Report of The American College of Trust and Estate Counsel on the Stop Tax Haven Abuse Act (S.681) and the Incorporation Transparency and Law Enforcement Assistance Act (S.2956) 

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W. Bjarne Johnson 
Church, Harris, Johnson & Williams, P.C.
21 Third Street North, 3rd Floor 
P. O. Box 1645
Great Falls, MT 59403-1645
Phone (406) 761-3000
Fax (406) 453-2313
E-mail: bjarnejohnson@chjw.com
 
February 17, 2009
 
Senator Max Baucus, Chairman
Senate Committee on Finance
219 Dirksen Senate Office Building Washington, D.C. 20510
 
 
Timothy F. Geithner, Treasury Secretary 
United States Department of the Treasury 
1500 Pennsylvania Avenue, NW 
Washington, D.C. 20220
 
 
Congressman Charles B. Rangel, Chairman 
House Committee on Ways and Means
1102 Longworth House Office Building
Washington, D.C. 20515
 
 
Senator Carl Levin 
269 Russell Senate Office Building 
Washington, D.C. 20510-2202
 
 
Senator Charles Grassley
Ranking Minority Member
Senate Committee on Finance
219 Dirksen Senate Office Building Washington, D.C. 20510
 
 
Congressman Dave Camp 
Ranking Minority Member 
House Committee on Ways and Means 
341 Cannon House Office Building 
Washington, D.C. 20515
 
 
Congressman Lloyd Doggett 
201 Cannon House Office Bldg. 
Washington, D.C. 20515
 
 
Dear Chairmen Baucus and Rangel, Treasury Secretary Geithner, Senators Levin and Grassley, and Representatives Camp and Doggett:
 

I am pleased to enclose the Report of the American College of Trust and Estate Counsel ("ACTEC") on the provisions of S. 681, The Stop Tax Haven Abuse Act, and S. 2956,The Incorporation Transparency and Law Enforcement Assistance Act. While both Bills expired with the end of the last Congress, we understand that similar or identical Bills are likely to be introduced in the new Congress. We urge that Senate and House staffs, and Treasury, take into account the comments in this Report in drafting new legislation. We would be pleased to meet with your staffs to discuss our proposals. 

ACTEC is a professional association of more than 2,500 members consisting of the leading trusts and estates lawyers in the United States and, to some extent, from abroad. As such, we deal regularly with offshore jurisdictions, and trusts and companies formed therein, for our domestic and foreign clients. We are experts in the matters covered by these Bills to the extent the proposals concern trusts and trust service providers. 

While the goal of the provisions of these Bills is for the most part commendable, we believe that to a considerable extent they will be difficult, if not impossible, to administer, that they will significantly impair the economies of "offshore secrecy jurisdictions", most of which are trading partners, and many of which share bilateral income tax treaties or reporting treaties, with the United States, and that to the extent they would change substantive tax rules, as distinct from enforcement and disclosure rules, they are unnecessary. In particular, we note:

 •      The provisions of Section 101(a) of S. 681, which creates a rebuttable presumption that anyone who directly or indirectly formed, transferred assets to, was the beneficiary of, or received money or other property or the use thereof from a foreign trust, corporation, or other entity created in an "offshore secrecy jurisdiction" is presumed to control the entity in United States enforcement proceedings, needs to be substantially narrowed and refined in order to achieve its ends.

 •      The provisions of Section 101(b) of S. 681, which define "offshore secrecy jurisdictions" by the enactment of an initial inclusive list, while authorizing Treasury to add or remove countries from the list, are out of date. The Organisation for Economic Cooperation and Development ("OECD"), which has been addressing the issue of Harmful Tax Competition since 1998, started out with a similar list and now has significantly reduced the number of countries upon its "black list" as a result of consultations over the past 10 years. Congress should leave it to Treasury to name the initial countries on the list, and Treasury should consider the OECD's deliberations in reaching its initial decisions.

 •      The provisions of Section 105 of S. 681, which deal with substantive taxing rules under Sections 672(f), 643(i) and 679 of the Internal Revenue Code, are in large part unnecessary because current law achieves the goals desired. The new provisions of proposed Sec. 672(f), dealing with "enforcer" and "protector" powers, is inconsistent with current law for Trustees and other power holders, and we do not believe it should be enacted. The new provisions of proposed Sec. 643(i), taxing to United States beneficiaries the value of their use of assets owned by foreign trusts, would change current law, and it may be desirable to enact it, but there are serious difficulties with application and enforcement which we discuss.

 •      S. 2956, The Incorporation Transparency and Law Enforcement Assistance Act, would, we believe, add materially to the costs of all 50 States in administering their offices of Secretary of State or other office which receives papers establishing corporations and limited liability companies, and the costs of the private sector in complying with the new rules. There are over 2,000,000 corporations and limited liability companies established each year in the United States. The Treasury has asked the Uniform Law Commissioners to devise a uniform law for the states to adopt that would accomplish the goals of this Bill, to have information available for law enforcement on the identity of beneficial owners of companies. We recommend that this effort be left to the Uniform Law Commissioners.

This Report was prepared by a Committee chaired by Henry Christensen III (hchristensen@mwe.com). Ellen K. Harrison (ellen.harrison@pillsburvlaw.com) and Robert C. Lawrence III (robert,lawrence@cwt.com), with Mr. Christensen, bore principal drafting responsibility for the Report on S. 681. Duncan E. Osborne (deosborne@ohkdlaw,com) and Edward M. Manigault (ed.m.manigault@ipmorgan.com) bore principal drafting responsibility for the Report on S. 2956. Norman J. Benford (BenfordN@GTLaw.com), John L. Campbell Ocampbell@kplaw.com) and Gideon Rothschild (grothschild@mosessinger.com) offered helpful comments. 

We hope that this Report is helpful to you, and that the private sector can work with your staffs to develop legislation that will function effectively to accomplish your ends. We would welcome the opportunity to meet with you. Mr. Christensen's telephone number is (212) 547-5658.

 

Very truly yours, 

W. Bjarne Johnson, President
American College of Trust and Estate Counsel

 

c:   Senator Carl Levin 
269 Russell Senate Office Building 
Washington, D.C. 20510-2202

Senator Sheldon Whitehouse 
502 Hart Senate Office Building 
Washington, D.C. 20510

 
 

Report of The American College of Trust and Estate Counsel on the Stop Tax Haven Abuse Act (S.681) and the Incorporation Transparency and Law Enforcement Assistance Act (S.2956)

 

This report concerns two bills which have been introduced in Congress during 2007 and 2008 which significantly impact trust service providers. The first, S.681, the “Stop Tax Haven Abuse Act”, introduced on February 17, 2007 by Senators Levin, Coleman and Obama (H.R. 2136 is the companion bill, introduced on May 3, 2007 by Representative Doggett with many cosponsors), is directed at ending the use of “offshore tax havens” for the avoidance of payment of United States taxes, principally but not solely income taxes. The second, S.2956, the Incorporation Transparency and Law Enforcement Assistance Act, introduced on May 1, 2008 by Senators Levin, Obama and Coleman, would impose expansive requirements on state agencies and taxpayers to make public filings regarding the creators and beneficial owners of corporations, trusts, limited liability companies and other entities. To the date of this Report, February 17,2009, no action has been taken upon either bill, and with a new Congress having convened on January 6, 2009 the bills will have to be reintroduced. We understand, however, that it is likely that similar or identical bills will be introduced early in 2009, and wish to offer our comments upon S.681 and S.2956 in the hope that we may assist Congress in the crafting of legislation that may evolve in 2009. 

