Introduction A brief review of the place of tax shelters in the American corporate landscape.

The Treasury's 2003 Offensive There was a kind of amnesty in 2002; and in 2003 the Treasury issued new guidance on tax sheltering.

Introduction

In America as nowhere else, business and the tax authorities play the 'tax shelter' game with rare dedication. From time to time, the IRS launches an all out attack on tax shelters, and the shelter industry retreats - but it is soon back again, applying all its wits to the creation of ever more intricate ways of minimising corporate tax bills.

Acceptable tax shelters make use of permitted loopholes or tax breaks which are there to encourage certain types of economic behaviour. The vast majority of tax shelters are in full compliance with the tax laws, but an increasing number of them have crossed the bounds into being what the Government terms "abusive tax shelters". These are cases where the revenue loss to the government produces little or no tax benefit to society.

The Tax Reform Act of 1986 represented a major attack by Government on tax shelters; in 2000 it tried again, but was stymied by Congress. In 2003 the Treasury Department released a new set of rules defining what it considers to be 'abusive' tax shelters. Throughout 2003 and 2004, the IRS and the Treasury concentrated their attack, with some success, more on the advisory firms that produce and 'market' tax shelters, rather than on the corporate users of the schemes.

Proposals to close further tax 'loopholes' approved by the Senate Finance Committee in early 2007 were removed by Congress from the legislation to which they had been attached.

Between 2007 and 2008, various tax shelter-related court cases were ongoing, usually being determined in the IRS's favour, but there were no concerted government initiatives. However, President Obama's contentious health-care legislation, currently making its way through Congress, includes codification of the ‘economic substance’ doctrine in tax shelter cases.

Many US tax shelters are business ventures in which accounting losses far exceed the accounting income. These losses are used to offset the taxpayer's income from other sources. Usually, a tax shelter also provides large deductions in its early years although the taxpayer may not have invested significant amounts of capital up front. For example, a taxpayer might purchase a rental property with a low down payment and offset his rental income with deductions for interest, taxes, and the maximum allowable depreciation.

Generally, losses are generated in the first years of existence and passed through to investors, who sometimes achieve a complete return of their original investment through tax savings in the first two or three years. But the existence of a loss does not always indicate a tax shelter. A loss may also occur as a result of business operations or from an unusual event such as a casualty loss. The key element which distinguishes a tax shelter loss from a true business loss is the substance of the event which gave rise to the loss.

Introduction A brief review of the place of tax shelters in the American corporate landscape.

The Treasury's 2003 Offensive There was a kind of amnesty in 2002; and in 2003 the Treasury issued new guidance on tax sheltering.