Look for the IRS to provide a definition of tax shelter before the end of the year
This will trigger reporting of all corporate tax shelters and also fill in gaps on when tax planning memos from accounting firms are privileged from discovery by the IRS during audits.
A 1997 law requires that corporate tax shelters be registered with the IRS, but the registration requirement does not take effect until the IRS provides a definition. The promoter of the idea must usually register it. However, in certain cases, companies to whom ideas are pitched must also register them. “Tax shelter” is defined broadly by statute to cover any plan or arrangement that has as “a significant purpose” avoiding or evading US taxes.
Communications with accountants have historically been subject to discovery by the IRS on audit. However, last summer, Congress extended a limited privilege for tax advice to accountants similar to the attorney-client privilege, but the new privilege does not cover advice concerning corporate tax shelters.
ANYONE WHO HAS TRIED TO CLAIM GRANDFATHER RIGHTS for tax benefits or SO2 allowances knows to be careful not to alter his project or contract that was the basis for grandfather relief. Otherwise, the relief may be lost.
Steelcase, a US furniture manufacturer, built a new headquarters building that it said qualified for investment tax credits and ACRS depreciation, even though these benefits were repealed in 1986. The company started building a two-story L-shaped building for $35 million before the deadline. It ended up with a seven-story pyramid that cost approximately $100 million.
Nevertheless, a federal appeals court said last month the project remained grandfathered. Steelcase claimed that since the building was “self constructed,” it should be tested under a more lax requirement that merely required that it start construction by a certain date even if it ended up with a different project.
The judge wasn’t moved by the government’s complaints about cost overruns. “If there is one party which we might be tempted to say ought not to be able to make this argument with a straight face, it is the federal government.”
LETTING A FACILITY THAT WAS FINANCED WITH TAX-EXEMPT DEBT sit idle may cause loss of the tax exemption on the debt.
A cement company used tax-exempt financing for a recycling plant for disposing of waste paints and solvents. It eventually shut down the equipment because the plant was outmoded technologically. The company then worked out a remediation plan with the US Environmental Protection Agency that required demolishing the equipment altogether.
The IRS said in a private ruling recently that this was okay. The tax-exempt debt could remain outstanding. The ruling discussed whether there was a “change in use” of the plant much earlier when it shut down, but said there was not because the owner “kept the components in a condition so that they could be reactivated and used for the qualifying purpose for which the bonds were issued.”
A change in use would have required that the bonds be repaid within 90 days (or the funds set aside in escrow).
THE IRS IS STUDYING WHEN IT WILL LET A COMPANY TRANSFER JUST PART OF ITS ASSETS to a new owner without triggering a tax on gain.
In 1997, Congress ruled out “tax-free spinoffs” of corporate assets to shareholders as part of a plan ultimately to transfer the assets to a new owner. In a spin-off, a company distributes part of its assets to its share-holders. Since 1997, the distribution will trigger a tax to the distributing corporation on any gain. This makes it more expensive to dispose of just part of a business.
The IRS is now wrestling with when it will link the two steps as a plan. James Sowell, a Treasury lawyer, suggested in mid-October that a plan will be found in most cases unless the company had no idea a suitor was lurking in the wings when it did the spinoff.