Magazine article The CPA Journal

Financial Statement Disclosure of Corporate Tax Shelters

Magazine article The CPA Journal

Financial Statement Disclosure of Corporate Tax Shelters

Article excerpt

Opening up to the light


Abusive Tax Shelter Disclosure and Control

While most of the controversy surrounding corporate tax shelters deals with issues of registration, listing, and disclosure of shelters for tax purposes, the disclosure of corporate tax shelters in a company's financial statements can be overlooked. The authors provide some basic background about tax shelters and discuss recent Treasury Regulations requiring the disclosure of certain transactions to the IRS. They analyze whether the accounting profession's current guidance and standards related to materiality and contingent liabilities could be useful in determining the appropriate financial statement disclosure of tax shelters. ccording to Lawrence H. Summers, former Secretary of the Treasury, abusive corporate tax shelters represent "the most serious compliance issue threatening the American tax system today" ("Treasury Turns Up the Spotlight on Abusive Corporate Tax Shelters," Tax Notes, March 6, 2000, p. 1333). While the anti-tax shelter position of the Clinton administration has been restrained somewhat by the Bush administration, a number of recent high-profile tax shelter court cases, settlements, proposed legislation, and modifications of the corporate tax shelter regulations have kept tax shelters in the limelight. As noted by Lee Sheppard ("Constructive Thinking About Tax Shelter Penalties," Tax Notes, August 20, 2001, p. 1013), "the shelter problem has clearly advanced beyond anecdotal evidence when legislators who are not normally associated with the aggressive pursuit of corporate tax dollars are drafting tax shelter legislation."

Primer on Tax Adlers

Although the precise impact of corporate tax shelters is difficult to quantify, the Joint Committee on Taxation OCT) estimated that abusive corporate tax shelters result in annual tax revenue losses exceeding $10 billion (JCS-3-99, July 22, 1999). More recently, the IRS reported that about 25 companies have disclosed under the new tax shelter disclosure regulations that they expected to receive $4 billion in tax savings from disclosed shelter transactions. Of this amount, about $1.5 billion was attributed to 1999 and 2000.

Under present law, a transaction is treated as a corporate tax shelter if it has as a significant purpose the avoidance or evasion of federal income tax. Although difficult to define precisely, the Treasury Department has identified a number of common characteristics of tax shelters, including the following:

* Lack of economic substance,

* Inconsistent financial accounting and tax treatment,

* The use of tax-indifferent parties, including foreign entities and tax-exempt entities,

* Active marketing by promoters,

* The use of confidentiality agreements by promoters,

* The use of contingent fees and insurance arrangements, and

* High transaction costs (Department of the Treasury, The

Problem of Corporate Tax Shelters, July 1999, p. ii-vi).

The recent IRS court victories in the abusive tax shelter area suggest that current tax laws are sufficient to curtail abusive shelters. Nonetheless, abusive tax shelters must ultimately be shut down before they are consummated. Disclosure and increased penalties are frequently cited as ways to accomplish this. On February 28, 2000, three temporary and proposed Treasury Regulations that require disclosure of "tax motivated transactions" by promoters and corporate taxpayers to the IRS were released. These regulations have subsequently been modified twice, most recently by T.D. 8961, effective August 2, 2001.

As described by Treasury, "the three regulations are designed to provide the Service with better information about tax shelters and other tax-motivated transactions through a combination of registration and information disclosure by promoters and tax return disclosure by corporate taxpayers" (IRS Announcement 2000-12, LR. …

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