80 Tax Notes 1603

Tax Notes

SEPTEMBER 28, 1998

DEPARTMENT: Special Reports (SPR)

CITE: 80 Tax Notes 1603

HEADLINE: 80 Tax Notes 1603 - CORPORATE TAX SHELTERS, 1997 AND 1998. (Section 6111) (Doc 98-29081 (11 pages))

AUTHOR: Johnson, Calvin H.

University of Texas

CODE: Section 6111

SUMMARY:

Professor Calvin Johnson notes that almost all corporate decisions qualify as tax shelters under the Taxpayer Relief Act of 1997 and the Internal Revenue Service Restructuring and Reform Act of 1998 since the definition of corporate tax shelter is very broad.

Calvin Johnson is professor of law, University of Texas. This report is based on a letter sent to the Assistant Secretary of the Treasury for Tax Policy with respect to a prospective regulation project to be opened to interpret the 'corporate tax shelter' provisions of the 1997 and 1998 tax acts.

The 1997 and 1998 acts define a 'corporate tax shelter'as an arrangement with a significant purpose to avoid or evade tax. The IRS has three remedies under the acts for corporate shelters. There is an automatic 20 percent penalty on large tax underpayments. The privilege allowing the corporation to prevent disclosures in civil litigation is narrower and does not cover written communiciations with a nonattorney adviser. The shelter must be preregistered with the IRS if there is a proprietary confidentiality agreement and promoter fees are substantial. Johnson argues that almost all corporate decisions qualify as tax shelters under the statutory definition, but that the remedies provided are modest and appropriate to the seriousness of the problem.

The author thanks Professors Michael Lang, David Weisbach, Mark Gergen, and Keith Engel for helpful comments on an early draft.

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Table of Contents

I. Broad Reach of the Statutory Definition. . . . . . . . . . . 1604

II. Remedies Should Be Broad-Reaching. . . . . . . . . . . . . . 1605

A. The 20 Percent Accuracy-Related Penalty. . . . . . . . . 1606

B. Testimonial Privilege. . . . . . . . . . . . . . . . . . 1607

C. Registration With the IRS. . . . . . . . . . . . . . . . 1608

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1 In the Taxpayer Relief Act of 1997 and the Internal Revenue Service Restructuring and Reform Act of 1998, Congress adopted remedies to control corporate 'tax shelters,' defining a shelter as a plan or arrangement for which a significant purpose is avoidance or evasion of any tax. Falling within the definition of 'tax shelter' means that (1) there is a 20 percent penalty on corporate tax deficiencies should the IRS prevail on the merits, /1/ (2) there is no privilege in tax litigation to prevent production of written communications between the taxpayer and nonattorney tax adviser with respect to the shelter, /2/ and (3) the shelter, if offered under a proprietary confidentiality arrangement and for aggregate promoter fees of over $100,000, must be preregistered with the IRS and its tax advantages disclosed. /3/ Treasury is in the process of formulating proposed regulations under the new corporate- shelter provisions, but nothing has been issued.

2 The definition of corporate tax shelter in the 1997 and 1998 acts is extraordinarily broad, even automatic. A corporate tax shelter is defined as an arrangement with a significant purpose to reduce tax. For better or worse, tax reduction is a significant issue in almost every corporate decision. Reduction of tax is a significant purpose, as long as corporate rates are significant, because corporations are organized to maximize after-tax income available to shareholders. The remedies, however, are appropriate, even modest, for the problem of corporate underreporting of tax, even if every corporate action is defined automatically as a tax shelter. The Treasury regulations defining corporate tax shelter cannot and should not narrow the very broad range to which the remedies apply, as determined by the plain meaning of the statute.

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I. Broad Reach of the Statutory Definition

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3 The statutory definition of 'corporate tax shelter' is broad. The new definition in the 1997 and 1998 acts is that a shelter is a plan or arrangement for which a significant purpose is avoidance or evasion of any tax. The definition applies to both avoidance and evasion of tax. Evasion has historically referred to the illegal criminal motive and avoidance has traditionally been used to describe legal tax minimization. /4/ 'Tax shelter' under the new provisions thus covers both legal and illegal tax reduction.

4 A corporation is presumably a tax-reducing entity on every occasion. A corporation is an enterprise organized for the profit of its shareholders. /5/ It has a fiduciary duty to its shareholders to maximize its after-tax income, so as to give shareholders the highest possible future dividends and share price. Tax reduction and nontax motives are not alternative or antagonistic paths. Taxes arise inevitably along the road from pretax income to the after-tax income that benefits shareholders. Because pretax and tax motives occur on the same road, a nontax or pretax motive does not negate a tax- avoidance motive. The prime maxim of the discipline of economics is that every actor maximizes its disposable return. For a corporation, that prime maxim means that after-tax income for shareholders is always the purpose of corporate actions and that every corporation reduces tax, to the full extent allowed by law and civilization.

5 Corporate tax is almost always a significant fraction of the ultimate corporate purpose. Congress chose the phrase 'significant purpose' because it was a lower percentage than existing standards. Congress was vague so that the language would stretch over varying views of different individual members, but the term significant still has enough content to cover any corporate planning that I know of. Significant is a lower percentage than 'the principal purpose,' /6/ which means 'greater than 50 percent' and lower than the standard, 'a principal purpose.' /7/ The article 'a' in the 'a principal purpose' standard means, somewhat oxymoronically, that cases exist in which there is more than one principal purpose, and given that, the smaller of two principal purposes has to have a weight of 50 percent or less. If there are three principal purposes, then the smallest principal purpose must have a weight of one-third or less. 'A principal purpose,' accordingly, probably covers down to under one-third. 'Significant' is even lower than 'a principal purpose' and that means that significant is under one-third by enough to justify adopting a new, unfamiliar standard. In accounting, an item usually becomes material at a level of 5-10 percent, /8/ and significant seems to mean at least material. Significant thus means some fraction well below 33 percent but greater or equal to 5-10 percent.

6 Corporate taxes are almost a greater percentage than 'significant.' Corporations usually face marginal tax rates of 34 percent or 35 percent. Even the next bracket, 25 percent, which comes in at corporate taxable income of $50,000, seems to be higher than 'significant.' Even for corporations with net operating losses currently, taxes still can be saved in the future by action now. There must then be a time-value-of-money discount of the statutory tax rate to reflect the fact that the corporation has net operating losses to protect it from tax for some years and that current tax deductions will save tax only after the NOLs are consumed. The time- value discount, however, can be quite modest. Even with net operating losses, taxes will usually represent a significant fraction of income. To show that a corporation did not take into account significant tax, a corporation would have to show that it had an imbecility that would mean we should not let it out on the streets on weekdays, and that would be hard to prove with credibility. For better or worse, corporate taxes are a significant aspect of almost every corporate decision.

