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Unformatted text preview: 2-1TAX 6845 Tax Planning & Consulting (September 8) Topic: Investment issues & the loss limiters updated: August 13, 2009 I. Abusive tax shelters vs. legitimate investment opportunities. A. What is an abusive tax shelter? 1. Abusive tax shelters are transactions promoted with the promise of tax benefits with no meaningful change in a taxpayers income or assets. 2. These transactions typically have no economic purpose other than reducing taxes with predictable tax losses or tax consequences. 3. Most abusive tax shelters involve the use of multiple layers of domestic and foreign pass-through entities such as trusts, partnerships, s-corporations, and limited liability companies. B. Abusive tax schemes became increasingly popular in the 1990s among both individuals and businesses because: 1. The penalties associated with participating in abusive tax schemes were too small to have a deterrent affect. 2. Promoters increased the marketing of abusive tax schemes as legally defensible ways to minimize tax burdens. 3. There was no efficient disclosure and reporting system for abusive tax schemes. C. What did the IRS do to combat abusive tax shelters and transactions? 1. The IRS maintains a list of certain tax avoidance transactions that are considered abusive. 2. Taxpayers are required to disclose their participation in these listed transactions. 3. Material advisors (promoters) must register the transactions with the IRS and they must maintain investor lists (and provide the list to the IRS upon request). 2-2II. Current efforts to further combat the abusive tax shelter problem. A. After years of failed attempts, Congress is trying to raise the legal hurdle that determines whether a tax shelter is legitimate or abusive. Their efforts are aimed at reining in questionable tax shelters that have deprived the government of hundreds of billions of dollars in tax revenues in recent years. B. The hurdle in question is the doctrine of economic substance. The economic substance doctrine holds that a transaction must have genuine economic substance, as well as a legitimate business purpose other than tax savings, in order to reap a legitimate tax benefit. C. In other words, if a tax shelter does fancy footwork to follow, or appear to follow, the letter of the tax code but violates its spirit by existing mainly to generate tax deductions, then it is an abusive tax shelter in the eyes of the Internal Revenue Service. D. Opposing viewpoints: 1. Senate and House proponents argue that making the doctrine into a law, rather than keeping it a common sense principle and leaving its interpretation up to the courts, will make it easier to crack down on abusive tax shelters....
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- Spring '09