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. Last Updated: 07/27/2016

Move to Curb Abusive Tax Shelters Debated

WASHINGTON -- The first clue was an obscure reference in a corporate financial statement to a sizable tax benefit, a possible tipoff to a new form of tax shelter.

Not long after that tidbit came to the attention of Treasury Department officials early last year, Jonathan Talisman, a deputy assistant Treasury secretary for tax policy, got a phone call from a tax professional describing a new and increasingly popular tax avoidance strategy that matched what was hinted at in the corporate document.

Analysts at the Treasury and the IRS spent the next few months figuring out the new shelter - a complicated set of transactions known as a "liquidating REIT'' - and determined that it was becoming so popular among corporations that it would cost the government billions of dollars in foregone revenues.

By the middle of the year, Treasury officials had convinced Congress that the transactions abused the tax code and should be shut down. A provision to do that was included in the tax bill signed into law by President Bill Clinton in October.

In many ways, the episode was a case study in how the federal government can root out attempts to game the tax system. But in its dependence on a few lucky breaks, it also showed the haphazard nature of efforts to control the proliferation of sophisticated corporate tax shelters.

Concerned about keeping ahead of the blizzard of tax-avoidance strategies being developed and marketed by accountants and lawyers to corporate clients, the Clinton administration has asked Congress for broad new powers to discourage use of tax shelters.

If adopted, the administration's proposals would fundamentally change the government's strategy for dealing with corporate tax shelters.

Instead of trying to find, understand and stop the transactions after they have occurred, either through informal intelligence gathering or audits or corporate returns, the administration wants to make using a questionable shelter sufficiently risky and costly that companies will choose not to use them in the first place.

"Our proposals are designed to impose a regime that will cause corporations not to engage in shelter transactions,'' Talisman said, "rather than having us chase them after the fact.''