7 The statutory standard cannot have been meant to be a subjective standard. Corporations are artificial entities, so that even if we had invented brain-wave readers by now, those brain- readers would not register anything when aimed at a corporate taxpayer. Minds, certainly fictitious things like corporate minds, are like Jell-O. To paraphrase the Green Berets, if enough tax is at stake, 'their hearts and minds will follow.' Tax cannot be built on so weak a foundation. 'A matter so real as tax,' Judge Friendly tells us, 'must depend on objective realities, not on varying subjective beliefs. . . .' /9/ Corporations can be understood to have purposes, as economic entities, because they are organized to reduce tax and maximize after-tax income for their shareholders. But it is silly to inquire into actual intent of a corporation that is entirely a nonactual, fictitious entity, once it is given that corporate tax rates are at a significant level.

8 The conference committee report on the 1998 act stated that the conferees did not understand that the promotion of tax shelters was part of the routine relationship between a tax practitioner and a client so that the tax shelter limitations would not adversely affect such routine relationships. /10/ Reading the language charitably, that is usually true. It is not good or routine tax practice to give the corporation advice that turns out to be wrong nor routine for the lawyer to keep ownership of the tax plan. Routine tax advice, one might hope, does not recommend that the corporation play the tax lottery. The object of a Treasury regulation, however, is not to parse or defend the statement of the conferees. The statutory definition -- an arrangement with a significant purpose to reduce tax -- is the standard in the bill that Congress passed and the president signed. Conference language, by contrast, is the work of staffers, usually under lobbyists' influence, who are trying to amend or override the statute with spin control. As Justice Scalia has well reminded us, the conference language is not the language to which the sovereignty of a statute attaches. /11/ Thus while Treasury should always be diplomatic to tax conferees, the statute on its face gives the regulation writers no occasion to worry about or interpret what 'routine tax practice' might be.

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II. Remedies Should Be Broad-Reaching

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9 The problem addressed by the new corporate shelter provisions, underreporting of corporate tax, is not a trivial concern. Ours is a self-reporting tax system that relies primarily on accurate reporting of tax due on tax returns. Ideally, every corporation would report on its return the amount of tax truly due under law, as would be determined by the final decision of a competent court after competent, comprehending audit. Tax law, as finally determined by a court, makes a sounder tax system than the ersatz systems created by the corporations themselves under conditions of underenforcement. A self-reporting system in which corporations report the correct amount of tax is also far better than a system that would require a full audit and litigation for every tax dollar. But a self-reporting system is not the same thing as an 'honor' or voluntary system for tax, and it does need some support from economic incentives to make it work.

10 It has to be in the economic interest of a corporation to self-assess tax accurately. Corporations do not ordinarily respond very well to pleas for patriotism or for loyalty to the integrity of the tax system. Corporations plausibly do have duties to the United States -- to US. A certificate of incorporation is not a license to shuck all law and clothing and run amok across the prairies. Still the duties of a corporation to the nation are not strongly developed. Relying on anything less than economic incentives to get corporations to report tax accurately may well be nothing but sanctimonious cant. /12/ If Congress wants corporations to follow the laws as passed, it will need to enforce the law. That will mean that errors in reporting tax need to bear a penalty, relative to accurate reporting.

11 Corporate tax aggressiveness seems to be increasing. According to available statistics, the gap between what large corporations owe and what they pay is large /13/ and growing fast. /14/ The figures available to the IRS, however, are also now so out of date that its statistics are unreliable, /15/ so that the IRS has been blinded from even assessing the size of the cloud. Still, knowlegeable observers do find that corporations are increasingly depending on shelters. /16/ The investment bankers and Big Five accounting firms are pushing corporate tax planning competitively to the very edge. Tax law was once written for a community that shared a faith in the underlying principles of tax law. The 1939 code, for example, stated tax due in terms of a few general principles, with the understanding that taxpayers and government would work out the consequences of the principles, with full respect, as the issues came up. That approach would never work under current norms. Audit rates are too low to be even a credible bluff. Even after audit, the disparity between private and IRS tax practitioner salaries has grown so large that the IRS staff is always in the dark, undertrained, undermotivated and stretched far too thin in any tax controversy. Tax planning has grown so aggressive that every word or provision that can be misunderstood is creatively misinterpreted to yield the least possible tax. No one seems to be reporting by looking to what the outcome would truly be if a competent court decided the issue.

12 Perhaps loopholes are inevitable:

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In this arms race betweeen taxpayers eager to hold onto as much

as they can and tax law eager to stop them, one should bet on

the taxpayers. . . . Like disobedient children taxpayers have a

great deal of ingenuity, a natural bent for coming up with new

and not-yet-forbidden ways of doing the sort of thing the rules

seem to be trying to forbid. They also have a taste for doing

just that. These talents and inclinations predictably outrun the

rulemakers' ability to define prohibited behavior with

precision. The legal system is, to some degree helpless. /17/

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The only reason why Treasury should not give up in full is that tax must somehow be collected. If tax is a game, Treasury has to win it.

13 Given the problem, the consequences triggered by falling within the definition of corporate tax shelter are quite modest. The function of the remedies is (a) to give inducements to corporations to report their tax accurately, as defined by the real decision that a court would reach, (b) to get evidence from advisers that would allow the courts to reach truth and justice, and (c) to give the IRS a chance, a road map, to contest budget-busting corporate schemes early in their life. For all three remedies, the broad definition of corporate shelter, provided by the significant purpose test, seems fully justified.

A. The 20 Percent Accuracy-Related Penalty

14 The first consequence of falling within the definition of a 'corporate shelter' is that standards of reporting get raised for the purposes of the 20 percent substantial understatement penalty. Section 6662 collects a number of civil accuracy-related, nondeductible penalties, each for 20 percent of tax underpayments. Subsection (d) of section 6662 imposes the 20 percent penalty on substantial understatements of tax, defining 'substantial' for corporations as tax underpayments that are larger than 10 percent of tax properly due and also larger than $10,000. In general, taxpayers can avoid the subsection (d) substantial understatement penalty if (1) there was 'substantial authority' for the taxpayer's position on the tax return /18/ or (2) if the taxpayer adequately discloses the position on the return or an attachment and the position on the return had a reasonable basis for it. /19/ In 1997 Congress amended the substantial understatement rules of section 6662(d) for corporate shelters. Falling within the definition of a corporate tax shelter now means that the defenses based on substantial authority and disclosure of a reasonable position are not available. /20/ An arrangement is a corporate tax shelter if there is a significant purpose to reduce tax and, as explained in the last section, that happens automatically. Thus the 20 percent penalty is automatic if the corporation tax return position ultimately loses and the underpayment is substantial.