The American College of Trust and Estate Counsel (“ACTEC”) is a professional organization consisting of over 2500 of the leading trust lawyers in the United States. As such, we deal regularly with offshore jurisdictions, and trusts and companies formed therein, for our domestic and foreign clients. Indeed, ACTEC has an International Estate Planning Committee which consists of ACTEC members having a substantial international practice. 

We note as a preliminary matter that at least since the publication by the Organisation for Economic Cooperation and Development (the “OECD”) of its report, Harmful Tax Competition: An Emerging Global Issue, on January 20, 1998, there has been significant international attention paid to offshore tax havens and international tax “competition”. We also note, and stress, that ACTEC supports efforts by Congress to fight tax evasion. ACTEC has worked closely with the United States Treasury and the Internal Revenue Service in the past on many tax matters and has for the last five years been assisting Treasury on international money laundering matters. 

In the spirit of our historic activities, ACTEC offers these comments upon S.681 andS.2956 and any new bills which may be introduced in 2009 based upon these bills. We note from the start that we do not oppose the goals of these bills, but, as experts in the field of trusts, trust companies, and trust service providers, we have significant problems with many of the specific provisions of the bills, discussed below. 

We would urge as an initial matter that Congress approach all of the issues taken up by these bills as a matter of bi-lateral information sharing with all of our treaty partners. The United States should not apply unilateral sanctions upon “offshore secrecy jurisdictions”. Rather, the United States should demand, and itself offer, transparency. This is the approach taken by the OECD, and we would recommend that Section 101 of S.681 not define “offshore secrecy jurisdictions” in the statute, but rather direct the Treasury to name an initial list of such jurisdictions, and further recommend that in defining offshore secrecy jurisdictions Treasury should consider the OECD’s determinations. Originally, the OECD proposed a long list of uncooperative “tax havens” much like the list inSection 101(b) of the Bill, but it substantially reduced the list of jurisdictions before the first formal publication of the list. We also urge the adoption of Proposed Treasury Regulations § 1.6049-8, as a demonstration of the United States’ commitment to transparency. These Regulations have been proposed and pending for some years, and would give the IRS information about interest earned by a nonresident alien on United States accounts which could be shared with treaty partners.[1] 

In summary, we support most of the goals of the two Bills, but believe them to be in many instances impractical, and in some cases undermining of present tax law, in their present form. We urge that staff of the appropriate House and Senate committees meet with the private sector before introducing bills in the new Congress so as to draft language which efficiently achieves the goals of the Bills. 

S681

Title I 

Section 101 

Section 101(a) of S.681 (the “Bill”) introduces a new Section 7492 to the Internal Revenue Code of 1986, as amended (the “Code”), which establishes presumptions in tax proceedings relating to entities and transactions involving offshore secrecy jurisdictions. 

Section 7492(a)

Code Section 7492(a) creates a rebuttable presumption for purposes of any civil judicial or administrative proceeding to determine or collect tax that a United States person (other than an entity with shares regularly traded on an established securities market) who directly or indirectly formed, transferred assets to, was a beneficiary of, or received money or property or the use thereof from an entity, including a trust, corporation, limited liability company, partnership or foundation (other than an entity with shares regularly traded on an established securities market), formed, domiciled or operating in an offshore secrecy jurisdiction exercised control over that entity. 

Comments

Section 7492(a) as proposed is impractical and would be very difficult to administer because of its breadth and lack of clarity. While we appreciate the objectives sought to be achieved, we believe they can be better achieved with some changes and have the following suggestions that may be of assistance. 

Section 7492(a) should not apply if the United States person is a professional advisor, such as a lawyer, accountant or banker who is acting in a professional capacity on behalf of a principal in creating or otherwise rendering services to an entity in an offshore secrecy jurisdiction. In such case the advisor, who has no economic or other interest in such entity, should not be deemed to exercise control over such entity, and we strongly urge that this be clarified. 

Similarly, transactions in the ordinary course of business should be excluded from the reach of Section 7492(a). For example, a United States person who rents a room in a hotel in Switzerland owned by a Swiss entity should not be deemed to control the Swiss entity. As drafted, Section 7492(a) literally applies because a United States person has transferred assets to and received the use of property from an entity formed and operating in an offshore secrecy jurisdiction. 

We recommend that the term “domiciled” be replaced by the term “resident” in determining whether, as a matter of first instance, a United States person has such a connection with an “offshore secrecy jurisdiction” as to be covered by the Bill. “Domicile” is not defined in the Code, but it is described in regulations with reference to individuals and not to entities or trusts. See Treas. Reg. § 20.0-1(b)(l). Under the common law, domicile is a term that applies only to an individual and not to an entity or arrangement. Thus we recommend it be replaced with the term “resident,” which is of general application for income tax purposes. 

A trust is not an entity; it is an arrangement authorized by law. Generally, the governing law, the residence of one or more of the Trustees or the place of administration should be controlling for determining if this Section applies. It may be useful to have reference to Code Sections 7701(a)(30) and (31) in establishing foreign residence of a trust. 

The term “operating” is not a workable standard and could apply to almost any activity. We urge that clearer terminology be utilized. Possibly, the term “operating” could be replaced by “doing business” or “having a principal office.” For example, is a United States entity “operating” in an offshore secrecy jurisdiction if it enters into a contract with another entity located in an offshore secrecy jurisdiction? Would the United States entity be presumed to control the foreign entity? Similarly, if a United States entity has a bank account with a bank in an offshore secrecy jurisdiction, should the United States entity be presumed to control the foreign bank (as distinguished from controlling the bank account)? We do not think it should. At a minimum, transactions in the ordinary course of business should be excluded. 

In the case of affiliated companies, will a United States person be considered to be operating in a jurisdiction if its affiliate does business in such jurisdiction? Will a subsidiary of a United States company be subject to the presumption if shares of the parent company, but not the subsidiary, are publicly traded? 

The proposed law states that covered persons will be presumed to control covered offshore entities “for purposes of any United States civil judicial or administrative proceeding to determine or collect tax.” It would be helpful to clarify that this presumption applies solely for purposes of providing documents and testimony in proceedings to determine or collect tax and to the enforcement of levies. This is important because control has different meanings and tax consequences under other provisions of the Code. This Section should not make the covered person the “owner” of the foreign account or entity for income tax purposes. 

Moreover, clarification is necessary as to whether the statutory presumption will be rebutted if a United States person demonstrates that he or she does not in fact have the power to produce the required information or pay a levy. For example, will the presumption be rebutted if he or she is not the trustee of the trust or the manager, chief executive officer, general partner or controlling shareholder or member of an entity? Will a United States person be able to rebut the presumption of control only by proving that other individuals who do hold those positions are independent of and not subject to the control of the United States person? If powers held by a third party are to be attributed to United States persons who do not directly hold those powers, it would be appropriate to distinguish between: (i) United States persons who either (a) voluntarily created the arrangement or entity that gave control to third parties or (b) have the right to select the third parties who will exercise control; and (ii) United States persons who neither participated in the creation of the arrangement or entity nor have any right to remove and replace the third parties who have control over the arrangement or entity. We recognize the frustration of United States regulators, and courts, involved with recent cases where a United States person claimed he or she had no control of a foreign trust or corporation or other entity, either because of provisions in the organizing documents or applicable law, but this provision should apply only to U.S. persons who either do in part control the foreign account or entity, or transferred funds to the account or entity and chose not to retain rights over the same. 

