The ongoing enforcement effort against abusive tax shelters has taken several turns in the past few months. Taxpayers and practitioners who have shelter issues need to be aware of a number of recent developments.
Legislative Developments. First, as of this date (mid-November) anti-tax shelter legislation appears to have stalled in Congress. The Senate has passed a comprehensive set of disclosure and penalty provisions, including a codification of the economic substance doctrine that is estimated to raise nearly $14 billion of revenue alone. But the economic substance provision continues to be controversial, and the shelter bill appears to be caught up in House-side wrangling over other tax legislation. To focus more attention on the shelter issue, several days' worth of hearings were held on Capitol Hill this fall. The Senate Finance Committee held a hearing in October at which Government, private sector, and so-called "whistleblower" witnesses testified about both systemic enforcement concerns and specific shelter transactions (such as "Son of BOSS" and cross-border leasing variants). And earlier this month, the Senate Permanent Sub-committee on Investigations held hearings focusing on the promoters and marketers of shelters and their professional and fiduciary obligations. Despite these efforts to bring attention to the issue, however, prospects for the passage of legislation continue to be uncertain.
Administrative Developments. The IRS has nevertheless continued its anti-shelter enforcement efforts using existing administrative tools. For instance, just recently the IRS updated its roster of so-called "listed" transactions for tax shelter reporting purposes under Code sections 6011 and 6112, and in July the IRS added certain compensatory stock option plans to that "list." The IRS also issued a Coordinated Issue Paper on lease-in, lease-out (or "LILO") transac-tions in October, and a new notice regarding so-called "lease stripping" transactions in November (at the same time withdrawing regulations first proposed in 1995).
In addition, the IRS is pursuing information from taxpayers and third parties using its existing summons power and other investigative tools. As of this writing, so-called "John Doe" summonses (under IRC section 7609(f)) have been sought from the law firm of Jenkins and Gilchrest, the Grant Thornton accounting firm, and the investment group Presidio Advisors. Several recent opinions in the BDO Seidman, Arthur Anderson, Wachovia Bank, and KPMG cases, as well as in the (non-shelter) G-I Holdings bankruptcy proceeding, have addressed the scope of privileges in the tax practice area, including the attorney-client privilege, so-called "Kovel" arrangements, and the statutory (IRC section 7525) tax advisor-client privilege.
And although the opinions are some-what confusing, they share one theme: privileges are endangered when tax shelters are involved. Likewise, tax accrual workpapers regarding shelter transactions may be sought more frequently, under the policy shift the IRS revised earlier this year
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This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.