15 A 20 percent penalty imposed automatically if the corporation loses in a substantial tax case is a very good idea. The corporate behavior you want to encourage is reporting and paying over the amount of tax that is due as finally determined by a court. The behavior you want to discourage is reporting and paying over less than the amount that is ultimately determined to be due. Giving a corporation an immunity from penalty if it has a reasonable basis or substantial authority for its reporting position will mean that the corporation will not try hard enough to predict real outcomes of the case. Giving the corporation credit for reasonable basis or substantial authority is a bit like scoring football games by the number of good tries or reasonable efforts. Scoring by touchdowns accomplished seems to encourage each side to try harder. Giving a corporation credit for reasonable effort or substantial authority also means that the corporations' lawyers and accountants will be looking for a good excuse not to pay tax and will not try hard enough to be right. Giving a corporation an immunity from tax penalty for reasonable basis or substantial authority does not give the corporation an incentive to correct its errors.

16 A penalty that made it in the corporation's self-interest to correct its errors would be an automatic penalty that would be very much higher than 20 percent. Assume, for example, that a corporation underreports tax, as tax would be finally determined, that there is a 50 percent chance of the corporation being audited, a 50 percent chance of the auditor spotting the error, a 50 percent chance of the auditor being able to articulate the issue well enough to convince the IRS to go forward on the error, and a 50 percent chance of the IRS prevailing eventually. That means that there is a 50 percent*50 percent*50 percent*50 percent or 1/16th chance of the IRS correcting the reporting error. A corporation would win on the audit lottery by underreporting its taxes, considering the law of averages for a 1/16th chance of correction, only if there is an automatic penalty on a corporate error that is 16 times the tax deficiency or 1,600 percent. /21/ The neutral penalty might be lower than 1,600 percent. An auditor's ability to spot an issue might not be independent of her ability to convince the IRS to go to court. On the other side, the IRS does not usually get to audit 50 percent of returns and the chances of its agents understanding the issue may be less than 50 percent, so that the appropriate penalty to neutralize the incentive to make errors can easily be much greater than 1,600 percent. Making the 20 percent penalty automatic -- depending on outcome and not on 'substantial authority' or 'reasonable basis' or a similar 'good try' idea -- is a step in the right direction if you want real tax law to be enforced. Even an automatic 20 percent penalty, however, is quite modest in comparison to the penalty that would be needed to take away the incentive for a corporation to make self-help errors on its return.

B. Testimonial Privilege

17 Falling within the 'tax shelter' definition also means that a corporate taxpayer cannot prevent written communications between the taxpayer and its nonattorney tax advisers from being discovered in civil tax litigation. The 1998 act enacted a new section 7525 to extend the common-law attorney-client privileges to civil tax cases and administrative tax proceedings in which it is not an attorney, but rather an accountant or enrolled agent who gave the taxpayer the tax advice. /22/ Section 7525 does not, however, extend the nondiscovery privilege to written communications between corporation and adviser in connection with the promotion of or participation in a corporate tax shelter. /23/ Since section 7525 defines corporate tax shelter by cross-reference as an arrangement with a significant purpose to reduce federal tax, /24/ the new privilege extension does not apply to any corporate decision where the corporation faces significant tax. Section 7525 thus is one of those big-hat, no-cattle provisions, because the section starts off with what might seem an important privilege, but then takes back the privilege when the client is a corporation.

18 Loss of the section 7525 privilege does not mean very much. The privilege is so riddled with exceptions, even in non-tax- shelter arrangements, that it is worth slightly less than nothing. The privilege is defined by reference to common law attorney-client privileges and the common-law privilege is leaky and unreliable. The common-law privilege does not attach to communications that really are incident to rendition of financial or accounting services, to communications incident to rendering business advice, or to communications incident to preparation of a tax return. /25/ The privilege is easily waived. /26/ It may not apply where it is the promoter's general promotional materials or projections that are sought and not confidential information specific to the taxpayer. /27/

19 The extension of the privilege, moreover, on the face of the statute does not apply to many kinds of legal proceedings where the outcomes can be draconian. The extension of the privilege to nonattorneys does not apply to civil litigation against nongovernment private parties, no matter how much is at stake. It does not apply to nontax proceedings such as SEC disciplinary proceedings, bank looting cases, or license revocation proceedings where a whole career is at stake. It does not apply to criminal tax cases, where a privilege might keep somebody out of jail. /28/ A privilege with so many exceptions is about like having the confessional booth hooked up to the public address system in the piazza, with the understanding that whenever something juicy is said, the PA system will be switched on. Loss of such a privilege is no loss at all. /29/

20 'A significant purpose to reduce tax' also just gets the system back to the good policy decisions of traditional law. Denial of the privilege for certified public accountants is perfectly consistent with sound public policy. Public accountants have always had a responsibility to the investing public to disclose unpleasant facts about the corporation in the financial statements or footnotes. The accounting firm that audits a corporation is a cop on the beat, with no obligation to be the corporation's friend or keep its secrets. No corporation should ever expect confidentiality from its certified public accounting firm. /30/

21 The effect of a testimonial privilege, moreover, is to prevent accurate but embarrassing facts from becoming known in court. The traditional view, denying a privilege to accountants, reflected a wise judgment that the strict confidentiality standards of the attorney-client privilege go too far /31/ and should not be extended. The traditional view, denying the privilege, holds that getting the right result is not just an important factor in a tax case; the right result is the only purpose of the tax proceeding. If all corporate decisions lose the privilege, that will merely reflect the wise traditional judgment that honesty and accuracy still count.

22 The properly broad tax shelter exception will, however, still leave some issues privileged from discovery. The tax shelter exception applies only to 'written communications.' In this age of e-mail, that undoubtedly applies to writing conveyed by electrons and to spreadsheets and projections, written in numbers. Hopefully, the exception has a penumbra under which litigators can ask a human being to explain what the writing means. The exception, however, probably does not apply to tapes, so that if, for instance, a famous-name- national-brokerage house gives a tape that is supposed to self- destruct after the client hears it, then the tape is immune from discovery. If anything, the privilege still available, even for corporate shelters, is too broad.

23 Section 7525 also apparently has no effect on the traditional attorney-client privilege, whatever the scope of that privilege, because it is stated in terms of extension of attorney- client privilege. For an arrangement that is a tax shelter, the section 7525 extender would not apply, but the common-law attorney- client privilege would still be available, whatever its uncertain scope.

