A further crackdown on corporate tax shelters looks likely

Further crackdown on corporate tax shelters looks likely | Norton Rose Fulbright

April 01, 2002 | By Keith Martin in Washington, DC

The US Treasury said in March that it plans to expand the number of transactions that must be reported to the government as possible tax shelters.  Reporting is required currently for “listed transactions” — 11 types of transactions that the IRS challenges routinely when it finds them on audit — plus other transactions that possess at least two of five tax-shelter characteristics.

Mark Weinberger, the outgoing assistant Treasury secretary for tax policy, told the Senate Finance Committee that the number of voluntary disclosures by taxpayers has been disappointing.  To date, only 99 companies have reported a total of 272 transactions.  Only 64 of the disclosures involved “listed transactions.” Many of the rest were routine leveraged leases that the government has asked taxpayers not to report, but that some lease advisers have encouraged be reported in the hope of burying the IRS with paper.

Weinberger said the IRS will replace the definition of “reportable transaction” in its current regulations.  Under the new definition, four kinds of transactions will have to be reported (in addition to listed transactions).  The four are “loss transactions” in which a corporation expects “section 165 losses” of at least $10 million in one year or $20 million over several years, “transactions with brief asset holding periods” where a company gets a tax credit of at least $250,000 after holding an asset for less than 45 days, transactions that create book-tax differences of at least $10 million, and transactions that are marketed under conditions of confidentiality and reduce the taxable income of a corporation by at least $500,000.

Weinberger also called on Congress to give the government more tools to go after aggressive tax planning by corporations.  He called for a penalty on companies that fail to disclose “reportable transactions.” The penalty would be $200,000 plus 5% of the extra tax owed in the case of listed transactions that are not reported, and $50,000 per failure to report in other cases.  He also asked for a penalty on tax shelter promoters who fail to report and turn over customer lists.  It would be $200,000 or 50% of the promoter’s fees, whichever is greater, in the case of listed transactions, and $50,000 per failure in other situations.  Weinberger asked Congress also to require corporations that are caught participating in an undisclosed listed transaction to report the penalties imposed to shareholders in a filing with the US Securities and Exchange Commission.

Senators Max Baucus (D.-Montana) and Charles Grassley (R.-Iowa), the chairman and senior Republican on the Senate Finance Committee, said they hope to move a bill this year imposing stiffer penalties on corporations that engage in tax shelters, as well as on tax shelter promoters and outside advisers who write opinions that the shelters work.  They plan to release the text of their bill in April.  Similar proposals the past three years have never been put to a vote.  House leaders appear to be less interested in the subject.

Meanwhile, the IRS has an amnesty program underway where corporations that come forward with information about tax shelters in which they participated will have accuracy-related penalties waived if the shelters are found not to work.  The deadline for coming forward is April 23.  IRS Commissioner Charles Rossotti said the IRS had received 147 voluntary disclosures under the program through March 18.

Enron is considering seeking amnesty under the program, according to news reports.  Its tax returns are already being looked at by Congressional staff in anticipation of possible hearings this summer on techniques that the company used to reduce its taxes.

Keith Martin