IG_C11 - CHAPTER 11 INVESTOR LOSSES LECTURE NOTES THE TAX...

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CHAPTER 11 INVESTOR LOSSES LECTURE NOTES TH E TAX SHELTER PROBLEM 1. In addition to discussing investment interest and limitations on other investment losses (see items 43 and 44 in these lecture notes), this chapter deals with the at-risk provisions and the passive loss limitations. Both sets of rules were necessitated by abuses under prior law in the tax shelter area . 2. The at-risk rules limit a taxpayer’s tax shelter deductions to the amount at risk (i.e., the amount the taxpayer stands to lose if the tax shelter investment becomes worthless and recovery of the investment is not possible). 3. Generally, under the passive loss rules , passive losses may offset only passive income, and may not offset active or portfolio income. ADDITIONAL LECTURE RESOURCE The Attack on Corporate Tax Shelters —Certain government officials wish to crack down on so- called corporate tax shelters, which, they say, cost the Treasury tens of billions of dollars in lost revenues every year. These tax shelters, which avoid the current passive loss rules, often go undetected by the IRS because they are buried in complex corporate tax returns. At the heart of the issue are questions about the meaning of the term tax shelter and whether certain transactions are intended to produce actual economic benefits or are pursued solely for tax savings. Stated another way by Yale University professor Michael Graetz, a tax shelter is “a deal done by very smart people that, absent tax considerations, would be very stupid." On the other side, there are those who claim that some of the government’s proposed fixes are worse than the problems they intend to solve. These opponents say that the proposed restrictions would so impede legitimate business transactions that they would be equivalent to a tax increase. ADDITIONAL LECTURE RESOURCE 11-1
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11-2 2009 Comprehensive Volume/Instructor’s Guide with Lecture Notes The at-risk rules and the passive activity loss limitations are designed to prevent taxpayers from claiming deductions generated by abusive tax shelters that do not reflect economic reality. Nonetheless, the presence of these rules does not guarantee that taxpayers will never claim improper deductions associated with their trades or businesses and investment ventures. A study by the IRS of 577 taxpayers revealed that wealthy individuals and big corporations recently claimed over $16 billion of improper deductions from abusive tax shelters. Of those involved in the study, 400 were individual taxpayers whose activities were clearly subject to the at-risk and passive loss rules. Whether their improper deductions were due to statutory flaws or ignorance of the law is subject to debate. While some taxpayers overstate deductions, many other taxpayers do not claim all of the
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IG_C11 - CHAPTER 11 INVESTOR LOSSES LECTURE NOTES THE TAX...

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