Tufts Law Firm
Home Firm Profile Practice Areas Latest News Events & Seminars Contact Search

Abusive Tax Shelters

Tax Products & Analysis

List Maintenance

Reportable Transactions

Transactions of Interest

Other Areas of Concern

State Anti-Tax Shelters

PATS Audit

Business Divorces

Partners in Peril

Tax Consulting

Tax Audits/Litigation

Worker Classification

Abusive Tax Shelters

Tax Products & Analysis

Many citizens are concerned about the impact of abusive tax shelters on our voluntary tax system. So, too, is the United States Government, the Department of Justice, and the IRS. Aided by Congressional hearings, the IRS is aggressively attacking abusive tax shelters. In addition, the IRS now mandates a high level of transparency and mandatory disclosures when taxpayers engage in transactions classified as merely potentially abusive tax shelters ("PATS"). In other words, whether a transaction "works" or not doesn't matter when it comes to a taxpayer's duty to disclose and report the transaction using IRS Form 8886.

Many companies and individual taxpayers have the desire to comply with these new disclosure rules, but don't know where to being. Indeed, we suspect that many companies and individuals do not have the means by which to determine whether or not a particular transaction is or is not a PATS. Some are even oblivious to these requirements.

In addition, Federal tax law now mandates a higher level of transparency, as taxpayers may be compelled to make mandatory disclosures on their tax returns when they engage in transactions classified merely as "potentially abusive tax shelters" (or "PATS", for short).

Taking a Hard Look at Promoted Tax Products Is it Too Good to be True?

Quite often, companies and individual taxpayers are approached and encouraged to buy into a particular tax product when there is an understanding by the promoters that the company or individual taxpayer has a particular tax or accounting problem. In other words, the company or individual taxpayer are tempted by the desire to minimize or eliminate a significant tax (or accounting) burden.

Distinguishing Between Legitimate Tax Minimization & Abusive Tax Shelters

Promoters act under the belief that any tax minimization strategy is without reproach, citing to the fact that it is universally recognized that taxpayers are entitled to structure their transactions in such a way as to minimize tax. ASA Investerings Partnership v. IRS, 201 F.3d 505 (D.C. Cir. 2000) . However, when such structuring is found to have gotten out of hand, to have been carried to such extreme lengths that any purported business purpose is no more than a façade, then courts will find that the business purpose doctrine has been violated and strike down the transaction. As the United States Court of Appeals from the District of Columbia Circuit stated in ASA Investerings , "A tax system of rather high rates gives a multitude of clever individuals in the private sector powerful incentives to game the system. Even the smartest drafters of legislation and regulation cannot be expected to anticipate every device. The business purpose doctrine reduces the incentive to engage in such essentially wasteful activity, and in addition helps achieve reasonable equity among taxpayers similarly situated-in every respect except for differing investments in tax avoidance." Id.

Impermissible Uses of Accommodation Parties & Tax-Indifferent Parties

When promoters of tax products lock in to achieving the tax desires or objectives of a particular company or individual, they often look to construct a tax structure that involves other parties, especially those who might be tax-indifferent or tax-neutral with regard to the transaction as proposed. Tax-indifferent parties may be a foreign corporation or a tax-exempt entity or even a domestic entity or person with significant tax losses.

Taxpayers must not assume that the use of accommodation parties is without reproach (e.g., that the transaction is part of some desire to enhance the business relationship between the parties). Courts may find that the desire to aid another party in tax avoidance is no more a business purpose than actually engaging in tax avoidance. ASA Investerings .

Detection and Analysis of Tax Products

We are vigilant in our efforts to stay on top of the latest Congressional and IRS investigations of tax products reported to have been previously sold by various promoters in the marketplace, apparently to vulnerable taxpayers. See, e.g., July 8, 2002, Declaration of Michael A. Halpert, IRS Revenue Agent (LMSB), U.S. v. KPMG, LLP (D.D.C. 2002) (Petition Exhibit 1);http://mauledagain.blogspot.com/2004. As part of this effort, we continue in our efforts, 24-7, to monitor the developments in this area.

Many companies or individual taxpayers may find that they have purchased one of these tax products or engaged in a transaction involving such product. These tax products are often identified by catchy titles or acronyms, and grouped by their tax objectives and target audience. Of course, the mere fact that some transaction bears a title or acronym is not in, and of itself, a problem. For example, in estate planning, the establishment of "FLPs" in the family business setting is, in and of itself, without reproach, without additional analysis as to whether the same runs afoul of a particular tax law rule or doctrine.

Tax Products

The following is a list of just some of the tax products that are reported to have been in circulation in recent years. Need New Link>>> http://mauledagain.blogspot.com/2004. If you have any information about any of these tax products or transactions or have had any involvement in the same, you should seek competent legal representation to ensure that you are acting in due regard to federal disclosure law requirements (and if applicable, state disclosure laws). For example, under existing law, you may have a duty to disclose the same on your federal income tax return, using IRS Form 8886. If you are unsure of your obligations in this regard, we are in a position to assist you in this process. If you are interested in retaining our services in making an analysis of any particular transaction or tax product, please contact us.