This Section is intended to cover United States persons, which includes not only citizens and long-term residents (green card holders) but also persons who are substantially present in the United States because of the number of days they spent in the United States in a particular calendar year or over a three - year period (known as the substantial presence test). The substantial presence test contains certain exceptions. Under Code Section 7701(b)(3)(D) a person may not meet the substantial presence test because presence was due to medical reasons. Under Code Section 7701(b)(3)(B) a person may not meet the substantial presence test because he or she has a closer connection to and tax home in another jurisdiction. In such cases, a determination about a person’s status under the substantial presence test may not be made for a considerable period of time. Consequently, because of the far reaching effects of this Section, we recommend that it be made clear that in the case where an individual is a United States person because of the possible application of the substantial presence test, this Section is not applicable until there has been a final determination of the individual’s status. 

Section 7492(a) would include United States persons who receive the “use” of property. Clearly an exception is needed for use in the ordinary course of business (as indicated in the above example of renting a hotel room). Similarly, “use” should not include gifts that are properly reported as such. If a parent creates a trust for the benefit of his or her descendants, a child who receives a distribution from the trust should not be presumed to be in control of the trust. Moreover, the enforcement of such a provision would be very difficult. At a minimum, some de minimis rule is appropriate. Consider this example. A United States person is invited by a colleague to spend the weekend at a home in the Cayman Islands. Unbeknownst to the United States person, the home is owned by a corporation owned by a trust administered in the Cayman Islands. The United States person’s presence as a house guest should not be a basis for treating the houseguest as controlling the foreign corporation or trust. This result is impractical and unfair. Moreover, this Section would also apply in the case of a rental arrangement at a fair market rental value because there is no provision that it applies solely in the case where the use of the property is gratuitous. We recommend that this Section only apply if the use (i) is not in the ordinary course of business, (ii) is for a period of more than 14 days in the aggregate during a calendar year, and (iii) the United States person receiving the use of the property is related to the donor/creator/owner of the property and the donor/creator/owner is not a United States person otherwise subject to these provisions. Again, we understand that the provisions of proposed Code Section 7492(a) go only to presumptions of control, and not to taxation, which is covered by Bill Section 105(c), discussed below. 

Section 7492(b)

New Code Section 7492(b) creates the rebuttable presumption for purposes of any civil judicial or administrative proceeding to determine or collect tax that (i) any amount or thing of value received by a United States person (other than an entity with shares regularly traded on an established securities market) directly or indirectly from an account or entity in an offshore secrecy jurisdiction constitutes income of such person in the taxable year of receipt and (ii)any amount or thing of value paid or transferred by or on behalf of a United States person (other than an entity with shares regularly traded on an established securities market) directly or indirectly to an account or entity in any such jurisdiction represents previously unreported income of such person taxable in the year of transfer. 

Comments

Section 7492(b) is overly broad and may have the consequence of interrupting normal business relationships and occurrences of everyday life, thereby causing hardships and unintended results and expenses. Exceptions should be created for (i) transfers for full and adequate consideration or in the ordinary course of business (e.g. payments for goods and services); (ii) amounts transferred between bank accounts that can be verified, (iii) gifts that are properly reported as such; and (iv) de minimis transfers, particularly in the case of United States persons who reside in an offshore secrecy jurisdiction. In particular, there should be relief available to United States persons who reside permanently in an offshore secrecy jurisdiction. 

Moreover, while it may be reasonable to require a person who receives funds or things of value from an offshore secrecy jurisdiction to rebut the presumption that the receipt of funds or things of value is income to the United States person (because the source of payments or transfers can be traced), it is less feasible to prove a negative, i.e., that the United States person who makes a transfer to an account in an offshore jurisdiction did not have unreported income for the year for which the transfer was made. 

This presumption is particularly onerous in situations where the transfer has a legitimate nontax purpose. Consider, for example, a United States person who owns a home in the Bahamas and transfers funds for the upkeep of that home to a Bahamian account in his or her name or in his or her Bahamian caretaker’s name. The statute would create a presumption that the United States person had unreported income even though the transfer of funds was not a tax avoidance scheme but rather an ordinary and necessary provision for maintenance of a home. Any funds that an immigrant laborer, who is a United States resident, transfers to his or her relations in Panama would be presumed to be previously unreported income for that year. A holiday gift received by an immigrant laborer who is a United States resident from his or her mother in Panama would be presumed to be previously unreported income to the laborer for that year. The fact that these everyday transactions could lead to the presumption that the United States persons involved have additional tax liability indicates how broadly the statute has been drawn. 

It is not clear what reporting requirements will apply to the above circumstances. Will a United States person be required to rebut the presumptions on his or her income tax return even if no proceedings have begun to determine or collect tax? Presumably, if such proceedings begin and the taxpayer has not disclosed relevant transfers on his or her return, the prudent United States person then will disclose all these transfers and will have to overcome the rebuttable presumption. 

If the provisions are truly intended to apply to the vast number of transfers each year between United States persons and relatives in foreign jurisdictions, the cost of administration will be vast. We recommend the inclusion of a de minimis annual amount of US $100,000, adjusted for inflation, be excluded from the application of this Section. Furthermore, we recommend that in appropriate circumstances any income imputed to the taxpayer should retain its original character for tax purposes. 

Section 7492(c)

Section 7492(c) provides that in order to overcome the presumptions created underSections 7492(a) and (b), it will be necessary for the United States person to meet the standard of “clear and convincing evidence”. That evidence must be “detailed documentary, testimonial and transactional evidence” and establish that, for subsection (a) that the United States person exercised “no control” over the entity in the offshore secrecy jurisdiction at the relevant time, and, for subsection (b) that the amounts or things of value that were transferred do not represent income to that United States person. Most problematically, the United States person would be prohibited from introducing as evidence any “foreign based document” that is not authenticated in court by a person (presumably under oath) with knowledge of the document, nor could any other evidence from a person outside the jurisdiction of the United States court system be introduced unless that person appears before the court. 

Comments

The requirement that the United States person prove that he or she had “no control” is overbroad. We believe that the statute is intended to prevent a United States person from causing a trust or entity he or she controls to fail to produce information or documents or pay tax. If a United States beneficiary of a trust has some power - such as a testamentary limited power of appointment - he or she should not be presumed to control the trust for purposes of Section 7492. The type of control he or she has in this case is not relevant to the production of information or documents or the payment of tax.

It is a truism that it is difficult to prove a negative. By imposing a “clear and convincing” evidentiary standard to prove the absence of control or that certain amounts are not income, this Section places a burden on the taxpayer who is the subject of these proceedings that may be impossible to meet. Furthermore, by requiring authentication of any evidence by a person with knowledge of that evidence in open court in the United States, the United States person will be dependent on other individuals who may not be permitted by their employers to travel to the United States to testify, as well as forcing the United States taxpayer to incur the expenses for the same. This seems unfair and imposes unreasonable requirements on the taxpayer. We also believe such a standard would have a devastating effect on the economies of the offshore secrecy jurisdictions to be covered by the Bill, many of which are important trading partners of the U.S.