C. Registration With the IRS

24 Falling within the 'tax shelter' definition finally affects whether the arrangement must be registered with the IRS. Section 6111 provides for registration of certain tax shelters with the IRS before the shelter is offered for sale to any taxpayer. The registration statement must explain, for the education of the IRS, the tax benefits of the shelter as represented to the potential investors. /32/ The organizer must provide a list of taxpayers who invested in the shelter and each investor must include on its tax return the identification number assigned to the shelter.

25 The general purpose of section 6111 for corporate shelters is to give the IRS an accurate road map about corporate deals that are especially threatening at an early stage of their development. With a good road map from the registration of the scheme, the IRS can decide what corporate tax returns it should select for audit and it can instruct its auditors to focus in on the real tax issues quickly and efficiently. The IRS can also use the registration information to decide whether additional legislation or administrative action is needed before the revenue losses get too out of hand. /33/ With a good road map, the Treasury Department can issue notices announcing that it considers the transaction to be abusive and that it will contest the claimed tax treatment on audit and in court. Good notices often act like first-aid compresses, slowing down the hemorrhaging revenue loss from an especially threatening scheme. /34/

26 Even beyond the specific transaction in the registration, a registration statement for tax shelters can prove to be an invaluable source of education for the IRS and its auditing agents. A registration must explain the tax benefits to the auditing agent just as the promoter was educating the client. Education from one registration can be used against other deals. When a number of registrations pile up, the IRS will have a large enough collection of registration statements that it can see the woods as well as the trees and see which shelters are truly threatening to the revenue base as a whole. The IRS may well come back and seek legislation or other remedy, only after some time and after a number of registered shelters of one kind have appeared in their files.

27 Prior to the 1997 act, the only test as to whether the shelter had to be registered was whether the ratio of tax deductions to cash invested was greater than 2:1. An arrangement was defined to be a shelter that had to be registered if at the end of any of the first five years, the deductions generated were in excess of twice the cash invested. /35/ The 1997 act added a new subsection (d) to section 6111, requiring registration for large-fee arrangements subject to propriety confidentiality agreements. /36/ Under new subsection 6661(d), an arrangement must be registered if it (1) was sold under conditions of proprietary confidentiality, (2) might generate more than $100,000 in aggregate promoter fees and (3) had a significant purpose to reduce tax. Congress's decisions to require preregistration are reasonable to the situation and Congress's decisions are binding law, even if they are not so reasonable.

1. Proprietary confidentiality.

28 To be a tax shelter under the 1997 addition, an arrangement must, first, be subject to a contract or understanding under which some promoter other than the taxpayer has a proprietary interest in the arrangement or can prohibit the taxpayer from disclosing the arrangement. An arrangement has the required proprietary interest if someone other than the taxpayer owns the arrangement (or any aspect of it). /37/ An arrangement also has the required proprietary confidentiality, if the offeror tells potential investors that the investor may not discuss or disclose the tax shelter or any significant tax features of it to someone else. /38/

29 The theory behind subsection 6111(d) is that giving a promoter intellectual property rights in an anti-tax scheme will create an incentive that can do far too much damage to a sound tax system. There is a law and economics literature arguing that giving intellectual property rights in an idea to some person will lead to the maximum exploitation of the idea. The owner with a proprietary right to exclude others from free use of the idea will be able to charge a price for the idea and thus will have an incentive to improve or perfect the idea and market it so as to maximize the output from the idea. /39/ Ownership or confidentiality allows the tax adviser to go from the careful custom-tailored tax planning of traditional law practice, pleasing one customer at time, and into mass-marketed 'cookie cutter' tax planning in which the tax adviser can keep using the same template for many different clients.

30 We do not, however, want to maximize the output from anti- government plans. The output from an anti-tax arrangement is an assault on the soundness and equity of the tax system and maximizing the output means maximum assault on the system. Once the best tax system is destroyed by such plans, the revenue system left after the assault will be far less even-handed and equitable and will do far more damage to the economy per dollar of revenue raised. Thus proprietary confidentiality is used as an indicator of potential abuse. The good idea behind subsection 6111(d) is that if anyone claims an exclusive property right in an anti-tax scheme, then he had better be required to give the government a road map just to counteract the incentive he are getting from property rights.

31 The proprietary confidentiality that is the target of new section 6111(d) does not mean confidentiality that the corporate taxpayer imposes on its tax attorney or other agents. An attorney is always prohibited from disclosing a client's business, under the rules of professional responsibility. An attorney may not discuss or disclose a client's business to anyone but the client without the client's permission. /40/ The target of section 6111(d), by contrast, is prohibitions of disclosure imposed on the taxpayer by the tax attorney or adviser. The fear is that the nontaxpayer promoter will market to many taxpayers to do maximal harm.

32 Proprietary anti-tax plans plausibly are a tell-tale sign of abuse, although perhaps not as good an indicator of potential abuse as the 2:1 ratio of tax deductions to cash invested, which was the only definition of a shelter under pre-1997 law. When shelter registration was first adopted in 1984, the 2:1 ratio was a very significant line. The top tax rate at the time was 50 percent. A taxpayer who could deduct $2 in the 50 percent tax bracket saved $1 tax, that is, an amount equal to the amount invested. If the tax saving held up, the taxpayer would go forward into the arrangement for the tax alone, even if the underlying activity was worthless ignoring tax. Shelters with a ratio of 2:1 often meant that the taxpayer would disregard the underlying nontax economics of the transaction. /41/ The 2:1 ratio was a telltale sign of a potentially very abusive tax shelter because the taxpayer investor stopped caring about the underlying economic reality of the transaction and it was a shelter that the IRS needed to go after. It is hardly clear that the property rights in a proprietary confidentiality arrangement are as potent an inducement toward abuse as the 2:1 ratio was. On the other hand, for the new subsection (d) proprietary confidentiality shelters, in any event, unlike the old 2:1 ratio shelters, there is also a substantiality requirement, that the promoters' fees exceed $100,000. The ability to do 'cookie cutter' deals may be a strong incentive. The $100,000 fee combined with proprietary ownership are together a signal that there may be a clear and present danger.

33 If the registration road map turns out to be too useful to the IRS, then it may well turn out that section 6111(d) will not generate any material number of registrations. Promoters will instead just abandon their claims to proprietary rights so that they do not have to disclose the tax benefits to the IRS. The other requirements for falling under section 6111(d), a significant purpose to reduce tax, and $100,000 in adviser's fees, are more difficult to avoid. The suppression of proprietary confidentiality agreements, however, may be an acceptable result, even though the opportunity to identify aggressive tax plans is lost. The tax system will then not be subject to such destructive attacks from cookie cutter shelters that promoters have property rights in.