Taxable Gain Reduction Strategies:

  • Tempest
  • InsureCO
  • Basis Importation
  • 79-21
  • B-FLIP
    ---See, Listed Transaction #13 (IRS Notice 2001-45)
    (an arrangement to shift basis and generate a loss form the sale of stocks & warrants, making unintended use of Sections 302/318 of the Internal Revenue Code)
  • Asset Monetization/Asset Protection (Triple By-Pass)
  • 501(c)(15) Co.
    ---See, Listed Transaction #18
  • LADD
  • Leveraged Disposition
  • Othello
  • Prepaid Lease
  • Lease In/Lease Out ("LILO")
    ---See, Listed Transaction #17 (IRS Rev. Rul. 2002-69)>
    (an arrangement aimed at enabling a taxpayer to invest in a future interest in property, but generate current deductions for the prepayment of rents)
    ---See, Listed Transaction #11 (IRS Notice 2001-16)
    --- Evergreen 351/high basis companies (see Farey-Jones v. Buckingham, 2004 WL 1510040 (E.D.N.Y. 7/7/2004)
  • Mixing Bowl
  • Enhanced Mixing Bowl
  • Basis Leap
  • Busted 351
  • Venture Capital Planning
  • Leveraged 704(c)
  • PIF
  • SC2 Gain Mitigator
  • PERX
  • PICO
  • IDV

International Tax Avoidance/Planning Strategies:

  • OPIS (Offshore Portfolio Investment Strategy)
    ---See, Listed Transaction #13 (IRS Notice 2001-45)
    (an arrangement to shift basis and generate a loss form the sale of stocks & warrants, making unintended use of Sections 302/318 of the Internal Revenue Code)
  • FLIP (Foreign Leveraged Investment Program)
    ---See, Listed Transaction #13 (IRS Notice 2001-45)>
    (an arrangement to shift basis and generate a loss form the sale of stocks & warrants, making unintended use of Sections 302/318 of the Internal Revenue Code)
  • Lease In/Lease Out ("LILO")
    ---See, Listed Transaction #17 (IRS Rev. Rul. 2002-69)
    (an arrangement aimed at enabling a taxpayer to invest in a future interest in property, but generate current deductions for the prepayment of rents)
  • U.S. Withholding Tax Eliminator
  • A&M Base Shifting
  • Alhambra
  • Pathfinder
  • Short Option

Loss & Deduction Creation Strategies:

  • OPIS (Offshore Portfolio Investment Strategy)
    ---See, Listed Transaction #13 (IRS Notice 2001-45)
    (an arrangement to shift basis and generate a loss form the sale of stocks & warrants, making unintended use of Sections 302/318 of the Internal Revenue Code)
  • BLIPs (Son of BOSS)
    ---See, Listed Transaction #8 (IRS Notice 2000-44)
    (an arrangement aimed at making use of a partnership via a contributed of an asset with a built-in gain and a cap on the amount of debt assumption made by the partnership in a 721 tax-free contribution; all of which is aimed at creating artificially high basis); see also, CCN 2003-020 (June 25, 2003)

    ---IRS Settlement Initiatives for Son of BOSS Transactions (IR 2004-64)(expired June 21, 2004)
  • 401(k)ACCEL
    ---See, Listed Transaction #1 (Rev. Rul. 90-105)
    (an arrangement that is aimed at taking deductions prematurely, when attributable to compensation earned by plan participants after year's end).
  • Economic Liabilities Transaction
    ---See, Listed Transaction #12 (IRS Notice 2001-17)
    (an arrangement involving purported Section 351 tax-free contributions to a liability management company and unmatured liabilities, aimed at taking advantage of Section 357(c) of the Internal Revenue Code)
  • CCB
  • 172(f)
  • Mitigation
  • 382
  • CLC
  • Dot-Bomb Monetization
  • PALS (Partnership Allocating Loss Strategy)-Income Absorption
  • Insureco
  • 501(c)(15) Captive
    ---See, Listed Transaction #18 (PORCs)
  • PINSCO (Personal Insurance Company)
  • Captive Tune-Up
  • 21% Solution
  • WITS
  • E Replacement (WITS for Homebuilders)
  • Employee Benefits Captive

S Corporation Abuses:

Finance & Leasing Strategies:

  • Lease In/Lease Out ("LILO")
    ---See, Listed Transaction #17 (IRS Rev. Rul. 2002-69)>
  • AF-EXO (Alternative Financing for Exempt Organizations)
  • Dot-Bomb Monetization
  • Enhanced Venture Leasing
  • Inbound Cross Border Leasing
  • LIFT
  • PERX
  • PIF (Partnership Investment & Financing Structure)
  • SLOTS (Sale Leaseback of Tenant Improvements)
  • TAT

