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Tax Shelters. Essay

1358 words - 5 pages

The Internal Revenue Code Section 6662 defines "a tax shelter as any partnership, entity, plan or arrangement if a significant purpose of such partnership, entity, plan or arrangement is the avoidance or evasion of federal income tax" ("What is a tax shelter"). The Internal Revenue code was purposefully created in order to avail corporations to benefit from legitimate tax shelters in order to ensure applicable social and economic benefit intended by Congress. Furthermore, Congress has determined that the resulting loss of revenue is a tolerable byproduct of a "special tax provision" that promotes legitimate investments and encourages economic growth. (Wade).A legitimate investment is typically one that carries a degree of risk due to the fact that it currently fails to produce gainful income, but within reasonably foreseeable future will avail future gains. On the other hand, an investment that one knows will persistently generate negative income, and has no probability of attaining a successful growth at a later date is disallowed by the tax shelter provision.For instance, an example of a legitimate tax shelter investment is a low-income property that provides "depreciation benefits" and requires a significant contribution with an element of risk. (Wade). In other words, IRS would rather support a healthy investment into this property in order for it to start yielding income in the foreseeable future than to have it constantly produce negative earnings. Thus, this leniency draws potential investors, and enables them to safely advance funds toward a loosing venture with hopes of recuperating their losses and becoming gainful taxpayers. Moreover, one could argue that because of the fact that IRS services grants this ability to potential investors in the form of an incentive it invests in the future growth of the US economy. Conversely, IRS allows corporations to write-off taxes in the initial stage of the purchase, but they are banking that at a later date the property would be one of a yielding nature and thus, would with time gross substantial revenue for the tax system.Characteristically, losses occur during the first years of venture and are passed down to investors, who on occasion accomplish a complete return on their investment through tax savings within the first two to three years (Wade). Typical methods that are utilized by the taxpayers in order to shelter their losses are found in tax deferment, conversion of regular gains (100 percent taxable) into capital gains (40 percent taxable), or capital losses (50 percent deductible), that are converted to normal losses (100 percent deductible); thus yielding lower tax accountability and where leverage is gained through various financing provisions (Wade). Example of tax deferment is an IRA allocation where you are allowed to defer the taxable income by contributing to you retirement fund.The following instances according to the IRS constitute abusive tax shelters: "marketing schemes that...

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