2. Large fees.

34 An arrangement needs to be registered under new section 6111(d) only if it is an arrangement 'for which the tax shelter promoters may receive fees in excess of $100,000 in aggregate.' /42/ The size of the tax adviser's fees is not a bad tell-tale sign of abuse. If we were to start afresh in defining the right scope for the preregistration remedy, we would need to design a rule that would identify big new loopholes, while exempting tax plans that the IRS cannot defeat under current law and which Treasury would not want to ask Congress to defeat. Such a screen separating big loopholes from well-settled tax avoidance is, however, next to impossible to design. Suppose the statute, expressing its intent, just said that big new loopholes have to be registered? How would you define a loophole? Any screen enacted will have to rely on imperfect indicators. The level of fees might well serve as an indicator of a new loophole because tax advisers cannot charge high fees for well beaten or routine paths to tax reduction. It does not take $100,000 to tell the client to buy municipal bonds.

35 Quite plausibly a fee of $100,000 is too low a number. /43/ Plausibly, the IRS needs first to have advanced warning on the budget-busting arrangements that might result in half-billion-dollar tax deficiencies. The IRS, first and foremost, needs to pick up half- billion-dollar corporate tax deficiencies that might otherwise slip through the cracks. In the truly budget-busting arrangements, the lawyers and accountants fees will be in excess of $100,000. But Congress in its wisdom has defined the $100,000 fee level as the level at which the IRS needs to get the advanced warning and the education about the tax benefits that a preregistration with the IRS would provide. The $100,000 statutory amount seems to be appropriately subject to the maxim that 'a statute drafted as meticulously as tax must be interpreted as a literal expression of the taxing policy, leaving only the small interstices for judicial interpretation.' /44/

36 The fact that $100,000 might have been set higher, however, may carry some implications about how tough the IRS needs to be in aggregating different clients to see if promoters receive $100,000 in aggregate. If all the shelter promoter does is make a global replacement of name of the taxpayer in the governing documents, then it seems that aggregation of fees from the different clients should be automatic. On the other end of the spectrum, if a lawyer specializes in real estate sales or equipment leases or ERISA plans and does a lot of custom work for each client and each transaction, then the fact that there are recurring patterns and even a set of master documents should not mean that the lawyer's fees for her entire career should be aggregated. The regulations might give a presumption that if half the writing is new for each client, then it can be presumed that the fees from each client will not be aggregated to reach $100,000.

37 The statute's use of promoter's fees aggregating $100,000 will, however, mean that there will be some clever planning to disaggregate fees to different attorneys or accountants. If a $100,000 fee is paid to a firm with 1,000 accountants, for example, one should expect to see claims that each individual member received only a $100 share and that only transactions giving more than a $100 million fee to the firm will be over the threshhold. Fees paid to a single firm should automatically be aggregated.

3. Significant purpose to reduce tax.

38 Registration under section 6111(d) also requires that a significant purpose of the plan or arrangement be for the evasion or avoidance of tax. As it has been argued above, tax is always a significant consideration in corporate decisions, whenever the tax rate is significant, so that the significant purpose requirement will not serve to exempt any arrangements from the registration requirement.

39 While the 'significant purpose' net sweeps very wide, it is difficult to see how Congress could have written any more selective a test and still kept the abuses within the net. Registration needs to reach the big budget-busting corporate arrangements that pose a large enough threat to corporate tax base that the IRS should be able to plan to meet them in advance. It is, however, impossible to anticipate beforehand just from where the attack on the tax base will come. The minds of tax planners are varied, fertile, and surprising. Take a look at some of the billion- dollar-plus corporate schemes of the last few years. They have almost nothing in common except for their ingenuity and their surprise:

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a. Converting corporate capital gain into dividends.

Seagram Inc. claimed to save $ 1.5 billion tax, by getting its

sale of Du Pont stock (to Du Pont) treated as a dividend

(subject to 10.5 percent tax) instead of capital gain (subject

to 35 percent tax) by creating an option of nonmaterial value to

reacquire nonvoting Du Pont stock. Under section 318(a)(4), an

option to acquire stock means that the corporation still owns

the stock, no matter how immaterial the value of the stock, so

that Seagram still literally owned the stock under the

constructive ownership rules for redemptions even after selling

the Du Pont stock. That meant that the sale qualified as a

dividend, at least literally. Congress attempted to close down

the scheme with amendments to the dividends received deduction

in 1997. /45/ It would have been nice if the IRS had had the

chance to go to Congress before, rather than after, the Seagram

scheme.

b. Cheshire-cat hybrid entities. Treasury's announcement

that it will ignore LLCs at the taxpayer's election has opened a

slew of tax reduction opportunities in foreign tax planning. For

example, assume a U.S. corporation pays an expense to an LLC

that pays dividends to Canadian shareholders and the LLC is

ignored for U.S. purposes, but not for Canadian tax purposes.

That means that the payments are deductible payments for U.S.

purposes, but still dividends to Canadian shareholders. Under

the U.S.-Canada treaty, the payment is deductible by the U.S.

corporation and exempt from tax to Canadian shareholder. /46/

Congress took away this specific example of such planning in the

1997 act, but Congress prevented Treasury from acting against

another set of arrangements using hybrid Cheshire cat entities

in 1998. /47/ Any inconsistent treatment of an entity by U.S.

and foreign taxing authorities means that there will be

anomalies that can be exploited.

c. MIPS and Cheshire-cat debt. The optimal world for a

corporation is to be able to report a financial instrument as

debt for tax purposes, so that interest accrued is deductible,

while avoiding having the instrument treated as debt on the

balance sheet for nontax accounting or credit rating purposes.

The combination of debt for tax and equity for nontax is

irresistible, and it will grow to rule the world. /48/ The

specific lines of the tax and nontax treatment do not matter.

Any inconsistency can be exploited.

d. Artificial losses from allocations. The subchapter K

partnership rules often act as chemical plants creating

artificial tax losses and distilling them out for U.S.

corporations. A tax-exempt partner is allocated large amounts of

taxable income or gain. That yields lots of losses for the other

partner, a U.S. corporation. /49/ The U.S. losses are

artificial, far in excess of the cash the U.S. corporation has

ever invested or could lose. /50/ The variations on the idea are

infinite. For individuals, the passive activity limitations have

so far contained the use of artificial losses to manageable

bleeding, but large corporations are not subject to the section

469 passive activity limitations.

e. Astronomical basis. The contribution and redemption

rules often shift basis of one shareholder onto another. If one

shareholder is a foreign taxpayer who can get basis from taxable

income or gain without paying tax, then basis can be created for

the foreign shareholder and shifted to the U.S. corporate

shareholder. /51/ The losses are once again artificial, far in

excess of any cash the U.S. corporation has ever invested or

could lose, but denying the losses requires cutting through

the formal rules to the underlying economic substance.

f. Deducting debt repayments: step down preferred.

