Senate Majority Leader Harry Reid and several other senators are sending a letter to the AIG chairman today that states, “We insist that you immediately renegotiate these contracts in order to recoup these payments and make the American taxpayer whole. We stand ready to take the difficult, but necessary step of working to enact legislation that would allow the government to recoup these bonus payments, perhaps by imposing a steep tax -- as high as 91 percent -- that will have the effect of recovering nearly all of the bonuses that have been paid out since AIG turned to taxpayers for help.” Baucus is planning to introduce a bill to impose the excise tax as soon as tomorrow.

MISCELLANEOUS GUIDANCE ISSUED TODAY:
Notice 2009-22 provides interim rules regarding asset valuation methods that are permitted to be used by single employer defined benefit pension plans for minimum funding purposes pursuant to changes made by the Worker, Retiree, and Employer Recovery Act of 2008, Public Law 110-458 (WRERA). This notice also provides automatic approval for a change in asset valuation method for plan years beginning during 2009 to adopt any permissible asset valuation method.

TAX BILLS INTRODUCED MARCH 16TH:
H.R.1509: To amend the Internal Revenue Code of 1986 to provide a standard home office deduction.
Sponsor: Rep McHugh, John M. [NY-23] (introduced 3/16/2009)      Cosponsors (1)

H.R.1512: To amend the Internal Revenue Code of 1986 to extend the funding and expenditure authority of the Airport and Airway Trust Fund, to amend title 49, United States Code, to extend authorizations for the airport improvement program, and for other purposes.
Sponsor: Rep Rangel, Charles B. [NY-15] (introduced 3/16/2009)      Cosponsors (5)

H.R.1518: To amend the Internal Revenue Code of 1986 to impose a higher rate of tax on bonuses paid by businesses receiving TARP funds.
Sponsor: Rep Israel, Steve [NY-2] (introduced 3/16/2009)      Cosponsors (4)

H.R.1519: To amend the Internal Revenue Code of 1986 to repeal the 1993 income tax increase on Social Security benefits.
Sponsor: Rep Johnson, Sam [TX-3] (introduced 3/16/2009)      Cosponsors (4)

H.R.1527: To amend the Internal Revenue Code of 1986 to impose a higher rate of tax on bonuses paid by certain businesses owned by the Federal Government.
Sponsor: Rep Peters, Gary C. [MI-9] (introduced 3/16/2009)      Cosponsors (None)

H.R.1539: To amend title 40, United States Code, to add certain Armed Forces organizations that are exempt from taxation under section 501(c)(19) of the Internal Revenue Code of 1986 to the list of organizations eligible for donations of personal property through State agencies.
Sponsor: Rep Stupak, Bart [MI-1] (introduced 3/16/2009)      Cosponsors (None)

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

STEPTOE & JOHNSON LLP - TAX PRACTICE
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving. Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them. Read more information on Steptoe's tax practice.