LEGISLATIVE UPDATE

District Court Bars Las Vegas Man from Promoting Sham Trust Tax Scam

On June 22, the U.S. District Court for the District of Nevada permanently enjoined Reinhold Sommerstedt from organizing and selling a sham trust tax scam in which the Las Vegas-based promoter allegedly created bogus domestic and foreign trusts to move customers' assets from the United States to offshore banks. (U.S. v. Sommerstedt, No. 2:06-cv-00273-BES-GWF (Order), 6/22/2009). The Department of Justice announcement said that Sommerstedt's customers paid as much as $14,500 to participate in the scheme, in which they allegedly used phony loans and gifts to repatriate their money while concealing it from the Internal Revenue Service. Three other defendants named in the case had already consented to permanent injunctions.

In a complaint requesting permanent injunction and other relief filed in 2006 [United States Of America, Plaintiff, v. Reinhold V. Sommerstedt; Daniel J. Young; Stephen R. Nestor; and Lynn A. Lakers, Defendants., 2006 WL 1287996 (D. Nev. 2006)], the government claimed that "Sommerstedt's promotion uses a series of sham domestic and foreign trusts to transfer his customers' income to an offshore bank in the West Indies in an attempt to conceal the income from the IRS and thereby assist his customers in evading the assessment and collection of their correct federal income tax liabilities. Sommerstedt (through his Independent Trust Consultants and Century Trust Company Ltd.) also serves as trustee of the foreign trusts, and assists his customers in repatriating their income from offshore accounts." The IRS estimated lost tax revenue at more than $31 million. After a series of failed motions to dismiss, the defendant petitioned for judgment on the pleadings "on the basis that he does not engage in the activity alleged by Plaintiff and because this action has been filed beyond the statue of limitations period."

The court disagreed with Sommerstedt. In granting the injunction barring him from promoting the trust scheme or any similar scheme, the judge noted that Sommerstedt failed to present "any evidence to refute the government's indication that Sommerstedt's trust scheme was organized and operated solely for the purpose of improperly reducing his customers' federal tax liabilities." The court further ordered Sommerstedt to give the government a complete list of names, addresses, e-mail addresses, telephone numbers and Social Security numbers of everyone who purchased any trust or other entity from him.

Source:
U.S. District Court - Nevada: United States v. Sommerstedt, D. Nev., No. 2:06-cv-00273-BES-GWF (Order), 6/22/09)

IRS Releases Interim Guidance on Penalty Procedures for Estate and Gift Tax Preparers

Early last month, the Internal Revenue Service released a Small Business/Self-Employed Division memorandum (SBSE-04-0509-009) providing interim guidance to the Service's estate tax attorneys on their responsibilities when reviewing estate and gift tax returns and detailing the return preparer penalty procedures for the consideration and assertion of I.R.C. § 6694 and I.R.C. § 6695 penalties in preparer penalty cases. The IRS noted that the memorandum will be incorporated into the Internal Revenue Manual 4.25.1 by May 8, 2010.

I.R.C. § 6694 addresses the understatement of taxpayer's liability by a tax return preparer, while I.R.C. § 6695 deals with a host of other assessable penalties with respect to the preparation of tax returns such as failure to furnish a copy of the return to the taxpayer, failure to sign the return, and failure to furnish an identifying number. Examiners are instructed to ensure that these specific sections of the Code are followed, to assert penalties in appropriate instances, and to "determine if further consideration of return preparer penalties is necessary" based on oral testimony and/or written evidence during every estate or gift tax return examination. The memorandum directs that the estate or gift tax exam is to remain separate and distinct from the return preparer penalty case and that the determination and settlement of the estate or gift tax exam is to proceed at all times without regard to the return preparer penalty issue.

John H. Imhoff, Jr, Director of Specialty Programs for the IRS, points out that while the statute of limitations on assessment of penalties under I.R.C. § 6694(a), which governs understatements due to unreasonable positions, and under I.R.C. § 6695 expires three years from the date the related return or claim for refund was filed, there is no statute of limitations on assessment of penalties for understatements due to willful or reckless conduct under I.R.C. § 6694(b) for promoting abusive tax shelters under I.R.C. § 6700, for aiding and abetting in the understatement of tax liability under I.R.C. § 6701, or on actions to enjoin preparers or promoters under I.R.C. §§ 7407 or 7408. Imhoff cautioned that extending the time to assess the tax on a taxpayer's return with a Form 872, Consent to Extend the Time to Assess Tax, does not extend the statute for the return preparer penalty case.

The memorandum also provides guidance to examiners on content for a comprehensive interview with the executor or donor and with the tax return preparer to identify misconduct by a preparer, and provides procedural instructions when a return preparer problem is identified.

Imhoff noted that "[m]ost of these penalty cases will derive from a Form 706 or Form 709 selected for audit. However, some cases may come from the Cincinnati campus because the cases involve a questionable tax practitioner."

Source:
Westlaw: IRS SB/SE Memorandum SBSE-04-0509-009, The Bureau of National Affairs, Inc., June 4, 2009; Internal Revenue Service: Internal Revenue Service Small Business/Self-Employed Division memorandum SBSE-04-0509-009, document dated May 8, 2009, published June 5, 2009.

