2.3 Tax Shelters

Question 1

what is a tax shelter

Answer 1

It is a legal method of minimizing or decreasing an investors taxable income and therefore tax liability. it ultimately lowers tax liabilities

Question 2

what is a tax benefit?

Answer 2

it includes deductions, exclusions from gross income, non-recognition of gain, tax credits, adjustments to the basis of property etc

Question 3

taxpayers are required to disclose tax shelter transactions on form

Answer 3

form 8886 - a copy of form 8886 must be attached to each years tax return that includes the transaction, and a copy must be filed with the Office of Tax Shelter Analysis in the first year of the transaction

Question 4

tax shelters may be classified as reportable transactions which need to be included on…

Answer 4

form 8886 - filed with the return itself and separately filed with the office of tax shelter analysis

Question 5

what are the 5 major categories of reportable transactions

Answer 5

1. listed transactions
2. confidential transactions
3. transactions with contractual protection
4. loss transactions
5. transactions of interest

Question 6

what are listed transactions?

Answer 6

tax avoidance transactions the IRS has identified by notice, regulation or other forms of published guidance, or transactions that are expected to obtain the same or similar types of tax consequences. it is essentially transactions specifically listed by the IRS on the IRS website and are updated periodically under listed transactions.

Question 7

what are confidential transactions?

Answer 7

transactions offered under conditions of confidentiality, such as where the disclosure of a transaction is limited in any matter by express or implied understanding or agreement whether or not such understanding is legally binding . these are essentially tax avoidance strategies sold to taxpayers by practioners under terms of confidentiality. there us a minimum fee requirement to be charged in order to qualify. $250,000 for corporations and $50,000 for most other transactions.

Question 8

what are contractual protection transactions?

Answer 8

these are transactions when the taxpayer has the right to a full or partial refund of fees paid to any person who makes or provides an oral or written statement about the potential tax consequences of a transaction if it is non sustained, or if fees are contingent on the taxpayer’s realization of tax benefits from the transaction. ESSENTIALLY IT OCCURS WHEN THE TRANSACTION IS OFFERED WITH THE RIGHT TO FULL OR PARTIAL REFUND OF FEES IF THE IRS DOES NOT ALLOW THE TAX BENEFIT OF THE TRANSACTION

Question 9

What are loss transactions?

Answer 9

these are transactions when taxpayers claim losses under section 165 exceeding thresholds for
1. corporations and partnerships having only corporations as partners, exceeding $10 million in a single year or $20 million in any combination of taxable years
2. all other partnerships, individuals, S corporations or trusts exceeding $2 million in any single year or $4 million in any combination of taxable years
3. individuals involved in certain foreign currency transactions, exceeding $50,000 in any single taxable year.

Question 10

Loss transactions exceptions

Answer 10

certain loss transactions may be exceptions to reportable transaction requirements:
1. losses from casualties, thefts, and condemnations
2. losses from the sale or exchange of an asset with a qualifying basis
3. losses from ponzi schemes
4. losses arising from any mark to market treatment of an item
5. certain swap losses

Question 11

what is a transaction of interest

Answer 11

transactions identified by the IRS via notice, regulation or other published guidance as having the potential for tax avoidance or evasion but lacking sufficient information to determine if they should be identified as tax avoidance transactions

Question 12

tax shelters - penalties

Answer 12

Generally a penalty will be imposed if a person required to register a tax shelter fails to register the shelter in a timely manner. no penalty will be imposed on a person for a failure to register a tax shelter if the failure is due to reasonable cause.

The fact that a transaction must be reported on form 8886 does not mean the tax benefits from the transaction will be disallowed

tax return preparers are subject to a penalty for promoting abusive tax shelters equal to the lesser of:
1. $1,000 for each sale or organization of an abusive arrangement or plan, or
2. 100% of the income derived from the activity