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 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 users of the schemes.
In
January 2007, the Senate Finance Committee
passed a series of measures cracking down
on tax shelter abuses, which were subsequently
removed from the legislation to which they
were attached as it made its way through
Congress..
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. BACK
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