Tax shelter. A device used by a taxpayer to reduce or defer payment of taxes. Common forms of tax shelters include: limited partnership interests, real estate investments which have deductions such as depreciation, interest, taxes, etc. The Tax Reform Act of 1986 limited the benefits of tax shelters significantly by classifying losses from such shelters as passive and ruling that passive losses can only offset passive income in arriving at taxable income (with a few exceptions). Any excess losses are suspended and may be deducted in the year the investment is sold or otherwise disposed of.
Webster's Ninth New Collegiate Dictionary, p. 1209, ISBN 0-87779-510-X (deluxe):
tax shelter n(1952): a strategy, investment, or tax code provision that reduces one's tax liability
IRS Website: Abusive Tax Shelters
IRS Website: Listed Abusive Tax Shelters and Transactions
IRS Form 8264: Application for Tax Shelter
IRM 5.20: Abusive Tax Avoidance Transactions
IRS Form 8271: Investor Reporting
of Tax Shelter Registration
IRS Publication 550: Investment
Income and Expenses-Read Chapter 2 on Tax shelters
IRS Abusive Tax Promotions Training Manual, Training 3118b-002-HOT!
IRS Market Segment Specialization
Program: Abusive Tax Shelters
IRS Market Segment Specialization
Program: Abusive Tax Shelter Penalty Guide
26 U.S.C. §461: General Rule for Taxable Year of Deduction
(i) Special rules for tax shelters
(3) Tax shelter defined
For purposes of this subsection, the term ''tax shelter'' means -
(A) any enterprise (other than a C corporation) if at any time interests in such enterprise have been offered for sale in any offering required to be registered with any Federal or State agency having the authority to regulate the offering of securities for sale,
(B) any syndicate (within the meaning of section 1256(e)(3)(B)), and
(C) any tax shelter (as defined in section 6662(d)(2)(C)(iii)).
26 U.S.C. §6111: Registration of tax shelters
(c) Tax shelter
For purposes of this section -
(1) In general
The term ''tax shelter'' means any investment -
(A) with respect to which any person could reasonably infer from the representations made, or to be made, in connection with the offering for sale of interests in the investment that the tax shelter ratio for any investor as of the close of any of the first 5 years ending after the date on which such investment is offered for sale may be greater than 2 to 1, and
(B) which is -
(i) required to be registered under a Federal or State law regulating securities,
(ii) sold pursuant to an exemption from registration requiring the filing of a notice with a Federal or State agency regulating the offering or sale of securities, or
(iii) a substantial investment.
(2) Tax shelter ratio defined
For purposes of this subsection, the term ''tax shelter ratio'' means, with respect to any year, the ratio which -
(A) the aggregate amount of the deductions and 350 percent of the credits which are represented to be potentially allowable to any investor under subtitle A for all periods up to (and including) the close of such year, bears to
(B) the investment base as of the close of such year.
(3) Investment base
(A) In general
Except as provided in this paragraph, the term ''investment base'' means, with respect to any year, the amount of money and the adjusted basis of other property (reduced by any liability to which such other property is subject) contributed by the investor as of the close of such year.
(B) Certain borrowed amounts excluded
For purposes of subparagraph (A), there shall not be taken into account any amount borrowed from any person -
(i) who participated in the organization, sale, or management of the investment, or
(ii) who is a related person (as defined in section 465(b)(3)(C)) to any person described in clause (i),unless such amount is unconditionally required to be repaid by the investor before the close of the year for which the determination is being made.
(C) Certain other amounts included or excluded
(i) Amounts held in cash equivalents, etc.
No amount shall be taken into account under subparagraph (A) which is to be held in cash equivalent or marketable securities.
(ii) Amounts included or excluded by Secretary
The Secretary may by regulation -
(I) exclude from the investment base any amount described in subparagraph (A), or
(II) include in the investment base any amount not described in subparagraph (A), if the Secretary determines that such exclusion or inclusion is necessary to carry out the purposes of this section.
(4) Substantial investment
An investment is a substantial investment if -
(A) the aggregate amount which may be offered for sale exceeds $250,000, and
(B) there are expected to be 5 or more investors.
(d) Certain confidential arrangements treated as tax shelters
(1) In general
For purposes of this section, the term ''tax shelter'' includes any entity, plan, arrangement, or transaction -
(A) a significant purpose of the structure of which is the avoidance or evasion of Federal income tax for a direct or indirect participant which is a corporation,
(B) which is offered to any potential participant under conditions of confidentiality, and
(C) for which the tax shelter promoters may receive fees in excess of $100,000 in the aggregate.
(2) Conditions of confidentiality
For purposes of paragraph (1)(B), an offer is under conditions of confidentiality if -
(A) the potential participant to whom the offer is made (or any other person acting on behalf of such participant) has an understanding or agreement with or for the benefit of any promoter of the tax shelter that such participant (or such other person) will limit disclosure of the tax shelter or any significant tax features of the tax shelter, or
(B) any promoter of the tax shelter -
(i) claims, knows, or has reason to know,
(ii) knows or has reason to know that any other person (other than the potential participant) claims, or
(iii) causes another person to claim, that the tax shelter (or any aspect thereof) is proprietary to any person other than the potential participant or is otherwise protected from disclosure to or use by others.
For purposes of this subsection, the term ''promoter'' means any person or any related person (within the meaning of section 267 or 707) who participates in the organization, management, or sale of the tax shelter.
(3) Persons other than promoter required to register in certain cases
(A) In general
If -
(i) the requirements of subsection (a) are not met with respect to any tax shelter (as defined in paragraph (1)) by any tax shelter promoter, and
(ii) no tax shelter promoter is a United States person, then each United States person who discussed participation in such shelter shall register such shelter under subsection (a).
(B) Exception
Subparagraph (A) shall not apply to a United States person who discussed participation in a tax shelter if -
(i) such person notified the promoter in writing (not later than the close of the 90th day after the day on which such discussions began) that such person would not participate in such shelter, and
(ii) such person does not participate in such shelter.
(4) Offer to participate treated as offer for sale
For purposes of subsections (a) and (b), an offer to participate in a tax shelter (as defined in paragraph (1)) shall be treated as an offer for sale.
(b) Potentially abusive tax shelter
For purposes of this section, the term ''potentially abusive tax shelter'' means -
(1) any tax shelter (as defined in section 6111) with respect to which registration is required under section 6111, and
(2) any entity, investment plan or arrangement, or other plan or arrangement which is of a type which the Secretary determines by regulations as having a potential for tax avoidance or evasion.
26 U.S.C. §6662: Imposition of accuracy-related penalties
(d) Substantial understatement of income tax
(C) Special rules in cases involving tax shelters
(iii) Tax shelter
For purposes of this subparagraph, the term ''tax shelter'' means -
(I) a partnership or other entity,
(II) any investment plan or arrangement, or
(III) any other plan or arrangement, if a significant purpose of such partnership, entity, plan, or arrangement is the avoidance or evasion of Federal income tax.
26 U.S.C. §6700: Promoting Abusive Tax Shelters
TITLE 26 > Subtitle F > CHAPTER 68 > Subchapter B > PART I > Sec. 6671
Sec. 6671. - Rules for application of assessable penalties
(b) Person defined
The term ''person'', as used in this subchapter, includes an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs
26 CFR § 301.6111-1T Questions and answers relating to tax shelter registration.