CITES BY TOPIC:  tax shelter

Black's Law Dictionary, Sixth Edition, pp. 1462-1463

Tax shelterA 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.
[Black's Law Dictionary, Sixth Edition, pp. 1462-1463]

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 "
[Webster's Ninth New Collegiate Dictionary, p. 1209, ISBN 0-87779-510-X (deluxe)]

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

PDF IRS Form 8271: Investor Reporting of Tax Shelter Registration

PDF IRS Publication 550: Investment Income and Expenses-Read Chapter 2 on Tax shelters

PDF IRS Abusive Tax Promotions Training Manual, Training 3118b-002-HOT!

PDF IRS Market Segment Specialization Program: Abusive Tax Shelters

District of Columbia v. Neyman, 417 F.2d 1140, 1143 (D.C. Cir. 1969)

"A taxpayer is at complete liberty to decrease his taxes or avoid them altogether by means which the law tolerates.”

[District of Columbia v. Neyman, 417 F.2d 1140, 1143 (D.C. Cir. 1969)]

United States v. Schmidt, NO: 2:14-CV-0237-TOR, 21 (E.D. Wash. Dec. 14, 2016)

Finally, the Government asserts that the Schmidts have refused to pay their tax obligation, knowing that it is due. The Schmidts testified that they retired, are living on a fixed income and that they no longer have the ability to pay the tax. The bankruptcy filing seems to confirm that the Schmidts are cash poor. However, even the willful failure to pay taxes, by itself, is not evasion. Hawkins, 769 F.3d at 669 ("no Circuit has held that living beyond one's means alone constitutes willful tax evasion, and no circuit has held that failure to pay taxes, by itself, constitutes willful tax evasion within the meaning of that clause in § 523(a)(1)(C).").

At bottom, this case is similar to Hawkins and Spies where the Ninth Circuit and the Supreme Court considered the difference between the misdemeanor of willfully failing to pay a tax or file a timely return with the felony of willfully attempting to evade or defeat a tax or its payment. In those cases, both Courts rejected the Government's contention that a willful failure to file a return, coupled with a willful failure to pay the tax, constituted a willful attempt to evade or defeat a tax. Rather, both Courts interpreted the statutes as requiring some "willful commission in addition to willful omissions." Hawkins, 769 F.3d at 668 (applying the logic of Spies to § 523(a)(1)(C)).

As such, the Government has failed to establish any badges of fraud, but more importantly, has failed to show by a preponderance of the evidence that the Schmidts willfully attempted to evade or defeat their 1998 taxes.

[United States v. Schmidt, NO: 2:14-CV-0237-TOR, 21 (E.D. Wash. Dec. 14, 2016)]

Waterman Steamship Corporation v. C.I.R, 430 F.2d 1185, 1193 (5th Cir. 1970)

Gregory does not per se preclude a taxpayer from decreasing his taxes or avoiding them by methods permitted by law. The application of that principle does not mean, however, that a person may reduce his tax liability by transferring his money from one pocket to another even though he uses different pairs of trousers.”

[Waterman Steamship Corporation v. C.I.R, 430 F.2d 1185, 1193 (5th Cir. 1970)]

Wight v. Davidson, 181 U.S. 371 (1901)

" A constitutional right against unjust taxation is given for the protection of private property, but it may be waived by those affected who consent to such action to their property as would otherwise be invalid."

[Wight v. Davidson, 181 U.S. 371 (1901)]

[EDITORIAL: In this case, concerning a property owner in D.C. SCOTUS acknowledged that even in D.C. there is a 5th Amendment protection for all persons against property being taken without due process of law.

This is a good point to make for those who believe that living in D.C. somehow prevents one from claiming nonresident alien status. Not if you are an American national!! An American national is present ANYWHERE in the USA or the federal United States by RIGHT and does not require a green card or any permission from anyone to be present on that land.

It is not mere presence on LAND that gives federal government right to tax income, but PRIVILEGE. That is the only thing that makes it NOT a violation of 13th Amendment or 9th Amendment reserved rights.]

Gregory v. Helvering, 293 U.S. 465 (1936)

"It is quite true that, if a reorganization in reality was effected within the meaning of subdivision (B), the ulterior purpose mentioned will be disregarded. The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted. United States v. Isham, 17 Wall. 496, 84 U. S. 506; Superior Oil Co. v. Mississippi, 280 U. S. 390, 280 U. S. 395-396; Jones v. Helvering, 63 App.D.C. 204, 71 F.2d 214, 217. But the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended. The reasoning of the court below in justification of a negative answer leaves little to be said."

[Gregory v. Helvering, 293 U.S. 465 (1936)]

[EDITORIAL: The principle established by SCOTUS in Helvering v Gregory was that a business arrangement with no business purpose other than to avoid tax was unlawful. This principle applies to U.S. persons that are taxable on all income, but would not necessarily apply to foreign persons, where there is jurisdiction to tax only federally sourced income. In other words, the IRS and courts cannot treat a foreign person's foreign status itself as an "arrangement" to avoid tax in the same way the "double irish" tax scheme is an arrangement to avoid tax. I suppose even a foreign person who arranged for federally sourced income to be reduced with such schemes would also face a disallowance of such tactics. It is all about whether U.S. has jurisdiction to begin with--whether over the person or over particular items of income.

In Gregory, a corporation was formed solely to reduce the taxable income of a sister corporation controlled by the same taxpayer. That case resolved around whether the taxpayer had effected a "reorganization" as defined in the statute. SCOTUS determined NO, because of the clear lack of any business purpose for the reorganization, and this went against how "reorganization" was defined in the statute. Note the two other SCOTUS cases in support of the principle that the taxpayer has a legal right to "altogether avoid" what would otherwise be his taxes, using means the law permits. In Gregory, the law did NOT permit what the taxpayer had done. Had the same taxpayer realized her corporation was foreign to begin with, and the income not federally-connected, there would have been no need in the first place to resort to this "reorganization" tactic to try to reduce the taxable income.]

26 U.S.C. 461:  General Rule for Taxable Year of Deduction

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.

26 U.S.C. 6112:  Organizers and sellers of potentially abusive tax shelters must keep lists of investors

(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

26 U.S.C. 6671(b):  Definition of "person" for the purposes of "abusive tax shelters" and other penalties

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 C.F.R. 301.6111-1T   Questions and answers relating to tax shelter registration.