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Note: The following is an excerpt from the introduction to the
article as published in The State and Local Tax Lawyer, 2006 Symposium Edition. Author citations have been
omitted for brevity.
State Strategies for Dealing with Tax Sheltering and Planning
Harley Duncan and William F. Fox*
I. INTRODUCTION
The extent of tax planning and sheltering is not well known and is difficult to measure, but a number of analysts have asserted that tax planning has likely been an important reason why the effective corporate income tax rate fell so dramatically in the 15 years after passage of the Tax Reform Act of 1986. Various commentators have identified the causes of increased tax sheltering or at least some of the conditions that have led to it. Among those identified are:
(1) A decline in audit activity and availability of sufficiently trained auditors, changing the risk–reward analysis of sheltering;
(2) Excessive statutory complexity creating uncertainty;
(3) The lack of clarity in the scope of permissible planning as courts and agencies have attempted to employ doctrines such as economic substance, business purpose, and sham transaction;
(4) Insufficient penalties and inconsistent application of the penalties;
(5) Increased attention to cost control and tax reduction strategies in the private sector;
(6) The growth of the tax planning adviser community, particularly in the state and local sector;
(7) Differences in tax laws across states; and
(8) Constitutional and statutory restrictions on state taxing authority.
This Article seeks to identify and assess some of the key strategies that state governments are using to limit the degree that corporations and individuals use tax sheltering and planning activities. Strategies are examined in terms of their implications for revenues, economic efficiency, and administration and compliance.
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*Harley Duncan : Federation of Tax Administrators
William F. Fox: University of Tennessee
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