Senate Finance Committee Ranking Member Ron Wyden (D-OR) has formally referred information from his committee’s investigation into the abuse of Puerto Rico’s Act 60 tax incentives to the IRS for further review. The referral urges the agency to examine legal opinions provided by specific attorneys to wealthy investors who may have improperly used the incentives to avoid U.S. taxes on capital gains.
Wyden Urges IRS to Investigate Act 60 Tax Scheme
In an April 29 letter sent to IRS Chief Tax Compliance Officer Jarod Koopman, Senator Wyden detailed his committee’s investigation into the compliance of wealthy U.S. persons who established residency in Puerto Rico to take advantage of its Act 60 tax exemption, also known as the “PR tax grant.”
The investigation focuses on situations in which taxpayers move to Puerto Rico, establish residency, and then sell appreciated property, claiming the resulting gain is Puerto Rican source income not subject to U.S. tax. Wyden’s letter describes this as a “serious misapplication of U.S. tax laws” that results in significant underpayment of taxes.
The letter notes that existing Treasury regulations substantially foreclose this approach. Under Treas. Reg. § 1.937-2(f)(1)(iii)(B), appreciation in property that predates an individual’s Puerto Rico residency generally does not qualify for the Puerto Rican-source income exclusion during the first decade of that residency.
Puerto Rico’s own Departamento de Hacienda has reached the same conclusion. Officials from that agency advised committee investigators that pre-residency appreciation does not constitute Puerto Rico-source income under the island’s own tax framework.
Wyden’s letter also references whistleblower allegations that certain wealthy individuals used legal opinions to avoid over $100 million in federal taxes on capital gains that accrued while they still lived in the U.S. That concern is compounded, the letter notes, by the fact that certain clients of the attorneys under scrutiny have already entered guilty pleas or otherwise admitted involvement in schemes that exploited Act 60 incentives, as illustrated by a recent federal tax fraud case.
Legal Opinions From Attorneys Under Scrutiny
The investigation specifically names attorneys Jeffrey Rubinger and Summer LePree, formerly partners at Baker McKenzie and now at Winston and Strawn, who are reportedly subjects of a criminal investigation by the Department of Justice and IRS Criminal Investigation stemming from their advisory work for wealthy clients relocating to Puerto Rico.
According to the letter, a Baker McKenzie spokesperson confirmed the firm had received a grand jury subpoena from the U.S. Attorney’s Office in Miami for records related to Rubinger and LePree’s work on “Puerto Rican Tax Planning Structures.”
The committee’s investigation established that Rubinger provided inaccurate legal opinions to other clients involving Act 60. According to the letter, committee investigators have verified that Rubinger is identified as “Attorney 1” in a criminal charging document filed against Suresh Gajwani in the U.S. District Court for the Southern District of Florida. Gajwani waived indictment in connection with that filing.
That case centers on allegations that Gajwani filed a false statement with the IRS to retroactively convert his corporation to S corporation status, a step necessary to access Act 60 benefits, in order to avoid taxes on capital gains that had accrued in the company’s portfolio.
Court records reflect that Attorney 1 provided Gajwani an opinion letter advising that “built-in capital gains for U.S. residents accrued prior to becoming a resident of Puerto Rico could be exempt from federal income taxes under Act 60.” The letter notes that IRS senior representatives subsequently advised Rubinger that both positions in his opinion letter were wrong.
Wyden Makes Requests of IRS
Wyden’s letter refers several specific concerns to the IRS, asking the agency to conduct a thorough review. The first is a request to determine the accuracy of all legal opinions that Rubinger and LePree provided to wealthy taxpayers related to Puerto Rico Act 60 and IRC § 933 or IRC § 937, and to investigate whether they inaccurately advised that built-in capital gains accrued before a move to Puerto Rico could be exempt from federal income tax.
The letter also asks the IRS to review whether specific wealthy beneficiaries of Act 60 paid U.S. federal income taxes on flow-through gains from assets that were acquired before their relocation to Puerto Rico. Wyden requests that the agency examine how much income these investors have treated as Puerto Rico source income and whether their federal tax returns properly distinguish between gains that arose while they resided in the U.S. and those that accrued only after their move.
Finally, Wyden calls for a review of all valuations of assets held by these taxpayers at the time they established residency in Puerto Rico. The letter also connects this referral to the ongoing IRS Large Business and International (LB&I) campaign related to Puerto Rico Act 22/60, requesting an examination of tax returns filed from 2021 to 2025 to identify whether any ultra-high-net-worth taxpayers have improperly classified U.S.-source income as Puerto Rican in origin for the purpose of reducing or eliminating their federal tax liability.
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