Legality of derivatives for tax avoidance questioned

The Wall Street Journal provides an inside look in today' s paper at the evolution of derivatives as a way for hedge funds with off-shore operations to cut taxes, using the work of Lehman Brothers Holdings as a case study.

"Internal Lehman emails reviewed by the Journal reveal bankers searching for the line between smart tax planning and improper tax avoidance. In the end, according to the emails and to people familiar with Lehman's business, the bankers and their lawyers concluded that it was a business worth pursuing," the Wall Street Journal says.

The Journal reported in July that the Internal Revenue Service is seeking information from Lehman and Citigroup Inc. about certain trades. Other firms expect to receive similar inquiries.

Senate investigators seek details on companies' tax-cutting transactions

The Senate's Permanent Committee on Investigations has sent letters to 30 companies seeking information on certain tax-cutting transactions and arrangements, The Wall Street Journal reported.

The investigation appears to have been sparked by disclosures required by a new accounting rule known as "FIN 28."

The Journal quoted one letter as requesting the companies to "describe any United States tax position or group of similar tax positions that represents 5 percent or more of your total [unrecognized tax benefit] for the period, including in the description of each whether the tax position involved foreign entities or jurisdictions."

Senate investigators also want to know what tax professionals and law firms were involved in tax-cutting transactions on which companies spent at least $1 million for legal fees or other costs.

Customers of tax evasion website get temporary reprieve

A federal appeals court judge temporarily blocked a court order that required the operator of a tax evasion website to provide the government the names and identifying details of people who had obtained information at the website on how to stop federal tax from being withheld from their paychecks, according to the New York Times.

Judge Peter W. Hall set Sept. 18 for oral arguments on the issue.

IRS offers closing agreements in municipal bond arbitrage cases

The Internal Revenue Service has announced a new Voluntary Closing Agreement Program (VCAP) to address violations of federal tax law on arbitrage investment restrictions. The violations are related to non-fair market value purchases of forward-float investment agreements used in advance refundings of tax-exempt municipal bonds.

This program will be available to municipal bond issuers who wish to correct such violations. Resolution terms described in this program are only available until March 1, 2008. Failure to correct a violation could result in a related bond issue being deemed “arbitrage bonds,” which lose their tax-exempt status.