Other Tax Issues of Interest

Tax Shelters

A tax shelter is an investment that requires substantial investment with a degree of risk. Tax shelters are required to be registered and the seller is required to maintain a list of the investors. The investors are required to report the tax shelter number on their tax return using Form 8271.

The amount of your deductions or losses from most activities is limited to the amount you have at risk.

You are considered at risk for an activity for the following amounts:

• The amount of cash you invested in the activity
• The adjusted basis of other property you contributed to the activity, and
• The amount you borrowed to invest in the activity, to the extent that you are personally liable on the loan or have pledged property not used in the activity as security.

Note: Losses and credits from tax shelters are often considered passive. Passive losses and credits can only be used to offset income from other passive activities. They cannot be deducted from other income such as wages, salaries, professional fees, or portfolio income. The limitations are computed on Form 8582, Passive Activity Loss Limitations.

Abusive Tax Shelters

Abusive Tax Shelters are marketing schemes that involve artificial transactions with little or no economic foundation. Generally, you invest money to make money. Abusive Tax Shelters offer:

• Inflated tax savings based on large write-offs and credits that are usually out of proportion to your investment.
• Little risk despite outward appearances.

Congress has enacted a series of income tax laws designed to halt the growth of abusive tax shelters.  Also, a substantial amount of penalties and interest may result if claimed tax benefits are disallowed or you fail to disclose certain information.

Important References

Form 8271	Investor Reporting of Tax Shelter Registration Number
Form 8275	Disclosure Statement
Form 8275-R	Regulation Disclosure Statement
Form 8582	Passive Activity Loss Limitations
Form 8886	Reportable Transaction Disclosure Statement
Publication 925	Passive Activity At-Risk Rules to the important references.
Publication 550	Investment Income and Expenses

Web Link

Abusive Tax Shelters and Transactions