Section 101(b) of the Bill adds new paragraph (50) to Section 770l(a) of the Code, defining “Offshore Secrecy Jurisdiction”.

Section 7701(a)(50)

The new paragraph (50) of Section 7701(a) of the Code gives considerable discretion to the Secretary of the Treasury to determine whether a foreign jurisdiction is an “offshore secrecy jurisdiction” under the new legislation. The Secretary is required to list a foreign jurisdiction as an offshore secrecy jurisdiction if the Secretary determines that its corporate, business, bank or tax secrecy rules and practices unreasonably restrict the ability of the United States to obtain information to enforce the provisions of the Code. These rules and practices “include both formal laws and regulations and informal government or business practices having the effect of inhibiting access of law enforcement and tax administration authorities to beneficial ownership and other financial information”.[2] Even if the Secretary determines the above described conditions exist, the Secretary does not have to list such a jurisdiction as an offshore secrecy jurisdiction if the Secretary also determines that it has “effective information exchange practices”. 

Jurisdictions are deemed to have ineffective information exchange practices unless the Secretary annually determines: (1) they have a prompt, obligatory and automatic information exchange treaty or agreement with the United States; (2) during the previous 12 months the exchange of information was “adequate to prevent evasion or avoidance of United States income tax by United States persons”; and (3) during that same period an intergovernmental group or organization, of which the United States is a member, has not identified the jurisdiction as uncooperative with international tax enforcement or information exchange, and the United States concurred with this identification. 

The Secretary has the discretion to remove a foreign jurisdiction from the offshore secrecy jurisdiction list if the Secretary determines that its corporate, business, bank or tax secrecy and confidentiality rules and practices no longer hamper the ability of the United States to gain tax information and enforce the Code. Subparagraph (E) provides an initial list of offshore secrecy jurisdictions and the Secretary has the power to remove any such jurisdiction if it qualifies under this Section. 

Comments

Under these provisions the Secretary has discretion with regard to the identification of offshore secrecy jurisdictions. In fact, under subparagraph (E) of this Section the Secretary can determine whether a foreign country should be listed based on an evaluation of both formal laws and regulations and informal government or business practices, the latter of which would be based, most likely, on anecdotal evidence. Furthermore, the Secretary’s determination of whether a foreign jurisdiction’s information exchange practices are effective is similarly based on such unquantifiable criteria as to whether the practices were “adequate to prevent evasion or avoidance of United States income tax.” 

While this objective is worthy, it should be made clear that the listing of a jurisdiction, not on the initial list, is considered an offshore secrecy jurisdiction is effective only after the listing is published and that status does not apply to transactions or matters before such date. If it were otherwise, there would be no certainty for the United States taxpayer. 

Finally, the criteria for the removal of a foreign jurisdiction from the list similarly is subject to the broad discretion of the Secretary and the same vague standards.[3] 

The standard for information exchange is much stricter than that demanded by the most recent United States Model Income Tax Treaty (2006) (the “Model Treaty”). While this Section demands that jurisdictions have treaties or agreements that provide for the “prompt, obligatory and automatic exchange” of information, the Model Treaty merely states that contracting states “shall exchange” information concerning taxes not contrary to the Model Treaty (and for assessment, collection and prosecution of tax proceedings) without any automatic or timely mandate. 

Of the 34 jurisdictions on the list, the United States has negotiated full income tax treaties with only 5 jurisdictions, Barbados, Cyprus, Latvia, Luxembourg and Switzerland, one of which (Barbados) concluded a protocol to its treaty as recently as 2004. But there are exchange of information treaties already in place with 13 of the 34 jurisdictions. A treaty is pending enactment with another (Malta), and Treasury has announced that treaty negotiations are advanced with another (Panama). The proposed legislation will stigmatize those jurisdictions, despite their good faith negotiation of tax treaties with the United States, and, by example, could discourage other jurisdictions from entering into such treaties. Furthermore, the Bill’s application of more onerous information sharing standards than the Model Treaty’s undermines negotiations that are using the Model Treaty as a foundation and the credibility of longstanding United States positions on information sharing.

Section 101(c) of the Bill creates rebuttable presumptions of control and beneficial ownership regarding entities in offshore secrecy jurisdictions for proceedings under the Securities Exchange Act

We have no comments on securities law provisions.

Section 101(d) of the Bill amends Section 5314(d) of the United States Code to create a presumption that a transfer to or from a financial institution with a connection to an offshore secrecy jurisdiction must be reported under FBAR.

Section 5314(d) of the United States Code would create the rebuttable presumption that any account with a financial institution formed, domiciled or operating in an offshore secrecy jurisdiction contains an amount that would require an FBAR filing under Section 5314

Comments

The IRS has discretion to determine the threshold for FBAR filings. Current IRS FBAR rules require United States persons with over US$10,000 in foreign bank accounts to file an FBAR report. By removing this discretion, the Bill will force any person with an account in an offshore secrecy jurisdiction to file annual FBAR reports, with no de minimis exemption. We believe this requirement is too broad and would result in a voluminous number of filings. We recommend retaining the de minimis threshold. 

Section 102

Section 102 of the Bill would amend Section 5318A of title 31 of the United States Codein order to expand its scope. Title 31 USC Section 5318A was enacted in 2001 as part ofPublic Law 107-56, the USA PATRIOT Act, in order to give additional authority to the Secretary of the Treasury to deal with foreign jurisdictions, and with United States persons having accounts in or transferring assets to or from those foreign jurisdictions, if the Secretary concluded that the foreign jurisdiction, or a bank or other person in the foreign jurisdiction, or a class of transactions involving the foreign jurisdiction, is “of primary money laundering concern.” 

Comments

Section 102 of the Bill would expand the coverage of Title 31 Section 5318A to also cover a foreign jurisdiction “which is impeding United States tax enforcement”. The Bill would in various ways equate tax evasion with money laundering. The two crimes are very different, and we note that the Organisation for Economic Cooperation and Development (the “OECD”) and the Financial Action Task Force on Money Laundering (the “FATF”) are quite separate international bodies which themselves do not equate the two crimes or their enforcement procedures. 

In its application, the new Section 5318A of Title 31 of the United States Code would give broader power to the Secretary of the Treasury to impose restraints and sanctions upon transactions involving jurisdictions or institutions which “[are] impeding United States tax enforcement” as well as those which are “of primary money laundering concern.” 

We have no objection in principle to the proposal, but caution that it is very broad and appears unilateral in its approach to enforcing transparency. We note that (1) the OECDand FATF treat money laundering and offshore tax avoidance as different issues (theOECD is not trying to deal with tax evasion, which is a crime, except through transparency); and (2) the list of “offshore secrecy jurisdictions” in Section 101 of the Billis extremely broad, and we are assuming that the Secretary of the Treasury will propose a far smaller list of offshore jurisdictions as those impeding United States tax enforcement. We note that in its first Progress Report, issued in 2000, the OECD had identified a long list of potential “uncooperative tax havens”, but that by the time the first formal list of tax havens was published in 2004 by the OECD, the list contained only seven countries as uncooperative tax havens. We recommend that Congress not name specific countries as offshore secrecy jurisdictions, but rather direct that Treasury do so, and that Treasury should consider the OECD list in defining offshore secrecy jurisdictions. 