Accounting Strategies:

  • Bad Debt Reserve Acceleration Strategies
  • Inventory Methods Review
  • Contested Liability Acceleration Strategy (CLAS)
    ---See, Listed Transaction #24
  • California Franchise Tax Acceleration
  • Acceleration of Prepaid Expenses
  • Service Company Strategy
  • IBNR (Incurred But Not Reported)

Pending Legislation-Whistleblower Reforms

While much of the Anti-Enron legislation made its way into the American Jobs Creation Act of 2004, enacted October 22, 2004, Congress did not codify the economic substance doctrine or enact significant whistleblower reforms.  However, on July 29, 2005, Senators Levin and Coleman have submitted the Tax Shelter and Tax Haven Reform Act of 2005 that would impose penalties for abusive tax shelters and offshore tax havens and implement a whistleblower reforms.  Under these reforms, Section 7623 of the Internal Revenue Code would be amended to allow for individuals to receive rewards of at least 15% but not more than 30% of the collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from one's "substantial contribution" to the taking of IRS action (and related actions) or from a settlement taken by the IRS.  Under this proposal, the IRS is to establish an IRS Whistleblower Office which will have the duty to investigate or assign a reported matter out to an appropriate IRS office, monitor the action, inform the informant that it has accepted the informant's information for further review, may impose non-disclosure requirements on informants, and may ask for additional assistance.  Under the proposal, only investigations made of individuals with gross income of over $200,000 for any taxable year or other entities (regardless of income, apparently) will qualify.  There are provisions to drop the award in cases where the contribution by the informant is viewed as benefiting from other disclosures, dropping the maximum recovery to 10%, unless the informant is the original source of the information provided.  No written contract will be needed under this proposal, as is now necessary.*   Nevertheless, we will continue to monitor this area for further developments and evaluate any legislation that could result in either being enacted.

Current Law:  No Relator Claim Available

Under current law (Section 3729(e) of the False Claims Act), courts lack subject matter jurisdiction to hear a relator's claims that depend entirely upon the establishment of a violation of the Internal Revenue Code. By this "tax bar" provision, "claims, records, or statements" made under the Internal Revenue Code are not actionable under the False Claims Act (which otherwise authorizes private citizens to sue on behalf of the United States to recover treble damages from those who knowingly make false claims for money or property upon the Government or who knowingly submit false statements in support of such claims or to avoid the payment of money or property to the Government). A recent case seems to confirm that this tax bar will apply even when the relator does not seek to recover federal taxes. See United States v. Sakura Global Capital Markets, Inc., BNA Daily Tax Report, No. 150, at K-5 (ISSN 1522-8800)(August 5, 2004)(FCA's tax bar deprives federal district court of subject matter jurisdiction over complaint filed by private citizen, as relator, which alleged that defendant was engaged in "yield burning" that caused municipalities to make false claims to the federal government with respect to the provision of forward supply agreements in connection with the advance refunding of federal tax-exempt municipal bonds).

As noted in a recent USA Today, the IRS does have a fraud hot line and its own criminal investigation unit, and informants can apply for rewards when taxes are recovered based on their tips, but critics say the program has too many obstacles to lure many informants. Plus the rewards are discretionary. In 2003, the IRS paid out $4 million to informants who helped the IRS pursue 190 cases, which together recouped more than $61 million in taxes owed. In the article, James Moorman, president of Taxpayers Against Fraud, states that the current IRS system suffers because it disqualifies people who have participated in tax evasion or prepared the suspect tax returns from getting rewards, which seems to eliminate those persons who have either been drawn into tax fraud reluctantly or unknowingly or who have a change of heart. "Feds Hope Whistle-Blowers Can Knock Out Tax Shelters," USA Today (June 19, 2004).

Informants-Current Law

Under current law, taxpayers who come forth with information often file IRS Form 211, which does not act to bind the IRS in any way. In other words, the payment of any reward by the IRS to any informant is discretionary. Alternatively, taxpayers may have the ability to enter into a more formal contract with the United States Government with respect to the receipt of such information, though this is a procedure that is rarely utilized.

We can assist potential informants in evaluating the processes by which they might bring forth such information and know how to help concerned citizens come forward to potentially reach contracts with the United States or alternatively make an appropriate Form 211 disclosure. If you have information that you believe may be of interest to the IRS and are interested in obtaining legal advice with respect to the status of the law in this area, please contact us.

Tufts Law Firm
Tufts Law Firm, PLLC
159 Lookout Place, # 202  •  Maitland, Florida 32751
Phone: (407) 647-8886  •  Fax: (407) 641-8082
Toll Free: 1-866-747-3423

Content is general information only. Information is not provided as advice for a specific matter, nor does its
publication create an attorney-client relationship. For legal advice on a specific matter, consult an attorney.

© Copyright 2010 | All rights reserved internationally.