This story appears in the
September 2001 issue of
Entrepreneur.
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While business owners may be encouraged by two recent court
decisions that overturned Washington's drive to crack down on
abusive tax shelters, experts say they shouldn't be too
encouraged. That's because these defeats may prompt Congress to
take legislative steps against shelters, says Thomas P.
Ochsenschlager of accounting firm Grant Thornton LLP.
In one case, a federal appeals court rejected the U.S. Tax
Court's opinion that UPS used a sham insurance policy to avoid
paying millions of dollars in corporate income taxes. (Transactions
whose only purpose is to avoid the payment of taxes are considered
"shams.") In the other case, a court of appeals
overturned a federal district court ruling that IES Industries Inc.
took part in sham stock trading to keep from paying nearly $100
million in taxes.
Until these decisions, the IRS was winning major legal victories
limiting the use of tax shelters. But that trend may be reversing.
"These cases indicate the courts might be relaxing their view
of what is economic substance and business purpose," says Mark
Luscombe, principal federal tax analyst with CCH Inc., a provider
of tax and business law information. In the IES case, says
Luscombe, the appeals court found "that some risk of loss,
even if it is a small risk, might be enough to support the economic
substance of a transaction."
Despite these decisions, however, the pendulum has not swung
entirely back in the direction of companies. As Congress searches
for revenue to pay for tax relief for businesses, lawmakers may
turn their attention to abusive tax shelters. Says Ochsenschlager:
"Politically speaking, [tax shelters] are one of the easiest
sources of revenue now."
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