Frequently Asked Tax Questions And Answers
Keyword: Tax Shelter
16. Other (Alternative Minimum Tax, Estates, Trusts, Tax Shelters, State Tax Inquiries):
What is a Pure Trust?
A so-called pure trust is an arrangement that purports to create a separate
entity without actually altering the taxpayer's control over the property
or business transferred to the pure trust. Generally, the trust issues certificates
that represent ownership of the trust. Notice 97-24 addresses certain abusive
trust arrangements. Often "pure trusts" are involved in those arrangements.
The pure trust may be treated as a sham for federal tax purposes depending
on the trust terms and its actual operation. Therefore, the taxpayer who transfers
property or a business to the trust must report all the income earned by the
trust and is liable for the taxes. The transferor may not circumvent the tax
system by structuring transactions with the purpose of evading taxes.
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I am considering a tax shelter investment. How can I recognize an
abusive tax shelter?
Tax shelters reduce current tax liability by offsetting income from one
source with losses from another source. The IRS allows some tax shelters,
but will not allow a shelter which is "abusive." An abusive shelter generally
offers inflated tax savings which are disproportionately greater than your
actual investment placed at risk. Generally, you invest money to generate
income. However, an abusive tax shelter generates little or no income, and
exists solely to reduce taxes unreasonably for tax avoidance or evasion. In
comparison, a legitimate tax shelter often produces income and involves a
risk of loss proportionate to the expected tax benefit. Abusive tax shelters
are often marketed in terms of how much you can write off in relation to how
much you invest. This "write off" ratio is often much greater than two-to-one
as of the close of any of the first five year ending after the date on which
the investment is offered for sale. A series of tax laws have been designed
to halt abusive tax shelters. An organizer of a potentially abusing tax shelter
who doesn't maintain a list of investors is subject to penalty of $50 per
failure, per person, unless due to a reasonable cause and not willful neglect.
Any person participating in an abusive tax shelter may be penalized up
to the lesser of $1,000 or 100% of the Gross Income derived or to be derived
from the activity.
For additional information, refer to Tax Topic 454, Tax
Shelters .
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