Repayment of principal is not supposed to generate a tax

deduction, but REITs get deductions for dividend distributions

and repayment of principal can be disguised as if it were just

an ordinary dividend. The REIT then has lots of deductions that

can shelter unrelated operating income. /52/

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The above sample is just one list of loophole schemes that have been found and publicized in the last few years. The sampled transactions are obviously just the tip of the iceberg. What about the deals that Lee Sheppard never heard about and never wrote about in Tax Notes? She can't have seen everything. Any fair sample of the budget-busting transactions would give a sound basis for paranoia. If the Treasury Department thinks that the soundness of the tax system is being tested every day by extraordinarily vicious and energetic enemies, that is not a misperception of reality.

40 It is also extraordinarily hard to see what screen for registration would catch all of the abuses in the sample while letting through only the correctly reported routine transactions. Treasury might ask on a registration form that taxpayers tell whether the transaction was reported differently to some foreign tax authority, or to some other agency of the U.S. government or on GAAP statements or credit ratings. Treasury might ask whether and when tax deductions exceed cash lost. Still, a broad overall net, such as the all-encompassing 'significant purpose to reduce tax' test, does seem to be needed to catch all of the budget-busting abuses. A precise definition of abuse or loophole is hopeless. Taxpayers would plan right around it, as the tide moves around a post. A net narrower than 'significant purpose' to reduce tax would miss some abuses and that is too bad for the country.

41 An automatic rule, like the significant purpose test, is also required by the procedural posture in which the scope of registration must be determined. Section 6111 requires the promoter to register or face penalties before there has been a judicial resolution of any issue. When the promoter is deciding whether to register or face penalties, there is no chance to make subtle distinctions as to what might be an abuse or a loophole. You cannot apply a sophisticated facts and circumstances test when there is no judge to make the determination. Congress adopted the automatic or semi-automatic significant-purpose rule test because it had to have a bright-line rule that could be applied and enforced on the basis of instructions on a tax return, but no judicial participation. A bright-line rule, as required by the procedural posture, does allow for exemptions or exceptions, but both the exemptions and the general rule for registrations must be stated as automatic rules.

42 Treasury has the authority to require registration whenever there is a confidentiality agreement and $100,000 fees, but there needs to be some exceptions for administrative convenience. If a taxpayer invests in vanilla municipal bonds, routinely tax-exempt under section 103, for example, the IRS could not deny the exemption and should not even try. No one buys tax-exempt bonds except to avoid tax. The pretax interest coupons a municipal bond gives are below the going interest rate so that no one buys them, except to reduce tax and maximize after-tax yield. The $100,000 fee level should work to filter out most of the routine, unchallengeable schemes, except that it will not always be clear whether the fee went for cutting edge tax advice or just for administrative or nontax issues. Still if it is clear beyond a shadow of a doubt that the transaction is unchallengeable, Treasury might as well save everybody the work of registration by issuing an exemption. If the tax advantages are clearly within the statutory mandate and Congress is unlikely to change the law, then the tax advantage is not an abuse under current law or under law that Congress might adopt and Treasury can exempt it from registration. Sometimes in a computer Key Word in Context search, the search generates too many hits and one has to refine the Key Word in Context search in midstream to stop so many false positives getting caught up in the search description. So Treasury can refine its registration questions, with experience, once it has studied what is out there. The way to handle the problem in regulations is to provide that the IRS may exempt future transactions from registration by Revenue Procedures issued from time to time.

43 Treasury and the IRS should, however, be very cautious in granting exemptions from registration. It is as hard to define what is not an abuse or not a loophole, as it is to define what is an abuse or a loophole. Until Treasury studies what it catches in the net, the variety of tax-avoidance schemes makes it difficult to see a priori whether it is an abuse. When you refine a Key Word in Context search, you do so to get rid of the chaff of irrelevant cases, but in narrowing the search some true gems are inevitably lost as well. Some section 351 transactions, for example, are above reproach and some are terrible shifting basis abuses in which the U.S. corporation ends up formally with a basis far in excess of any real investment. Some debt instruments are vanilla instruments, entitled to an interest deduction without question, and some instruments labeled 'debt' represent a new hybrid that will turn billions of dollars of corporate stock into debt. Even a municipal bond might seem to be a vanilla unchallengeable instrument at first glance, but turn out in fact to be a new budget-buster scheme to avoid the arbitrage bond or industrial development bond restrictions.

44 The regulations or early revenue procedures might well exempt transactions from registration if the taxpayers are seeking a private letter ruling: the private letter ruling process is probably sufficient in most cases to protect Treasury's interest. Treasury should, similarly, look kindly on claims for exemption from registration filed with a registration statement that explains the tax advantages. On the other hand, Treasury has no pressing administrative need to create big gaps in the net because Treasury will not be swamped with registration statements from section 6111(d). Promoters will avoid section 6111(d) if it matters, just by avoiding proprietary confidentiality agreements.

45 Opponents of the shelter registration rules have argued that registration might impede 'clearly permissible' tax minimization. /53/ 'Tax minimization,' however, is just a synonym for 'tax avoidance,' /54/ so that the statutory term 'tax avoidance' covers 'tax minimizations' completely. The statute defines both 'evasion' and 'avoidance' as a shelter and so on the face of the statute, some permissible tax reductions will be subject to registration. The registration remedy was designed so that Treasury would have a chance to find and close even those loopholes that are apparently available under a technical reading of current law. If a loophole is going to be a budget buster, Treasury needs to get a Distant Early Warning even if the loophole might comply with current law. One can also not tell whether an arrangement is 'clearly permissible' when registration must be decided, because the promoter must decide whether to register or face penalty long before the litigation over the legitimacy of the loophole has reached its final determination. The section 6111 preregistration also serves to give notice to the IRS even for some cases that the IRS is simply not going to win. Certainly if the registration in fact would make a difference to the outcome of any big-money dispute, because it lets the IRS understand the scheme and prepare for it, that is a pretty good reason for requiring the arrangement to be registered in advance.

