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LEGAL ISSUES

A Caution On Tax Shelters
 

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Few tax shelters are as reliable and safe as a qualified plan. For unwary investors, more arcane "shelters" can wind up offering about as much protection as a house with no roof. Before you invest in any sort of a tax shelter, remember this: A shaky business proposition does not become better because of possible tax advantages. But a deal with real substance can be enhanced by tax benefits.

The Alaska District Director of the Internal Revenue Service recently defined an abusive tax shelter as "a transaction where the primary emphasis is on the immediate tax savings rather than the economic profit to be derived from the investment." He went on to offer some guidelines to tax professionals who might advise clients on the merits of tax shelters. These six guidelines not only tell you precisely how the IRS analyzes a shelter deal to see if it can be nullified, but also that you should keep out of deals with the following characteristics:

1. The tax shelter is not related to an actual trade or business, and the transaction does not have economic substance.

2. The transaction does not have a profit motive.

3. The transaction takes place only on paper.

4. A prudent investor, interested in profit, would not enter into the transaction based solely on a written presentation.

5. If property is involved, a bank would not lend the same amount as your investment with the property as collateral.

6. The transaction offers nothing more than a tax benefit.

Be forewarned: The IRS is attacking abusive tax shelter schemes of all kinds. If either you or your tax professional has any doubts about the tax consequences of a particular transaction, insist on seeing a copy of an IRS Private Letter Ruling approving the deal.

Last updated: Aug 1, 1981




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