Loopholes and Tax Shelters

tax shelterA common misconception is that, in order to be entitled to a reward under the Tax Whistleblower Reward Program, you must possess information regarding fraud or perhaps criminal tax evasion.  However, this Program is not limited to issues rising to such a level.  Instead, the statute is clear, the IRS is seeking information with respect to any underpayment of tax.  We anticipate that most of the payouts under the Program will be in exchange for information regarding civil tax issues where criminal tax charges would not be merited.


Wealthy individual and corporate taxpayers pay billions of dollars each year to large accounting firms and large law firms to exploit perceived tax "loopholes" in the Internal Revenue Code.  A tax loophole is an unintended legal result that occurs when lawmakers fail to recognize the interplay between different provisions of the law when applied to an unanticipated set of facts.  A loophole in tax law contravenes the intent of the law without technically breaking it.  For example, in some places, one may attempt to avoid paying taxes to a jurisdiction by forming a nominal address in another location.  Loopholes are sought and used strategically by unscrupulous individuals and corporations in a variety of circumstances in the Federal tax system.  When the IRS catches a wealthy individual or corporation attempting to exploit a tax loophole, the IRS rarely seeks criminal punishment.  This is because transactions designed to exploit a loophole are generally very complex and technically follow the black letter of the law but not the spirit of the law.  However, the IRS routinely brings civil tax audits and civil Tax Court cases in an attempt to close the loophole through case law and to collect the tax that should have been paid.


The terms "tax shelter" and "loophole" often can be used interchangeably.  A tax shelter is a transaction designed for the purpose of lowering tax liabilities but otherwise has no economic value.  Whether labeled as a loophole or a tax shelter, such transactions stretch the limits of legal interpretation of Federal tax laws.


The IRS publishes a list of transactions that it deems to be abusive tax shelters or loopholes.  The purpose of this list is to put Americans on notice that the IRS disagrees with and intends to challenge the purported tax benefits that have been claimed to flow from these transactions.  Nevertheless, history tells us that, as soon as the IRS is successful in identifying, publishing, and shutting down an abusive tax shelter transaction, creative promoters concoct derivative transactions to take its place.  Thus, if you have information about a tax shelter transaction, it is highly likely that such a transaction will not fit within the mold of the listed transactions previously identified by the IRS.  You will be rewarded under the Tax Whistleblower Reward Program for identifying new or old loophole and tax shelter transactions.  Please call our law firm to discuss with one of our attorneys whether you have information regarding a new or old tax shelter or loophole transaction.


Below is the list published by the IRS of tax shelter and loophole transactions previously identified by the IRS:


Notice 2007-57 - Loss Importation Transaction (IRB 2007-29)

Revenue Ruling 90-105 – Certain Accelerated Deductions for Contributions to a Qualified Cash or Deferred Arrangement or Matching Contributions to a Defined Contribution Plan (transactions in which taxpayers claim deductions for contributions to a qualified cash or deferred arrangement or matching contributions to a defined contribution plan where the contributions are attributable to compensation earned by plan participants after the end of the taxable year)

Notice 95-34 – Certain Trusts Purported to be Multiple Employer Welfare Funds Exempted from the Lists of §§ 419 and 419A (certain trust arrangements purported to qualify as multiple employer welfare benefit funds exempt from the limits of §§ 419 and 419A of the Internal Revenue Code)

ASA Investering Partnership v. Commissioner - Transactions similar to those described in the ASA Investering litigation and in ACM Partnership v. Commissioner, 157 F.3d 231 (3rd Cir. 1998) (transactions involving contingent installment sales of securities by partnerships in order to accelerate and allocate income to a tax-indifferent partner, such as a tax-exempt entity or foreign person, and to allocate later losses to another partner)

Treasury Regulation § 1.643(a)-8 – Certain Distributions from Charitable Remainder Trusts (transactions involving distributions described in § 1.643(a)-8 from charitable remainder trusts)

Notice 99-59 – Transactions involving the distribution of encumbered property in which losses claimed for capital outlays have been recovered (aka BOSS transactions) (transactions involving the distribution of encumbered property in which taxpayers claim tax losses for capital outlays that they have in fact recovered)

Treasury Regulation § 1.7701(I)-3 – Fast Pay or Step-Down Preferred Transactions (transactions involving fast-pay arrangements as defined in § 1.7701(l)-3(b))

Revenue Ruling 2000-12 – Debt Straddles (certain transactions involving the acquisition of two debt instruments, the values of which are expected to change significantly at about the same time in opposite directions)

Notice 2000-44 – Inflated Partnership Basis Transactions (Son of BOSS) (transactions generating losses resulting from artificially inflating the basis of partnership interests)

Notice 2000-60 – Stock Compensation Transactions (transactions involving the purchase of a parent corporation’s stock by a subsidiary, a subsequent transfer of the purchased parent stock from the subsidiary to the parent’s employees, and the eventual liquidation or sale of the subsidiary)

Notice 2000-61 – Guam Trust (transactions purporting to apply § 935 to Guamanian trusts)

Notice 2001-16 – Intermediary Transactions (transactions involving the use of an intermediary to sell the assets of a corporation)

Notice 2001-17 - § 351 Contingent Liability (transactions involving a loss on the sale of stock acquired in a purported § 351 transfer of a high-basis asset to a corporation and the corporation’s assumption of a liability that the transferor has not yet taken into account for Federal income tax purposes)

Notice 2001- 45 – § 302 Basis-Shifting Transactions (certain redemptions of stock in transactions not subject to U.S. tax in which the basis of the redeemed stock is purported to shift to a U.S. taxpayer)

401(k) Accelerated Deductions

S Corporation ESOP Abuse of Delayed Effective Date for Section 409(p)

Collectively Bargained Welfare Benefit Funds under Section 419A(f)(5)

Certain Trust Arrangements Seeking to Qualify for Exemption from Section 419

Abusive Roth IRA Transactions

S Corporation ESOP Abuses:  Certain Business Structures Held to Violate Code Section 409(p)

Deductions for Excess Life Insurance in a Section 412(i) or Other Defined Benefit Plan