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 the last
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.
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.
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