Section 103
 

Section 103 would add a new Section 6501(c)(U) to the Code, extending the statute of limitations for collection of taxes involving offshore secrecy jurisdictions.
 

The new Code Section 6501(c)(11) would extend from 3 years to 6 years the statute of limitations on assessment of tax deficiencies for tax returns filed by taxpayers who “directly or indirectly formed, owned, transferred assets to, was a beneficiary of, or received money or property or the use thereof from a financial account or an entity, including a trust, corporation, limited liability company, partnership or foundation (other than an entity with shares regularly traded on an established securities market) formed, located, domiciled or operating in an offshore secrecy jurisdiction.” 

Comments

We believe the proposed statute is overbroad. 

The statute of limitations should be extended only for the assessment of tax deficiencies attributable to the activity associated with the operations in the offshore jurisdiction. For example, a taxpayer who owns an interest in a family business located in Switzerland should be subject to the 6 year statute of limitations only with respect to deficiencies attributable to such ownership and not for adjustments to tax related solely to activities in the United States (or other jurisdictions that are not classified as “offshore secrecy jurisdictions”). Similarly, the statute would reach an attorney who formed the trust, corporation, limited liability company, partnership or foundation but who had no financial interest in those arrangements or entities. 

We would also make an exception for transactions for full and adequate consideration. 

Section 104
 

Section 104 requires the reporting of United States beneficial ownership of foreign owned financial accounts. Section 104 adds two sections, 6045A and 60458, to Subpart 8 of part III of subchapter A of Chapter 61 of the Code.

The new Section 6045A requires a withholding agent to file IRS Form 1099 with the IRS if:

 •      The withholding agent under Code Sections 1441 (Withholding of Tax on NonResident Aliens) and 1442 (Withholding of Tax on Foreign Corporations) has the “control, receipt, custody, disposal, or payment of any amount constituting gross income from sources within the United States of any foreign entity, including a trust, corporation, limited liability company, partnership, or foundation (other than an entity with shares regularly traded on an established securities market); and

 •      The withholding agent determines for “purposes of Titles 14, 18, or 31 of the United States Code that a United States person has any beneficial interest in the foreign entity or in the account in such entity’s name (hereinafter “United States Beneficial Owner”).”

The information required to be in IRS Form 1099 includes:

 •      Name, address, and taxpayer identification number of United States Beneficial Owner.

 •      Known facts pertaining to relationship of United States Beneficial Owner to the foreign entity and the account.

 •      Gross amount of income from sources within the United States.

 •      Such other information as the Secretary may by forms or regulations provide.

In addition to IRS Form 1099, the withholding agent must also furnish a statement to each United States Beneficial Owner about whom the withholding agent is required to file a report. Such statement must be furnished to such United States Beneficial Owner on or before January 31 of the year following the calendar year for which IRS Form 1099 was required to be made. The statement must set forth:

 •      The name, address, and telephone number of the withholding agent required to file IRS Form 1099.

 •      Information required to be shown on IRS Form 1099 with respect to such United States Beneficial Owner.

Comments

We note first the irony of Congress proposing penalties upon withholding agents which do not provide data to the Internal Revenue Service on payments made to foreign trusts, corporations, limited liability companies, partnerships, or other entities which have a United States person who has any beneficial interest in the foreign entity when Congress has pressed the United States Treasury not to adopt Proposed Treasury Regulations §1.6049-8, as noted above.[4] Is the position of the United States to be that we are insistent, and aggressive, on obtaining information for the Internal Revenue Service on income paid to offshore entities which may ultimately be held for the benefit of United States persons, but Congress refuses to allow the Internal Revenue Service to collect the same information upon income accrued for foreign persons?

While we don’t object in principle to the information gathering objective of proposed Code Section 6045A, we note a serious business issue inherent in the proposed statute. Many foreign grantors create trusts which are for the benefit of many beneficiaries, some of whom may be United States taxpayers. If the law requires United States withholding agents to obtain all of the information covered by proposed Code Section 6045A from a foreign entity investing in the United States, or risk a penalty for not having obtained the information, foreign entities will have a disincentive to invest in the United States. We would recommend broad reporting requirements only for trusts or other foreign entities created by United States persons.

Proposed Section 6045B requires any financial institution to report to the IRS if it directly or indirectly

 •      opens a bank, brokerage, or other financial account; or

 •      forms or acquires an entity, including a trust, corporation, limited liability company, partnership, or foundation (other than an entity with shares regularly traded on an established securities market).

in an offshore secrecy jurisdiction as listed in Section 101, at the “direction of, on behalf of, or for the benefit of a United States person.” The report must include the following information:

 •      Name, address, and taxpayer identification number of such United States person.

 •      Name and address of the financial institution at which a financial account is opened, the type of account, the account number, the name under which the account was opened, and the amount of the initial deposit.

 •      Name and address of an entity formed or acquired, the type of entity, and the name and address of any company formation agent or other professional employed to form. or acquire the entity.

 •      Such other information as the Secretary may by forms or regulations provide.

In addition to the report to the IRS, the financial institution must also furnish a statement to each United States person whom the financial institution is required to report. Such statement must be furnished to such United States person on or before January 31 of the year following the calendar year for which report to the IRS was required to be made. The statement must set forth:

 •      The name, address, and telephone number of the financial institution required to file the report to the IRS.

 •      Information required to be shown on such report with respect to such United States person.

Any class of United States persons or any class of accounts or entities may be exempted from the requirements of Section 6045B by the Treasury Department if it is determined that the application of the Section is not necessary to carry out the purposes of the Section.

Section 104 also amends Section 5239(b)(1) of the Code and Section 21 (d)(3)(A) of the Securities Exchange Act of 1934 to impose penalties on banks and securities finns. 

Comments

1.     Is the new Section only to apply to domestic financial institutions? The language is not clear, and application to foreign financial institutions is problematic.

2.     We assume that the proposed new law would not require a United States financial institution which took no part in creating a foreign entity to determine if any United States person directly or indirectly created the foreign entity before it could make distribution to the entity. Compliance costs otherwise would be very high, and those who truly wished to avoid reporting could still do so through the use of nominees who did not disclose their principals.

3.     Proposed Code Section 6045B would apply to accounts opened in an “offshore secrecy jurisdiction at the direction of, on behalf of, or for the benefit of a United States person”. We recommend that any legislation distinguish between the investigatory and reporting requirements which it imposes upon United States financial institutions with regard to foreign accounts or entities created, directly or indirectly, by United States persons, and with regard to foreign accounts or entities created by foreign persons for the benefit of United States persons. In addition to our comment upon proposed Section 6045A regarding the difficulty of determining who the discretionary beneficiaries of a trust may be, such a broad and intrusive requirement will only encourage the trustee of a foreign trust created by a foreign donor to always invest in foreign securities, rather than United States securities.

Section 105

Section 105(a) would enact a new Code Section 672(f) (redesignating the current Code Section 672(f) as §672(g), which attributes trust protector or trust enforcer powers to grantors for purposes of the grantor trust rules; Section 105(b) treats any U.S. person who receives distributions from a foreign trust or who benefits from the use of property owned by a foreign trust as a beneficiary unless he or she paid fair market value for the benefit received; Section 105(c) treats foreign trust transfers of real estate, artwork or jewelry consistently with the transfer of securities for purposes of Code Section 643(i); and Section 105(d) treats contingent and future U.S. beneficiaries as beneficiaries for purposes of Code Section 679.

