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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.
A Critique of Current State Tax Shelter Laws
Marilyn A. Wethekam*
I. INTRODUCTION
Corporate business transactions may result in a reduction of federal, international, and state income taxes. In some instances it may be the primary purpose of the transaction or merely a favorable by-product of the transaction. All business planning projects, restructuring projects, and basic business transactions require attention to both substance and detail, and they should be analyzed from both a business operation and financial perspective. The tax consequences also must be considered in the analysis. In analyzing the project, one must consider not only the federal tax doctrines that have been used to evaluate tax-orientated transactions but also the application of those doctrines by the state taxing authorities.
In addition to analyzing a project in light of the federal tax doctrines and the various state interpretations of those doctrines, one must also take into consideration the recently enacted tax shelter regimes and amnesty programs. This analysis is not only required for future projects, but due to the recent statutory and financial accounting rule changes, must also be applied to existing business transactions. The challenge is, as evidenced by several recent court decisions, that at the state tax level there is no uniform application of the federal doctrines or general tax policy with respect to what will be considered an unacceptable transaction.
While the structuring of tax transactions to reduce or minimize tax liabilities is not a new concept, there was a perception in the late 1990s that there was a substantial increase in the number of abusive tax shelters (ATSs). The federal government and the Internal Revenue Service (the Service) began cracking down on such transactions. In 2003, the Service joined forces with several states to combat the perceived increase in abusive tax shelters, and memoranda of understanding between the Service and individual states were executed. Generally, the goal of this federal–state partnership was to increase the efficiency with which the federal and state governments tackled ATS schemes, primarily through increased exchanges of information and coordination, as well as through participation in joint public outreach programs.
This article will review the federal tax doctrines that have been utilized when evaluating business transactions. These doctrines are the foundation for various states’ judicial challenges. The article will also address recently enacted federal tax shelter laws and regulations and examine select state statutes that have incorporated the federal laws and regulations in whole or in part.
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*Marilyn Wethekam is a partner in the Chicago law firm of Horwood Marcus & Berk Chartered. She practices exclusively in the area of state tax.
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