TAX SHELTER RULES and ETHICAL DILEMMAS

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TAX SHELTER RULES andETHICAL DILEMMAS

• Victoria Sherlock
• Mike Terracina

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(No Transcript)
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WHAT IS A TAX SHELTER

• A partnership or other entity, any investment
  plan or arrangement, or any other plan or
  arrangement, IF A SIGNIFICANT PURPOSE of such
  plan, or arrangement is the avoidance or evasion
  of Federal taxes.

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ANOTHER DEFINITION

• transactions that have been represented to
  generate tax benefits greater than twice the
  amount of cash and property to be contributed . .
  .

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History Lesson

• System of Voluntary Compliance
• IRS believes that Corporations (and lately
  high-net worth individuals) are being very
  aggressive
• IRS having difficulties ferreting out abusive
  transactions
• Number of revenue agents at an all time low

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Early 2000

• Concerted effort to deal with abusive tax
  shelters
• February 2000 Office of Tax Shelter Analysis
  (OTSA) created
• February 28, 2000 Issued three sets of
  temporary regulations as new enforcement weapons

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February 28, 2000 Regulations

• Taxpayers required to report listed and other
  reportable transactions
• Promoters are required to register confidential
  corporate tax shelters
• Promoters are required to maintain list of each
  tax shelter participant and turn in list to IRS
  upon request

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CHARLES O. ROSSOTTION CORPORATE TAX SHELTERS and
DISCLOSURE

• To deal effectively with this problem, we need
  better disclosure so we can evaluate these
  devices openly. Disclosure is what helps us
  distinguish between a legitimate business
  transaction and one that inappropriately
  manipulates the code.
• MARCH 20, 2002

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TREASURY ASSISTANT SECRETARY FOR TAX POLICY MARK
WEINBERGER

• If a taxpayer is comfortable entering into a
  transaction, a promoter is comfortable selling
  it, and an advisor is comfortable blessing it,
  they all should be comfortable disclosing it to
  the IRS.
• MARCH 20, 2002

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DEFINITION OF REPORTABLE TRANSACTION

• Transactions having 2 out of 5 general
  characteristics (not covered by an exception), or
• Same or substantially similar to listed
  transaction

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POTENTIAL TAX SHELTER 2 of 5

• Conditions of confidentiality
• Contractual protection of tax benefits
• Fees in excess of 100,000 contingent upon
  participation
• Book/Tax difference 5 M
• Participation of tax indifferent party

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IRS NEWS RELEASE 9/16/02

• OTSA reports 1,664 disclosures from 1,206
  taxpayers
• IRS examining 30 promoters
• IRS issued 163 summonses to 12 promoters
• The IRS continues to seek the views of taxpayers
  and practitioners as to resolution processes that
  should be considered and that are consistent with
  good tax administration.

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SOMETHING TO THINK ABOUT

• Is turning tax advisor into government snitch
  good tax policy?

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TAX SHELTER v. GOOD TAX PLANNING

• Compaq v. Commissioner
• Will the Fifth Circuit Reconsider??

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No Disclosure Initiative for . . .

• Factual shams
• Fraud or criminal conduct
• Taxpayer concealed interest in, or authority over
  a foreign financial account
• Taxpayer concealed distribution from foreign
  trust, transfer of assets to foreign trust, or
  that taxpayer was grantor of a foreign trust
• Business deductions that are really personal
  expenditures

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NEW STANDARD IDR

• Transactions that are the same or substantially
  the same as listed transactions
• Facts
• Tax Treatment
• Documents
• Privilege Claims

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TAX OPINIONS

• SUBSTANTIAL AUTHORITY
• MORE LIKELY THAN NOT
• SHOULD
• WILL

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OTHER STANDARDS

• FRIVOLOUS
• NOT FRIVOLOUS
• REASONABLE BASIS
• REALISTIC POSSIBILITY

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HYPOTHETICAL 1

• LARGE CAPITAL GAIN I WILL NOT PAY ALL THIS
  TAX I WILL DO ANYTHING THAT IS LEGALLY
  AVAILABLE TO REDUCT THIS TAX You are aware of an
  extremely aggressive situation that will reduce
  tax to zero but has high risk? What do you do?

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HYPOTHETICAL 1

• Client sells his lifelong business for large
  capital gain
• I WILL NOT PAY ALL THIS TAX DO SOMETHING
• You are aware of an extremely aggressive strategy
  being marketed by somewhat nefarious investment
  banker that will reduce taxes to zero but carries
  high risk you will receive a referral fee for
  introducing your client
• WHAT DO YOU DO????

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HYPOTHETICAL 2

• Client is presented with aggressive tax strategy
  that generates large deduction far gt cash
  invested
• Client is a publicly held audit client
• Fees are in excess of 100,000 and the
  transaction meets 2 out of 5 characteristics and
  you are not sure if exception will apply
• Client wants a refund of the fee if IRS audits
  and challenges the deduction. Can you or should
  you agree?

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HYPOTHETICAL 3

• SAME FACTS AS HYPOTHETICAL 2, EXCEPT
• CLIENT WANTS TO INCLUDE AS PART OF THE ORIGINAL
  FEE REPRESENTATION AT AUDIT, AND APPEALS, AND IN
  COURT
• CAN OR SHOULD YOU AGREE?

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HYPOTHETICAL 4

• Client asks you for tax ideas that will help
  minimize federal tax on large gain
• You come up with a somewhat aggressive deferral
  strategy but have not fully developed your
  position
• Client agrees to pay high fee but wants an
  opinion that is at least at the more likely than
  not level
• There is disagreement between you and others at
  the firm as to the proper level of opinion to
  give
• Reluctantly you get permission to go to the more
  likely than not level
• What, if anything, do you tell the client (who by
  the way was the maid of honor at your wedding)?

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HYPOTHETICAL 5

• CLIENT ENGAGES YOU TO COME UP WITH A STRATEGY TO
  REDUCE TAXES ON AN OUTBOUND FOREIGN TRANSACTION
• YOU DEVISE AN AGGRESSIVE STRATEGY THAT DOES NOT
  MEET 2 OUT OF 5 NOT SIMILAR TO LISTED TO
  TRANSACTION
• BEFORE CLIENT COMPLETELY IMPLEMENTS STRATEGY BUT
  AFTER YOU HAVE BEEN PAID THE FEE, IRS PUBLISHES A
  NOTICE THAT AT LEAST PRESENTS THE ARGUMENT THAT
  TRANSACTION IS SIMILAR TO LISTED TRANSACTION
• WHAT DO YOU DO?