The Bush administration, Congress and the Internal Revenue Service are proposing new initiatives to crack down on tax-exempt organizations' involvement with tax shelter schemes.
In recent years, some pension funds, charities and state or local government entities have, in effect, rented out their exemptions to wealthy individuals and corporations. Such shelters commonly are deals in which income is credited, at least on paper, to the tax-exempt entities, while losses flow to the taxable people or businesses.
Half of the 30 or so transactions listed by the IRS as abusive tax shelters involve tax-exempt groups, Steven T. Miller, the IRS commissioner for tax-exempt and government entities, said at a meeting of employee benefits professional in Los Angeles last week. "The time has come to deliver a message to a small number within the benefits community who have begun to taint our important public purposes with abuse," he said.
In its fiscal 2006 budget this week, the administration called for new penalties on charities that receive conservation easements -- for which donors take deductions -- if the charities fail to enforce them. That change would raise $96 million over 10 years, the Treasury Department figures.
Yesterday, the Senate Governmental Affairs' permanent subcommittee on investigations, in a report based on a two-year examination of tax shelters, cited public-employee pension funds in Texas and California as having "participated as counter parties in a highly questionable tax shelter . . . in return for substantial payments."
The two funds, the Los Angeles Department of Fire and Police Pensions and the Austin Fire Fighters Relief and Retirement Fund, participated in 33 of the 58 such deals arranged by the KPMG LLP accounting firm, the subcommittee report said.
The deal, known as SC2, was added to the IRS's list of abusive transactions last April.
The subcommittee said the pension funds allowed themselves to be recipients of "donations" of stock in Subchapter S corporations, which the original owners later bought back. Subchapter S corporations are not taxed themselves; their profits and losses instead flow to shareholders and are reported on their tax returns.
The original owners got two tax breaks. First, they took charitable deductions for donating the stock to the funds. Then, by "allocating," but not actually paying, company income to the stock while the fund owned it, the owners could buy back the stock and claim that the income was already taxed.
In return, subcommittee investigators found, the pension funds expected to receive substantial payments. The amounts were not specified in the report.
The corporate tax bill Congress passed last fall tightened regulations of sale and leasing transactions involving tax-exempt municipal entities such as transit systems. A number of other anti-shelter provisions approved by the Senate, but not the House, were dropped from the final bill.
The Joint Committee on Taxation last month suggested that tax-exempt organizations be required to report if they participate in any transaction on the IRS's list of abusive shelters, and that any manager who approves participation in a shelter be subject to $20,000 in taxes.
Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) has promised to toughen rules for charities and other tax-exempt organizations. Grassley hopes to have a bill ready this spring, an aide said.