We believe all of these provisions are overbroad and generally unnecessary to prevent the avoidance of income tax by U.S. taxpayers.

Comments

The new Code Section 672(f) does not limit attribution to the grantor of protector or enforcer powers to foreign trusts. It would also apply to domestic trusts. Domestic trusts are now subject to tax on worldwide income just like any other U.S. taxpayer. Therefore, making a domestic trust a grantor trust will not increase income tax in almost all cases. Because income tax rates are relatively flat, it is often advisable for a taxpayer to intentionally make a trust a grantor trust so that the grantor’s payment of income tax subsidizes the trust.

Code Section 679 treats any foreign trust created or funded, directly or indirectly, by a U.S. taxpayer as a grantor trust if the trust has or may ever have a U.S. beneficiary. This statute effectively prevents the use of foreign trusts to avoid U.S. income tax. Regulations under this section promUlgated in 2001 effectively prevent evasion of U.S. tax by giving a very broad construction of the statute. Because Section 679 is so broad, the usual technique used to escape its reach was to have a nonresident alien person as the purported grantor. Again, the regulations foreclose this possibility by broadly defining indirect transfers. In addition, regulations promulgated in 1999 defining “grantor” (Treas. Reg. §671-2(e) prevent using nominees to escape Code Section 679. Consequently, it is unnecessary to attribute protector or enforcer powers to U.S. grantors to prevent tax avoidance.

The proposed statute provides that a grantor shall be treated as holding any power or interest held by any trust protector or trust enforcer or similar person appointed to influence, oversee or veto the actions of a trustee. The powers deemed to be held by the grantor may cause the grantor to be treated as the owner of trust income under the grantor trust rules, going much further than the current “grantor trust” rules of Sections 671 through 679 of the Code. The proposed new rules broadly attribute protector or enforcer powers to the grantor, so as to make trusts into “grantor” trusts owned by the grantor, and effectively give more weight to powers held by a protector or enforcer than current law gives to powers held by a trustee. The rules imputing to the grantor powers that are held by a fiduciary should be uniform, whether the fiduciary powers are held by a trustee, a protector, enforcer or person called by any other name.

If the protector, enforcer, or person called by any name holds his or her powers in a nonfiduciary capacity, Code Section 675 covers the powers now. Under current law, there are rules governing when trustee powers should be treated as held by a grantor for purposes of the grantor trust rules. The same rules should apply to a protector or enforcer. Under current law, powers held by a fiduciary who is independent of the grantor are not imputed to the grantor. See, for example, Revenue Ruling 95-58.

The proposed statute would apply to nonresident alien grantors. This statute may expand the circumstances in which a nonresident alien grantor will be treated as the owner of the trust for U.S. income tax purposes. Generally, Code Section 672(f) now restricts the circumstances in which a nonresident alien will be treated as the owner of a trust. If a trust is treated as owned by a nonresident alien grantor, distributions may be made to U.S. beneficiaries of the trust free of tax because the distributions are treated as gifts from the grantor and a donee is not taxable on the receipt of gifts. Code Section 672(f) provides that a nonresident alien will be treated as the owner only if the trust is revocable so that the property will revest in the grantor, or the trust may make distributions during the lifetime of the grantor only to the grantor or the grantor’s spouse. If a protector’s power to revoke the trust is deemed to be held by the nonresident alien grantor, the effect of the statute may be to expand the circumstances in which a nonresident alien grantor will be treated as the owner of the trust.

In sum, we would not amend Section 672 of the Code in this fashion. Instead, we would add a provision to Section 672 to make clear that a protector or enforcer who holds powers as a fiduciary shall be deemed to be a trustee.

Section 1 05(b) is unnecessary because under current law a trust is treated as having a United States beneficiary if distributions are made to a U.S. person even if the distribution is in violation of the trust terms. See Treas. Reg. §1.679-2(a)(4)(ii)(C) and Example 2. Amending the Code to confirm what the regulations already provide is unnecessary unless the regulations are thought to be invalid, and the amendment of the Code could create an inference that the regulation was insufficient.

Section 105(c) creates significant problems of valuation and administration. Currently, Code Section 643(i) treats a loan of cash or marketable securities from a foreign trust to a grantor or beneficiary who is a U.s. person as a “trust distribution” except as provided by regulations. Section 643(i) of the Code was enacted in its present form in P.L. 104-88, The Small Business Job Protection Act of 1996, and for the first time treated loans by foreign trusts of cash or marketable securities to United States grantors or beneficiaries as taxable distributions of the full amount of the property loaned except as provided in Regulations. In Treasury Notice 97-34, 1997-1 C.B. 422, at 428, Treasury announced that Regulations once adopted would provide that only loans made as “qualified obligations”, by the terms of which repayment could be fairly presumed, would be treated as loans and not distributions. Such a standard is far easier to impose with respect to loans of cash or marketable securities than it is with respect to use of real estate or tangible personal property. If a trust beneficiary uses a vacation home for a week, and the home is owned by a foreign trust, is the beneficiary to take the entire value of the home into his or her income (subject to a limitation of the distributable net income or undistributed net income of the foreign trust)? What if the beneficiary wears once a necklace owned by the foreign trust? Furthermore, applying the new provisions regarding loans of real estate or tangible personal property to the language of the present statute, Section 643(i) provides that if a foreign trust makes an unqualified loan to a person related to a beneficiary of a foreign trust, the amount loaned shall be deemed a distribution of income not to that person, but to the beneficiary to whom the person is related. Thus, if an individual is a beneficiary of a foreign trust, and the trust allows the person’s daughter to spend a week at a vacation home owned by the trust, the entire value of the home is deemed distributed to the parent who is the trust beneficiary. Surely this cannot be good law.

We would again urge a de minimis exception, and that any imputation of income be limited to the value of the use, not of the property used.

Section I 05( d) is unnecessary because under current law a trust is treated as having a U.S. beneficiary even if the beneficiary’s interest is a future or contingent interest. See Treas. Reg. §1.679-2(a)(2)(i). If a trust that does not have a U.S. beneficiary subsequently acquires a U.S. beneficiary, the grantor is treated as receiving a distribution of all undistributed income of the trust. Code Section 679(b). However, a trust is not treated as having a U.S. beneficiary if a nonresident alien beneficiary first becomes a U.S. person more than five years after the transfer to the trust. The current rules are adequate to address this issue.

Section 106

Section 106 of the Bill would amend Section 6664 of the Code by adding a new subsection (e) thereto concerning penalties. Section 6664 contains definitions and special rules regarding accuracy - related penalties on understatements of tax (Section 6662), accuracy-related penalties on understatements with respect to reportable transactions (Section 6662A), and penalties relating to fraud (Section 6663). While there can be little defense, other than a demonstration of fact and intent, to a penalty asserted for fraud, the basic premise of Section 6664 is that a taxpayer has defenses to all of the penalties under Sections 6662, 6662A and 6663 if the taxpayer had “reasonable cause,” which includes reliance by the taxpayer upon certain levels of opinions from counsel.

