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Irs targets 3shelters { October 5 2002 }

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IRS Targets 3 Types of Tax Shelter
Participants Are Given Deadlines for Settlement

By a Washington Post Staff Writer
Saturday, October 5, 2002; Page E01

The Internal Revenue Service issued an ultimatum to participants in three types of tax shelters yesterday, giving them until roughly the end of the year to come in and work out a settlement or face the government in court.

Such settlements will require the shelter participants to pay what the IRS called "significant amounts of tax, plus interest," but "both the government and the taxpayers will avoid expensive litigation on these issues," the agency said.

The initiative involves hundreds of taxpayers and billions of dollars in lost revenue to the government, IRS officials said.

The announcement is part of the agency's continuing effort to shut down the largest and most expensive tax shelters, especially those marketed by promoters who package them and sell them to both individuals and corporations. However, IRS Commissioner Charles O. Rossotti, in a report to the IRS Oversight Board last month, noted that the agency is finding it difficult to keep up as shelters become increasingly sophisticated and both the tax law and the economy grow more complex.

The agency has a mixed record challenging the shelters in court.

"This effort is a way to resolve cases without months or years of costly litigation while making it clear to taxpayers who may consider participating in abusive tax shelters in the future that they will end up in a bad deal," Rossotti said in a statement. "It is not smart business to rely on the claims of promoters who stand to gain fees by selling these deals."

The three shelters, all highly complicated, are:

Broad-based, leveraged corporate-owned life insurance, or COLI, in which companies take out life insurance on their rank-and-file workers, borrow against the policy, deduct the interest and then keep tax-free death benefits. This one has been struck down by the courts.

Section 351 contingent-liability shelters, in which, through the exchange of stock, assets and liabilities, affiliated companies can manage to deduct the liabilities twice.

Section 302 basis-shifting shelters, in which a taxpayer with a large capital gain uses a series of stock and option transactions with non-taxpayers, such as foreign banks and companies, to create a paper loss approximately equal to his gain.

"The complexity of the issues covered by the settlement initiatives today illustrates again the importance of simplifying the tax law. We must eliminate the shadows in which those who would avoid tax can hide," said Pam Olson, assistant Treasury secretary for tax policy.

The IRS identified the basis-shifting and the contingent-liability shelters as improper last year but had not offered to settle them before. The agency said yesterday that taxpayers in basis-shifting transactions will have until Dec. 3 to notify the IRS that they will seek a settlement. Those in contingent liability transactions will have until Jan. 2 to apply.

The IRS has been offering COLI participants a settlement since August 2001 but will be withdrawing that offer in 45 days.

In some cases, the IRS indicated, it will allow the taxpayers to keep a portion, perhaps 20 percent, of the tax benefits it has obtained through the shelter.

2002 The Washington Post Company

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