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FOOTNOTES

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/1/ Section 6662(d)(2)(C) as amended by Taxpayer Relief Act of 1997, section 1028(c) (defining 'tax shelter' as a plan or arrangement for which a significant purpose is avoidance or evasion of any tax). Section references are to the Internal Revenue Code of 1986, as amended, and the regulations thereunder, except as otherwise noted.

/2/ Section 7525 added by the Internal Revenue Service Restructuring and Reform Act of 1998, section 3411.

/3/ Section 6111(d) added by the Taxpayer Relief Act of 1997, section 2014.

/4/ See, e.g., Harry Graham Balter, Tax Fraud and Evasion section 2.03, at 2-6 (1976) (saying that tax evasion connotes attempt to reduce tax by unlawful means, while avoidance connotes the 'same ends by lawful means.'); accord, Borris Bittker and Lawrence Lokken, 1 Federal Taxation of Income Estates and Gifts para. 4.3.2 (2d ed. 1989). See Randolph Paul, 'Restatement of Tax Avoidance,' Studies in Federal Taxation 104 (1937) (collecting numerous authorities to effect that tax avoidance by legal means is permissible).

/5/ See, e.g., Dodge v. Ford Motor Co., 204 Mich. 459, 507, 170 N.W. 668,684 (1919) (corporation is organized and carried on primarily for the profit of its shareholders); American Law Institute, Principles of Corporate Governance section 2.01 (1974) (objective of a corporation is to enhance corporate profit and shareholder gain).

/6/ Section 269(a) (acquisition made for the principal purpose of tax avoidance); section 269A (items from personal service company may be reallocated if the principal purpose of company was tax avoidance). The Taxpayer Relief Act of 1997, section 1028, replaced the phrase 'the principal purpose' with the phrase 'significant purpose' in section 6662(d)(2)(C)(iii) (accuracy-related penalties).

/7/ See, e.g., section 302(c)(2)(B) (redemption may be tested ignoring constructive ownership of shares in some circumstances if the acquisition was not made with 'one of the principal purposes' being avoidance of federal income tax), section 467(b)(4)(B) (landlord may be required to accrue rent if 'a principal purpose' of lease in which rent increased was tax deferral); Treas. reg. section 1.704-2(b) (1995) (antiabuse rules triggered by tax avoidance being 'a principal purpose').

/8/ James W. Pattillo, 'The Concept of Materiality in Financial Reporting' (Financial Executive Research Foundation 1976) (finding 5-10 percent to be a widely accepted rule of thumb to define materiality). But see Financial Accounting Standards Board, Statement of Concepts No. 2, paras. 123-137, 161-170 (1980) (emphasizing that materiality level depends on the context).

/9/ Lynch v. Commissioner, 273 F.2d 861, 972 (2d Cir. 1955) (step-transaction doctrine used to deny interest deduction on grounds debt was a sham).

/10/ Conference Committee Report, HR Conf. Rep. No. 105-599 at 89 (1998).

/11/ See, e.g., Blanchard v. Bergeron, 489 U.S. 87, 98-99 (1989) (Scalia, J., concurring.); Thompson v. Thompson, 484 U.S. 174, 192 (1987) (Scalia, J., concurring) (stating that legislative history is a 'frail substitute for a bicameral vote upon the text of a law and its presentment to the President'). See W. David Slawson, 'Legislative History and the Need to Bring Statutory Interpretation Under the Rule of Law,' 42 Stan. L. Rev. 383 (1992).

/12/ Accord, Frank Easterbrook & Larry R. Fischel, The Economic Structure of Corporate Law 38 (1991) (arguing that law should attach prices to social costs, while expecting managers to maximize the wealth of shareholders, instead of expecting managers to have mixed loyalties).

/13/ According to IRS figures the corporate tax gap was $33 billion in 1992. George Guttman, 'Increasing Voluntary Compliance to Over 90 Percent Is Unlikely,' Tax Notes, Apr. 11, 1994, p. 146 at 147.

/14/ U.S. Senate Budget Committee Majority Staff, Senate Budget Committee Estimates Tax Gap, Tax Notes, Feb. 13, 1995, p. 1000 (saying that there was a 50 percent growth in the corporate tax gap from 1981 to 1992, with large corporations identified as having a 79.2 percent increase compared with the 2.4 percent increase for small corporations.)

/15/ Martin Sullivan, 'Is Taxpayer Cheating Up or Down? Nobody Knows,' Tax Notes, June 2, 1997, p. 1177.

/16/ Joe Bankman, 'The New Market for Corporate Tax Shelters,' Ernst & Young Tax Policy Seminar at Georgetown Law Center (April 3, 1998), -- Tax L. Rev. -- (forthcoming 1999).

/17/ William J. Stuntz, 'Law and the Christian Story,' 78 First Things 28 (Dec. 1997) (The author begins the next paragraph saying 'I am, of course, exaggerating. After all, the IRS does manage to collect a lot of taxes.').

/18/ Section 6662(d)(2)(B)(i).

/19/ Section 6662(d)(2)(B)(ii).

/20/ Section 6662(d)(2)(C)(ii).

/21/ The classical formulation is Michael Allingham & Agnar Sandmo, 'Income Tax Evasion: A Theoretical Analysis,' J. of Pub. Econ. 325 (Nov. 1972).

/22/ Section 7525 added by the Internal Revenue Service Restructuring and Reform Act of 1998, section 3411(a).

/23/ Section 7525(b).

/24/ By reference to section 6662(2)(C)(iii).

/25/ Steve R. Johnson, 'Tax Advisor-Client Privilege: An Idea Whose Time Should Never Come,' Tax Notes, Feb. 23, 1998, p. 1041 at 1043.

/26/ Lee A. Sheppard, 'What Tax Advice Privilege?' Tax Notes, July 6, 1998, p. 9. /

/27/ See 'DOJ Seeks Reversal of Determination Allowing Attorney- Client Privilege,' Tax Notes, July 13, 1998, p. 205.

/28/ Section 7625(a)(2).

/29/ Accord, Paul R. Rice, 'The Tax Practitioner Privilege: A Sheep in Wolf's Clothing,' Tax Notes, Aug. 3, 1998, p. 617 (saying that the exceptions destroy the privilege).

/30/ Burgess Raby and William Raby, 'Work-Product Doctrine and the CPA,' Tax Notes, Mar. 9, 1998, p. 1289 at 1291, quoting a letter from one Calvin Johnson to the SEC saying that the SEC needs to intervene in the deliberations over section 7525 to protect the audit function. See letter, Calvin H. Johnson to Chairman Arthur Levitt (Feb. 5, 1998), 98 TNT 39-44, (arguing that if CPA firm begins to think of itself as business confidant it will cease to serve the investing public).

