Issues in Tax Controversy - Commentary on Tax Enforcement, News & Developments

On March 15, the Colorado Court of Appeals issued its much anticipated decision in Kowalchik v. Brohl.  The Court determined that transferees who purchased conservation easement credits from donors of conservation easements were not required to be joined in the conservation easement litigation that has been brought pursuant to House Bill 1300.  This issue was raised by the Department of Revenue (“Department”) in most cases filed pursuant to H.B. 1300,  the statute authorizing  trial procedures for taxpayers arguing with the Department over the validity and value of countless conservation easements credits. 

By way of background, since 2001, the Department has disallowed a vast majority of conservation easement credits claimed by taxpayers.  Taxpayers filed administrative appeals which were sitting in a queue with little prospect for timely resolution.  Last year, the legislature passed H.B. 1300 permitting taxpayers to bypass the administrative appeals process and get their case in front of a judge who had the authority to expedite the case.  These cases were required to be filed by October 1, 2011 and hundreds of cases were filed.  In cases where a donor of a conservation easement sold the gross conservation easement tax credit to a transferee, the Department moved to dismiss the case or, in the alternative, to compel joinder of the transferees of the credit.  The Department’s position was that unless the transferees were named as parties in the district court, the litigation would not be binding on the transferees.  

The District Court rulings on this issue were divided, some in favor of the Department’s Motion to Dismiss and some denying the Department’s Motion to Dismiss.  In Kowalchik, the Huerfano County District Court held that joinder was not required and denied the Department’s motion to dismiss.   The Department appealed this finding to the Court of Appeals which expedited the matter.  The Court of Appeals ruled last week that joinder of the transferees was not required because the transferee’s interest were represented by the donor, or Tax Matters Representative (“TMR”), who was authorized under the statute to enter into agreements with the Department regarding the validity and value of the easement and that those agreements would bind transferees.  The Court of Appeals found that the legislature’s clear intent was not to require joinder of the transferees.  Furthermore, the Court of Appeals determined that  failure to join the transferees did not violate the transferees’ due process rights because the transferee voluntarily entered into a contractual arrangement agreeing to be represented and bound by the Tax Matter Representative with respect to the amount of the credit.  Because the TMR’s and transferee’s interests are aligned and the statute clearly gives transferees the right to intervene if the transferee is not satisfied with the representation of the TMR, the procedures do not violate the transferee’s due process rights.  In a final matter, the Court ruled that the transferees were taxpayers who are subject to deficiencies, interest, and penalties.

The Court of Appeals opinion is available here: CCA_2011ca2634_031512_Opinion.pdf

If you have questions about how this case may impact you, please contact Jennifer Benda at 303-764-4025 or Paul Enockson at 303-764-4017.

The HIRE Act of 2010 enacted Section 6038D which requires single taxpayers to report ownership of specified foreign financial assets which in aggregate exceed $50,000 on new Form 8938, which is filed with an individual’s Form 1040.  Various dollar thresholds apply to individuals who do not file single taxpayer returns.  Individuals required to file Form 8938 are still required to comply separately with Treasury rules for filing FBARs, or Form T.D. 90-22.1, to report foreign bank and financial accounts. 

Specified foreign financial assets generally include financial accounts maintained at foreign financial institutions; stock, securities, and other financial instruments issued by a foreign person or other foreign issuer; and interests in foreign entities held for investment.  Assets held at U.S. branches of foreign financial institutions are not specified foreign financial assets.  The IRS recently posted responses to Frequently Asked Questions about Form 8938.  The IRS FAQ’s are available here:  http://www.irs.gov/businesses/corporations/article/0,,id=255061,00.html

The FAQs elaborate on many common situations.  For example, FAQ’s 7 and 8 provide that foreign investments maintained by a U.S. financial institution or its holdings, such assets held through U.S. mutual fund accounts, IRAs (traditional or Roth), 401(k) retirement plans, qualified U.S. retirement plans, and brokerage accounts maintained by U.S. financial institutions, are not reported on Form 8938.  FAQ 3 discusses the rules governing foreign real estate.  Foreign real estate held directly by an individual is not reportable on Form 8938.  However, if foreign real estate is held through a foreign entity, such as a corporation, partnership, trust or estate, the investment in the entity is a specified foreign financial asset that is reported on Form 8938 if you meet the reporting threshold. 

There is a $10,000 penalty for failure to file Form 8938 and failures to report tax on income generated by assets not disclosed on Form 8938 are subject to a 40% accuracy-related penalty.  In addition, when a taxpayer fails to file Form 8938, the statute of limitations for the tax year remains open until three years after Form 8938 is filed. 

If you would like to discuss your obligations to report foreign assets or are looking for assistance with any IRS reporting requirements, please contact Jim Mastracchio at (202) 861-1650 or Jennifer Benda at (303) 764-4025.

The IRS formal program for making voluntary disclosures of offshore accounts and unreported foreign income has been reopened.  This is the third in a series of voluntary disclosure programs announced by the IRS.  This newest program reinstates fixed penalty amounts for taxpayers who agree to amend prior tax returns and pay taxes due and file outstanding FBARs to disclose foreign accounts.  For taxpayers who still wish to come clean with the government, this offers an opportunity to come into compliance with the tax laws.  Most terms of the 2012 program remain the same as the 2011 program, but the maximum FBAR civil penalty is increased from 25% to 27.5%.

The prior programs have proven lucrative for the government, with the IRS collecting $4.4 billion to date.  The IRS believes a large number of taxpayers still have not reported their foreign accounts.  Taxpayers who would like more information regarding the 2012 Voluntary Disclosure Program should call Jim Mastracchio at (202) 861-1650 or Jennifer Benda at (303) 764-4025.

The IRS announcement can be found here:  http://www.irs.gov/newsroom/article/0,,id=252162,00.html?portlet=108

When and why are clients' discussions with their tax accountant and their tax attorney protected as confidential and privileged? Is there a difference between the discussion that a client should have with their accountant versus their attorney? Why does the law treat these discussions differently?

The article linked here, originally published in the June 2011 edition of the Colorado Lawyer, reviews important case law addressing whether attorney communications with accountants are protected communications. The article also discusses new IRS disclosure requirements and whether any attorney–accountant communications related to the creation of those disclosures may be protected.

We are working with the Colorado Department of Revenue on behalf of several taxpayers to resolve our clients' outstanding tax issues.