Comments

The new Section 6664(e) would provide that a taxpayer may in no circumstances rely upon an opinion of a tax advisor for a transaction involving “an offshore secrecy jurisdiction” for purposes of avoiding underpayment penalties, except as the Secretary may provide by Regulations. This provision is consistent with the approach toward transactions involving offshore secrecy jurisdictions in Section 101 of the Bill, but unless the Secretary promptly proposes and adopts regulations which dramatically reduce the list of jurisdictions in the proposed new code Section 7701 (a)(50)(E), the ability of taxpayers to enter into entirely appropriate transactions with entities established in those jurisdictions will be impaired. Purely as examples, we note that the United States of America has a full bilateral income tax treaty with Switzerland, and has bilateral exchange of information treaties with Barbuda, Aruba, the Bahamas, Bermuda, the British Virgin Islands, the Cayman islands, Guernsey, Jersey, the Isle of Man and the Netherlands Antilles.

While some of the jurisdictions on the Bill’s initial list - such as Nauru and Vanuatu - remain suspect, and others, such at the Cook Islands, may be uncooperative with the United States in asset protection matters, the Bill should not be enacted without reducing the list of covered jurisdictions dramatically. Otherwise, ordinary business transactions which require tax advice will be thrown into doubt if they involve any of these jurisdictions.

Title II

Sections 201 and 202 of the Bill deal with securities law questions which ACTEC is not competent to comment upon.

Section 203

Section 203 of the Bill amends Section 5312 (a)(2) of Title 31 of the United States Code relating to anti-money laundering rules.

The amendment would add to U.S. Code Section 5312(a)(2) by adding as a new subparagraph (z) the class of “persons involved in forming new corporations, limited liability companies, partnerships, trusts, or other legal entities.” The Secretary of the Treasury is directed to publish a proposed Rule requiring persons described in the new subparagraph (z) to establish anti-money laundering programs within 90 days of enactment of the Bill as law, and final regulations within 180 days.

Comments

The (now) 26 subparagraphs of Section 5312(a)(2) of the United States Code cover a wide variety of professions and businesses and require the Secretary of the Treasury to adopt rules to regulate the conduct of persons in each of these businesses with regard to money laundering. The FATF has urged regulation of persons covered by the proposed Section 5312(a)(2)(z) of the United States Code, generally known as gatekeepers. To date, cognizant officials of United States Treasury have resisted such regulation. We understand that the position of the United States Treasury is based on the fundamental belief that: (1) gatekeepers are regulated by other professional rules in the United States; (2) any attempt to adopt federal rules to regulate accountants and, in particular, lawyers, will be subject to immediate attack as unauthorized under applicable law and constitutional principles. As a note of experience, Section 5312 (a)(2)(u) of the United States Code, covering persons involved in “real estate closings and settlements’” was enacted effective on November 18, 1988. Despite strong efforts by the Treasury Department to adopt regulations under this and other subsections after the events of September 11,2001, and many discussions with professional groups, debates and discussions concerning this subparagraph which continue to this date, no final regulations have been adopted. Creating a deadline of 180 days for final regulations under the proposed new subparagraph (z) seems unrealistic.

Title III

Sections 301 and 302, amending Code Sections 6700 and 6701

Sections 301 and Section 302 increase the penalty for promoting abusive tax shelters and for aiding and abetting the understatement of tax liability from 100% of the gross income derived from the activity to 150% of the gross income derived from the activity and provide that any penalty imposed or amount paid to settle or avoid a penalty is not deductible.

Comments

The prohibition on deducting amounts paid to settle or avoid the penalty unduly limits the ability of IRS examiners to settle cases. Moreover, it may be unclear whether the amount paid to settle a tax dispute where the IRS has asserted a penalty and then waives the penalty in settlement of the dispute will not be deductible. It is common for the IRS to assert a penalty to induce a settlement and agrees to waive the penalty if a settlement is reached.

Section 303, barring tax patents

Section 303 add a new subsection (g) to Section 102 of Title 35 of the United States Code (redesignating the current subsection (g) as subsection (h), which would bar patents for inventions “designed to minimize, avoid, defer, or otherwise affect the liability for Federal, State, local, or foreign tax.” ACTEC does not oppose this new subsection, and has formally supported the IRS’s efforts to bar tax shelter parents (see letter of President W. Bjarne Johnson to The Honorable Eric Solomon dated May 14, 2008).

We note, of course, that all tax practitioners seek to help their clients “minimize, avoid [or] defer” their Federal and state income taxes, and there is nothing wrong with giving such advice. We do not, however, believe that tax advice should be capable of being patented, as in our view all lawyers are giving similar advice, or advice which is accretive to advice previously given by others.

Section 304, Prohibited Fee Arrangements

Section 304 would add a new subsection (f) to Section 6701 of the Internal Revenue Code (redesignating the current subsections (f) and (g) as (g) and (h), respectively).Section 6701 concerns penalties for aiding or abetting understatement of tax liability. The new subsection (1) provides:

(f)     Prohibited Fee Arrangement

(1)     Any person who makes an agreement for, charges, or collects a fee which is for services provided in connection with the internal revenue laws, and the amount of which is calculated according to, or is dependent upon, a projected or actual amount of-

(A)     tax savings or benefits, or

(B)     losses which can be used to offset other taxable income, shall pay a penalty with respect to each such fee activity in the amount determined under subsection (b).

Comments

Section 6701(b) provides for a penalty of $1,000, upon the lawyer, preparer, or other person providing the advice under such a fee arrangement. This penalty is, one might claim, minor in amount. But no tax practitioner ever wishes to be assessed a penalty for what he or she does for his or her livelihood, and Code Section 6701(a) otherwise penalizes professionals who aid and abet the understatement of tax upon a return. We understand that the Treasury, and Congress, wish to discourage some of the fee arrangements which have been publicized under which law finns and accounting finns sought as a fee a percentage of the savings for the client’s entering into a prohibited tax shelter activity. But the language of the statute is very broad, and many lawyers charge more or less for their services according to whether the advice is of high quality and great value to the client. We would urge that the text of the new Code Section 6701(f) be revised so as to define a prohibited fee arrangement as one

“which is for services provided in connection with the internal revenue laws, and the amount of which is calculated so as to award the person providing services a portion of the projected or actual amount of.—

(A)     “tax savings or benefits, or

(B)     “losses which can be used to offset other taxable income ... ”

In all events, regulations should make clear that success fee billing is not a prohibited fee arrangement under the new statute.

Section 305

Section 305 is intended to combat financial institutions entering into tax shelter activities. The Federal banking agencies and the Securities and Exchange Commission are directed to develop examination techniques to detect potential violations of Sections6700 or 6701 of the Internal Revenue Code by financial institutions.

Section 306

Section 306 would amend Section 6103(h) of the Internal Revenue Code to provide that upon a legally authorized written request from the SEC, an appropriate Federal banking agency, or the Public Company Accounting Oversight Board (that is, only Federal agencies, and not State or foreign governments), the Internal Revenue Service is required to disclose confidential return information to the requesting agency if the investigation, examination or proceeding will “evaluate, determine, penalize or deter” conduct by a financial institution which is associated with a potential violation of Internal Revenue Code 6700 or 6701, or “activities related to promoting or facilitating inappropriate tax avoidance or tax evasion”.

Comments

Our only question here is that on its face the new section does not seem limited to criminal investigations, and we would have thought that secrecy was a strong principle in tax administration, such that disclosure would not take place in civil matters.