/31/ See, e.g. Fred C. Zacharias, 'Rethinking Confidentiality,' 74 Iowa L. Rev. 351 (1989) (arguing that empirical study implies that strict attorney-client confidentiality goes too far).

/32/ Section 6111(a).

/33/ See, e.g., U.S. Treasury Department, General Explanations of the Administration's Revenue Proposals, at 81 (February 1997). Accord, U.S. Treasury Department, General Explanations of the Administration's Revenue Proposals, at 116 (March 1996).

/34/ See Notice 97-21, 1997-11 IRB 9 (step-down preferred stock deals); Notice 95-53, 1995-2 C.B. 334 (lease stripping transactions); Notice 90-56, 1990-2 C.B. 344 (contingent payment installment sales); Notice 89-21, 1989-1 C.B. 651 (prepaid interest rate swaps).

/35/ Section 6111(c). Tax credits were translated into deduction of (assumed) equivalent value.

/36/ The penalty for failure to register a shelter falling under section 6111(d) is penalty equal to the greater of $10,000 or half of all the fees paid to all promoters of the tax shelter for offerings before the shelter is registered. If failure to file is intentional, then the penalty is raised to the greater of $10,000 or 75 percent of all fees paid before registration section 6707.

/37/ Section 6111(d)(2)(B).

/38/ Section 6111(d)(2)(A).

/39/ See, e.g, Edmund Kitch, 'The Nature and Function of the Patent System,' 20 J. of Law and Econ. 265 (1977); Richard A. Epstein, 'Luck,' 6 Social Phil. & Policy 17, 26-28 (1988). See Tom Bethell, The Noblest Triumph: Property and Prosperity Through the Ages (1998) (arguing that private property rights are the 'noblest triumph' and primary determinant of the wealth of nations).

/40/ American Bar Association, Center for Professional Responsibility, Model Rules of Professional Conduct (1995), Rule 1.6 (lawyer duty not to reveal client information).

/41/ The shelters of the 1970s and 1980s often had large amounts of income at the back end of the shelter, beyond the first five years of the shelter. At the front end of the shelter, an investor got deductions in excess of cash invested because deductions were based on the investor's deemed liabilities. At the back end of the shelter, the investor would have capital gain or ordinary income when the liabilities were satisfied or avoided. Still investors commonly underreported the gain -- by the back end all the accountants and lawyers had been fired -- and even more commonly, the promoter's projections ignored the back end results so that the investor did not think about them. The 2:1 ratio of tax deductions to cash invested in the first five years was thus not technically the real point at which tax benefits offset an invested dollar, but investors acted as if it were.

/42/ Section 6111(d)(1)(C).

/43/ Joseph Bankman, supra note 13, at 27 (suggesting raising the threshold to a $2,000,000 fee).

/44/ Evelyn F. Gregory, 27 B.T.A. 223 (1932), rev'd sub nom Gregory v. Helvering, 69 F.2d 809 (2d Cir. 1934), aff'd 293 U.S. 463 (1933).

/45/ See, e.g., David Stewart, et al., 'Extraordinary Dividends after TRA '97,' 25 J. of Corp. Taxation 252 (1998).

/46/ Taxpayer Relief Act of 1997, Pub. L. No. 105-34, section 1054 enacting section 894 to deny treaty benefits to certain payments through hybrid entities.

/47/ See Lee A. Sheppard, 'Notice 98-11 Withdrawal: Who Won?' Tax Notes, June 29, 1998, p. 1671. For other foreign tax credit schemes, see, e.g., James M Peaslee, 'Economic Substance Test Abused: Notice 98-5 and the Foreign Law Taxpayer Rule,' Tax Notes, Apr. 6, 1998, p. 79.

/48/ See, e.g, Edward D. Kleinbard, 'Lee Sheppard's Misguided Attacks on MIPS,' Tax Notes, June 8, 1998, p. 1365 at 1367 (stating that MIPS now represent a $90 billion market, and defending the tax deduction). See also John Reid, 'MIPS Besieged: Solutions in Search of a Problem,' Tax Notes, Dec. 1, 1997, p. 1057 (defending MIPS).

/49/ See, e.g, ACM Partnership v. Commissioner, T.C. Memo. 1997- 115, Doc 97-6453 (130 pages), 97 TNT 44-17 (large artificial gain from installment sale proration of basis rule was allocated to foreign partner yielded large artificial loss to U.S. corporate partner); Notice 90-56, 1990-2 C.B. 344 (similar contingent payment installment sales); Lee Sheppard, 'Hero of the Day: Laro Saves the Corporate Income Tax,' Tax Notes, Mar. 17, 1997, p. 1382 (giving Judge Laro credit for saving the corporate tax base in ACM Partnership); Lee A. Sheppard, 'Colgate and Merrill Lynch Will Fight ACM Decision,' Tax Notes, May 19, 1997, p. 887.

/50/ See Treas. reg. section 1.165-1(b) (1959) (providing that only bona fide loss is allowable and that substance and not form shall govern in determining a deductible loss).

/51/ See, e.g., Joseph Bankman, supra note 13, at 2 (describing scheme involving contribution of built-in loss property to domestic corporation); Lee A. Sheppard, 'Importation of Built-In Losses and Devolution,' Tax Notes, Apr. 13, 1998, p. 148 (explaining variations of artificial losses through overstated basis); Lee A. Sheppard, 'Treasury Battles Importation of Foreign Built-In Losses,' Tax Notes, Mar. 16, 1998, p. 1353; David Friedel, 'The Labyrinth of Section 304 and 1059 -- New Fictions Create Real Questions,' 89 J. of Taxation 79, 91 (Aug. 1998) (concluding that changes preclude most mischievous basis shifting).

/52/ Notice 97-21,1997-11 IRB 9 (preferred stock that left only immaterial amount after a normal debt term did not generate dividend deduction for a REIT). See Lee A. Sheppard, 'Treasury Steps on Step- Down Preferred,' Tax Notes, Mar. 3, 1997, p. 1102.

/53/ See Mark H. Ely and Evelyn Elgin, 'New Tax Shelter Penalties Target Most Tax Planning,' Tax Notes, Dec. 8, 1997, p. 1153.

/54/ See, e.g., Harry Graham Balter, Tax Fraud and Evasion section 2.01, at 2.1 (defining 'avoidance' as method to 'take advantage by lawful means of all the opportunities provided by present law for reducing or minimizing taxes.' (emphasis added)). See also authorities cited, supra note 4, to the effect that 'tax avoidance' by legal means is permissible.

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END OF FOOTNOTES

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