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Corporate Tax Shelters

Treasury takes aim at abuses.

BY NICHOLAS FIORE

Please note: This item is from our archives and was published in 2000. It is provided for historical reference. The content may be out of date and links may no longer function.

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orporate tax shelters have been the subject of intense debate over the past few years. They are a growing problem, costing the federal government billions of dollars annually. In an effort to curb these abuses, after a series of hearings (in which the AICPA, among other organizations, participated), the Treasury proposed regulations that would require registration, listing investors and disclosure of certain tax-motivated transactions. However, these proposals seem to be overly broad in scope and onerous in parts and may encompass many creative—but legitimate—business transactions.

What Is a Corporate Tax Shelter?

While a corporate tax shelter is difficult to define, under current law an arrangement is treated as such an entity if one of its significant purposes is the avoidance or evasion of federal income tax. These arrangements or transactions share several characteristics:

  • Lack of economic substance.
  • Inconsistent treatment for financial accounting and tax purposes.
  • Use of parties not directly affected by the tax treatment (“tax-indifferent”), such as foreign entities and tax-exempt entities.
  • Active marketing by promoters.
  • Promoters that require participants to sign confidentiality agreements.
  • Contingent fee or insurance arrangements.
  • High transaction costs.

New Regulations

In February 2000, the Treasury proposed regulations to curb these abuses.

Registration. In general, tax shelter promoters would be required to register any entity, plan, arrangement or transaction

  • That is structured for a significant purpose of tax avoidance or evasion. This includes
    • Any “listed transaction,” identified by published guidance from the Treasury or the IRS.
    • Transactions lacking economic substance, in which the pretax profit is insignificant relative to the present value of the participant’s expected net federal income tax savings.
    • Transactions structured to produce federal tax benefits that are an important part of the transaction’s intended results and that the promoter reasonably expects to be presented to more than one potential participant.
  • That is offered to corporate participants under conditions of confidentiality.
  • For which the promoter receives fees in excess of $100,000.

Lists of investors. Organizers and promoters would have to maintain lists of investors and copies of all offering materials. This requirement applies to any transaction structured for a significant purpose of tax avoidance or evasion, regardless of whether offered under conditions of confidentiality or the promoter fees involved.

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Reportable transactions. Unless an exception applies, a corporate taxpayer would have to disclose participation by attaching a statement to its return in two types of transactions:

  • Listed transactions expected to reduce a corporation’s federal income tax liability by more than $1 million in any single year or more than $2 million for any combination of tax years.
  • Transactions expected to reduce a corporation’s income tax liability by more than $5 million in a single tax year or more than $10 million in multiple years if at least two of six enumerated characteristics are part of the deal.

For a discussion of the proposed regulations and the AICPA comments, see “ Registration, Listing and Disclosure of Potentially Abusive Corporate Tax Shelters ,” by Roby Sawyers, in the August 2000 issue of The Tax Adviser.

—Nicholas Fiore, editor
The Tax Adviser