Magazine article The CPA Journal

Clinton Targets Corporate Tax Shelters

Magazine article The CPA Journal

Clinton Targets Corporate Tax Shelters

Article excerpt

The Clinton administration recently released its Fiscal Year 2000 budget submission, unveiling an extensive package of revenue raisers targeting perceived corporate tax shelters, corporate transactions, financial products, international transactions, and insurance. New proposals include the following:

Corporate Tax Shelters

Tax shelter penalties. The substantial understatement penalty imposed on corporate tax shelter items (as redefined) generally would be increased to 40o (from 20%), with no reasonable cause exception, effective for transactions entered into on or after the date of "first committee action."

Treasury authority to deny tax benefits. The Treasury Department could disallow deductions, credits, exclusions, or other allowances obtained in a corporate tax shelter, effective for transactions entered into on or after the date of first committee action.

No deduction for corporate tax shelters. The proposal would deny deductions for fees and tax advice expenses related to corporate tax shelters and would impose a 25% excise tax on fees received in connection with promoting or rendering tax advice related to corporate tax shelters. The proposal would be effective for payments made and fees received on or after the date of first committee action.

Excise tax on tax shelter "rescission" provisions. The proposal would impose on the corporate purchaser of a corporate tax shelter an excise tax of 25% of the maximum payment to be made under a tax benefit "protection arrangement." These arrangements include certain rescission clauses, guarantees of tax benefits, or other arrangements (e.g., insurance) protecting the purchaser. The proposal would be effective for arrangements entered into on or after the date of first committee action.

Positions inconsistent with transaction form. The proposal generally would preclude corporate taxpayers from taking any position (on a tax return or refund claim) that the Federal income tax treatment of a transaction is different from that dictated by its form if a "tax indifferent" person has a direct or indirect interest in the transaction. Tax indifferent persons would be defined as foreign persons, tax-exempt organizations, Native American tribal organizations, and domestic corporations with expiring loss or credit carryforwards. The proposal would not apply where the taxpayer discloses the inconsistent position on its tax return. The proposal would be effective for transactions entered into on or after the date of first committee action.

Tax-indifferent parties Income allocable to a tax-indifferent party with respect to a corporate tax shelter would be taxable; other participants in the tax shelter would be jointly liable for the tax. The proposal would be effective for transactions entered into on or after the date of first committee action.

Forward stock sales. A corporate issuer of stock sold through a forward sale contract would be required to recognize as interest the time-value element of the forward contract. The proposal would be effective for forward contracts entered into on or after the date of first committee action.

Built-in losses. The proposal targets the "importation" of foreign losses and other tax attributes incurred outside the U.S. taxing jurisdiction that are used to offset income or gain otherwise subject to U.S. tax. The proposal would eliminate such attributes and require that tax basis be marked to market in certain circumstances, effective for transactions in which assets or entities become "relevant" for U.S. tax purposes on or after the date of enactment.

S corporation ESOPs. The propos al would 1) require an ESOP to pay tax on S corporation income (including capital gains) as the income is earned and 2) allow the ESOP a deduction for distributions of such income to plan beneficiaries. The proposal would be effective for taxable years beginning, acquisitions of S corporation stock, and S corporation elections made on or after the date of first committee action. …

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