Shelter for Shelters? The IRS may not like 'em-but the courts don't seem to mind.

While business owners may be encouraged by two recent courtdecisions that overturned Washington's drive to crack down onabusive tax shelters, experts say they shouldn't be tooencouraged. That's because these defeats may prompt Congress totake legislative steps against shelters, says Thomas P.Ochsenschlager of accounting firm Grant Thornton LLP.

In one case, a federal appeals court rejected the U.S. TaxCourt's opinion that UPS used a sham insurance policy to avoidpaying millions of dollars in corporate income taxes. (Transactionswhose only purpose is to avoid the payment of taxes are considered"shams.") In the other case, a court of appealsoverturned a federal district court ruling that IES Industries Inc.took part in sham stock trading to keep from paying nearly $100million in taxes.

Until these decisions, the IRS was winning major legal victorieslimiting the use of tax shelters. But that trend may be reversing."These cases indicate the courts might be relaxing their viewof what is economic substance and business purpose," says MarkLuscombe, principal federal tax analyst with CCH Inc., a providerof tax and business law information. In the IES case, saysLuscombe, the appeals court found "that some risk of loss,even if it is a small risk, might be enough to support the economicsubstance of a transaction."

Despite these decisions, however, the pendulum has not swungentirely back in the direction of companies. As Congress searchesfor revenue to pay for tax relief for businesses, lawmakers mayturn their attention to abusive tax shelters. Says Ochsenschlager:"Politically speaking, [tax shelters] are one of the easiestsources of revenue now."

Contact Sources

• CCH Inc.
  www.tax.cch.com
• Grant Thornton LLP
  1900 M St., #300, Washington, DC 20036, tochsenschlager@GT.com