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Senators Demand Answers On Abusive Tax Transaction

by Mike Godfrey, Tax-News.com, Washington

20 June 2007

The Senate's senior tax writers have written to Treasury Secretary Henry Paulson regarding a type of abusive tax transaction involving the contribution of noncash property to tax-exempt organizations.

Finance Committee Chairman Max Baucus and Ranking Republican Chuck Grassley said that they are seeking information on the entities employing this 'abusive tax shelter' and clarification of the response of the Internal Revenue Service.

The transaction in question involves the contribution of non-cash property to a charity and the claiming of a charitable deduction in an amount that substantially exceeds the true fair market value of the property.

Baucus first wrote to the Treasury Secretary regarding the transaction in April of this year. According to the Senators, the IRS has indicated knowledge of the abusive tax tactic, but has not yet determined whether to make it a listed tax shelter transaction.

“The IRS is clearly aware of this shell game involving contributions of property to tax exempt entities, but I’m not satisfied that enough is being done quickly enough to stop this abusive transaction,” explained Baucus. “We want to know how widespread the problem is and who’s playing fast and loose with the tax code in this way. The IRS needs to take timely action to stop deals like this from proliferating.”

Grassley added: “The IRS must send a clear signal that charities cannot engage in these types of transactions and expect to continue to receive the benefits of tax-exempt status. The agency needs to use all of the tools it has to police the charities – big and small - that engage in these transactions.”

"We are troubled by organizations that benefit from tax exempt status taking advantage of this privilege by aiding and abetting abusive tax transactions that allow others to avoid paying tax," the Senators wrote, continuing: "We believe that the IRS needs to give serious consideration to imposing Section 4965 penalties on these charities as well as revoking the exempt status of those charities that knew or had reason to know about their participation in these transactions."

Section 4965 was passed in the Tax Increase Prevention and Reconciliation Act of 2005 in response to testimony from the Commissioner of the IRS that charities and other tax-exempt organizations were serving as accommodating parties for tax shelters and tax abusive transactions. In general, the penalties and taxes of Section 4965 are triggered when a tax exempt entity is a party to a prohibited tax shelter transaction – which is defined as either a listed transaction or a prohibited transaction.

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