The Tax Shelter Disclosure Act: The Next Battle in the Tax Shelter War
27 Pages Posted: 15 Feb 2010
Date Written: June 1, 2002
On August 3, 2001, Chairman Max Baucus (D-Montana) and ranking minority member Charles E. Grassley (R-Iowa) released draft legislation in the Senate Finance Committee intended to strengthen the Internal Revenue Service's (Service) weaponry in the continued battle against abusive tax shelters. If, during the course of such structuring, a taxpayer reduces the tax burden in a legitimate manner and in reliance on the opinion of the taxpayer's independent tax advisor, one could still argue that the reduction of tax is "tax avoidance" and that a "significant purpose" of such structuring was such "tax avoidance." The NYSBA, the ABA, and the AICPA, comment that other changes should be made to the "tax shelter" definition. Many of these indicators already exist in corporate tax shelter law as indicators that a transaction must be reported as a "reportable transaction" by a corporate taxpayer. We agree with your draft legislation's basic premise that if there is an "applicable tax shelter understatement" (generally an increase in tax, arising from the incorrect treatment of a "tax shelter" item, unless there was (i) "substantial authority" for that treatment, (ii) "adequate disclosure" and (iii) a "reasonable belief" the tax treatment was more likely than not appropriate) a 40 percent penalty will be imposed. The NYSBA is incorrect that even if all of the conditions of the draft TSDA are met, the taxpayer should still suffer a twenty-percent penalty if the transaction is deemed a "tax shelter."
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