Section 307

Section 7216 of the Internal Revenue Code establishes the basic rule that a tax return preparer shall not “knowingly or recklessly” disclose the information on a taxpayer’s return to third parties, and is subject to payment of a fine on violating the section.Section 307 of the Bill would amend Section 7216 of the Code to allow disclosure of information by tax return preparers pursuant to order of a court, a grand jury, or a proper administrative order of a Federal or State agency.

Section 307(b) of the Bill would amend Section 6104(a) of the Internal Revenue Code to direct the Secretary of the Treasury to disclose to Congress documents relating to an organization’s request for a determination of exempt status as a charity, upon request from a committee or subcommittee of Congress.

We have no comments.

Section 308

Section 308 would amend Section 330(d) of title 31 of the United States Code to require the Secretary of the Treasury to adopt new standards covering all facets of tax opinions issued by practitioners, including 8 listed categories upon which advice/standards are to be adopted.

Comments

Such regulations will require extensive consultation with the private sector in order to be workable. Again, ACTEC opposes abusive tax shelters and opinions enabling the same, but tax practitioners offer opinions all of the time. We do not oppose standards regarding independence of the tax practitioner providing the opinion, barring joint financial interests, and avoiding conflicts of interest. We question how the Treasury can determine, in advance, (a) the standard of opinion provided by others upon which a tax practitioner can rely, (b) what factual representations by the taxpayer can be relied upon by the tax practitioner, or (c) what fees are appropriate.

Section 309

Section 309 of the Bill would amend Section 162(f) of the Internal Revenue Code so as to deny any deduction as a trade or business expense of fines, penalties or other amounts paid or incurred in relation to “violation of any law or the investigation or inquiry by such government or entity into the potential violation of any law.”

Comments

Section 162(f) of the Code presently denies the deduction, as a trade or business expense, “for any fine or similar penalty paid to a government for the violation of any law.” Treas. Reg. § 1.162-21 interprets this prohibition broadly. The proposed amendment would cover fines or penalties paid either to a government or to a non-governmental entity, and cover both amounts paid “for the violation of any law” and amounts paid “in relation ... to the investigation or inquiry by such government or entity into the potential violation of any law.” These changes on their face do not seem controversial. But the proposed amendment would now bar deductions as a trade or business expense of “any amount paid or incurred ... to, or at the direction of, a government or [government] entity ... in relation to ... the investigation or inquiry by such government or entity into the potential violation of any law.” This change would go far beyond current law, which permits deductions of expenses a taxpayer incurs in contesting a fine or penalty.

Title IV - We have no comments with regard to Title IV.

S. 2956 The Incorporation Transparency and Law Enforcement Assistance Act

Approximately 2,000,000 corporations and limited liability companies are formed each year in States of the United States. Formation is allowed without identification of beneficial owners, which S.2956 says facilitates money laundering, tax evasion, and other criminal activity. One purpose of the bill is to require States to secure information on beneficial ownership and make sure that on subpoena or summons that information is available to law enforcement authorities.

The bill requires States to amend .their business formation statutes so as to require certain information relating to “beneficial owners” of certain companies or legal entities that are formed under state law. In addition, the bill would impose certain enhanced anti-money laundering compliance requirements on company “formation agents”, defined to include “any person involved in forming a corporation, limited liability company, partnership, trust, or other legal entity.” The bill also would require two studies by the GAO one due within one year of the enactment of the statute, and another due by 2012. These studies would examine (1) the extent to which current state laws and procedures raise concerns regarding money laundering and terrorist financing activities, impede adequate law enforcement, or otherwise raise concerns under international anti-money laundering standards, and (2) which states have taken action to comply with the requirements to obtain beneficial ownership information as required by the legislation. A future Congress would determine what remedial action to take.

Under the bill, any applicant wishing to form a corporation or limited liability company (other than a publicly-traded company or one of a limited group of excepted companies) would have to provide to the State a list of beneficial owners and addresses, and additional similar detail if the new entity is owned or controlled by another entity. The list would have to be updated annually, or when ownership changes, and be kept for five (5) years after the entity is dissolved. This data would have to be maintained by the State and furnished to law enforcement on subpoena or summons. For non U.S. beneficial owners involved in entities formed under state law, the applicant and/or the formation agent would have to verify names, addresses and identities of beneficial owners and obtain a copy of a passport with photographic identification.

Criminal penalties would be imposed on any person filing false information.

While the bill only covers corporations and limited liability companies, it calls for further study and reporting by the GAO on partnerships, trusts, and other legal entities.

The bill would also require the U.S. Department of the Treasury to issue a new rule requiring “formation agents” (as defined above) to establish anti-money laundering programs, similar to those required by existing financial institutions Those programs would include, at a minimum, an internal compliance plan, training, and independent audit of the anti-money laundering compliance program adopted by the formation agent. (As an initial matter, it does not appear that formation agents would be required to file suspicious activity reports with federal regulators, as banks are currently required to do.) As defined, “formation agents” would appear to include lawyers who are involved in the formation of legal entities.

Comments

The U.S. Department of the Treasury has asked the Uniform Law Commissioners to prepare a uniform law for the States to adopt to achieve the bill’s goals of transparency and information. We suggest that since the effort between Treasury and the ULC is underway, these aspects of the proposed legislation are not necessary.

With respect to information agents we reiterate that: (1) gatekeepers are regulated by other professional rules in the United States; (2) any attempt to adopt federal rules to regulate accountants are, in particular, lawyers, will be subject to immediate attack as unauthorized under applicable law and constitutional principles.

[1]       See discussion on p. 12, below.

[2]       We note that Line 10 of Page 6 of the Bill refers to “tax secrecy rules and practices”, while Lines 17 and 20 of Page 6 refer to “tax secrecy or confidentiality rules and practices” in reference to the term on Line 10. We assume that Line 10 was meant to include the term “or confidentiality” and suggest it do so.

[3]       We note that under proposed Section 7701(a)(50)(8) and (F)(i) that the Secretary is required to list a foreign jurisdiction as an offshore secrecy jurisdiction if the Secretary determines that it meets the qualifications necessary, but that underproposed Section 7701(a)(50)(F)(ii) the Secretary has the discretion to remove a jurisdiction that does not meet the offshore secrecy jurisdiction requirements. Although the very wide discretion granted to the Secretary in the proposed legislation means that this discrepancy has little effect, for the sake of consistency and symmetry, the Secretary’s addition or removal of foreign jurisdictions to or from the offshore secrecy jurisdiction list should be either mandatory or discretionary.

[4]       Current Treas. Reg. § 1.6049-8 requires United States payors of interest to nonresident alien payees to report that interest to the Internal Revenue Service upon a Form 1099 only if the payee is a Canadian resident. Treasury on July 3, 2002 proposed to amend Treas. Reg. § 6049-8 so as to expand its scope to require United States payors of interest to report payments to nonresident aliens upon Form 1099s filed with the Internal Revenue Service if the payee was a resident of anyone of 15 major trading partners of the United States, in addition to Canada. The purpose of the reporting was not to collect revenues for the United States, but to have the interest income information in the hands of the Internal Revenue Service should a trading partner seek information upon one of its resident taxpayers. More than 100 Congressmen went on record as opposing the proposed new regulation, and the “Coalition for Tax Competition” urged then Treasury Secretary Snow that adoption of the proposed regulation would cause capital to “flee” the American banking system and relocate to less well regulated banking systems in London, Zurich and elsewhere. Those jurisdictions now have much stronger reporting systems, but the irony of the United States’ position is clear.