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Treasury, IRS shut down tax shelter involving charities


WASHINGTON (AP) - The Treasury Department and the Internal Revenue Service acted Thursday to stop businesses from partnering with charitable organizations to generate improper tax deductions.
This announcement marked the first time tax officials have designated tax-exempt organizations, such as charities, as participants in a tax shelter.

"The participation of tax-exempt entities in these abusive transactions is a worrisome trend," said IRS Commissioner Mark Everson. "We are acting today to ensure the integrity of our charities. We don't want Americans to lose faith in a unique and vital part of our nation's social fabric."

The transaction involves businesses organized as corporations that pass income, and thus taxes, through to their shareholders. The Treasury Department and IRS acted to stop those businesses from partnering with a charity and shifting income to the tax-exempt organization to generate improper tax deductions.

In one such strategy, shareholders reduced taxes on the company's income by temporarily allocating it to a tax-exempt entity. They also got a tax deduction for donating nonvoting stock, which was created specifically for this transaction, to the tax-exempt group.

"Use of tax-exempt organizations as mere accommodation parties should not be permitted," said acting Assistant Treasury Secretary Gregory Jenner.

The announcement means taxpayers and promoters using the transaction must disclose their actions to the IRS. Firms promoting the arrangement must keep lists of investors.

The arrangement came under scrutiny last fall when Senate investigators examined tax shelters sold by accounting firm KPMG in the late 1990s and early 2000s. The firm said it no longer offers the tax strategies.

The Senate Governmental Affairs investigations subcommittee concluded that about a half-dozen tax-exempt groups participated in the transaction.

The top Democrat on the panel, Sen. Carl Levin of Michigan, said he was pleased to see the IRS attack the shelter.

"It is particularly disturbing when tax shelter promoters start involving charities in their tax dodges," he said.

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