IRS Announces Changes Affecting Split-Interest Trust Information Return

Last month, the Internal Revenue Service announced changes to the filing requirements and content of Form 5227, Split-Interest Trust Information Return, for the 2007 tax year. According to the notice published on its web site, these changes are due to legislative changes and a major redesign.

One of the key changes noted is that Form 5227 now meets the I.R.C. § 6034 filing requirements for split interest trusts described in I.R.C. § 4947(a)(2), including charitable lead trusts, charitable remainder trusts described in I.R.C. § 664, and pooled income funds described in I.R.C. § 642(c)(5) that meet the definition of a split interest trust. As a result, these trusts no longer file Form 1041-A, U.S. Information Return - Trust Accumulation of Charitable Amounts.

The announcement stated that "[a]ny charitable remainder trust described in section 664 that has unrelated business taxable income (within the meaning of section 512 and related regulations) is liable for a tax which is treated as a private foundation excise tax equal to the trust's unrelated business taxable income. It must file a Form 4720 to report the tax due."

The IRS explained that Form 5227, with the exception of Schedule A as it contains information that is specific to private beneficiaries, is subject to the public inspection requirements under I.R.C. § 6104(b). The service also pointed out that non-filing penalties now apply to Form 5227 and have been increased and expanded to include incorrect and incomplete filings.

Source:
Westlaw: IRS Announces Redesign, New Filing Rules For Split-Interest Trust Information Return, The Bureau of National Affairs, Inc., Daily Tax Report, 118 DTR G-3, 2009, June 23, 2009; Internal Revenue Service: Major Redesign of Form 5227, Charities & Non-Profits, Changes to Forms and Instructions, June 18, 2009.

AARP Publishes 2009 State Health Care Briefs

Last month, the AARP Knowledge Management issued a research report on health care costs and financing in the United States (State Health Care Briefs 2009: Why Health Care Reform is Important, AARP Knowledge Management, June 2009). The report presents a one-page summary of health care data for each of the 50 states and the District of Columbia. As a leading advocate for senior citizens, the AARP has long promoted health-care reform to ensure that all Americans receive adequate health-care coverage.

Included in each state's summary is information about the state's aging population, under-insured and uninsured residents, Medicare beneficiaries including residents who fall into the Part D "doughnut hole," re-hospitalizations among Medicare beneficiaries, the allocation of Medicaid funds on behalf of residents between nursing home care and home/community based care, and residents' expenditures for prescription drugs.

The complete set of State Health Care Briefs is available in the Policy and Research section of AARP's website.

Source:
AARP.org: State Health Care Briefs 2009: Why Health Care Reform is Important, AARP Knowledge Management, June 2009

Applicable Federal Rates for July 2009 (Rev. Rul. 2009-20)

TABLE 1
Applicable Federal Rates (AFR) for July 2009 for purposes of I.R.C. § 1274(d)

Period for Compounding

	Annual	Semiannual	Quarterly	Monthly
Short-term
AFR	.82%	.82%	.82%	.82%
110% AFR	.90%	.90%	.90%	.90%
120% AFR	.98%	.98%	.98%	.98%
130% AFR	1.07%	1.07%	1.07%	1.07%
Mid-term
AFR	2.76%	2.74%	2.73%	2.72%
110% AFR	3.03%	3.01%	3.00%	2.99%
120% AFR	3.32%	3.29%	3.28%	3.27%
130% AFR	3.59%	3.56%	3.54%	3.53%
150% AFR	4.15%	4.11%	4.09%	4.08%
175% AFR	4.86%	4.80%	4.77%	4.75%
Long-term
AFR	4.36%	4.31%	4.29%	4.27%
110% AFR	4.80%	4.74%	4.71%	4.69%
120% AFR	5.24%	5.17%	5.14%	5.12%
130% AFR	5.68%	5.60%	5.56%	5.54%

TABLE 2
Adjusted AFR for July 2009 for purposes of I.R.C. § 1288(b)

Period for Compounding

	Annual	Semiannual	Quarterly	Monthly
Short-term adjusted AFR	.84%	.84%	.84%	.84%
Mid-term adjusted AFR	2.22%	2.21%	2.20%	2.20%
Long-term adjusted AFR	4.33%	4.28%	4.26%	4.24%

TABLE 3
Rates under I.R.C. § 382 for July 2009

Adjusted federal long-term rate for the current month	4.33%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months)	4.58%

TABLE 4
Appropriate Percentages under I.R.C. § 42(b)(1) for July 2009

Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, and before December 31, 2013, shall not be less than 9%.

Appropriate percentage for the 70% present value low-income housing credit	7.82%
Appropriate percentage for the 30% present value low-income housing credit	3.35%

TABLE 5
Rate under I.R.C. § 7520 for July 2009

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest	3.4%

TABLE 6
Blended Annual Rate under I.R.C. 7872(e)(2) for 2009

Section 7872(e)(2) blended annual rate for 2009	0.82%

Source:
Westlaw: Federal Rates; Adjusted Federal Rates; Adjusted Federal Long-term Rate and the Long-term Exempt Rate, Rev. Rul. 2009-20, 2009 WL 1719863; Internal Revenue Service: Rev. Rul. 2009- 20, Index of Applicable Federal Rates (AFR) Rulings, June 19, 2009.

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