Abusive tax shelters more prevalent than ever?

Well, it's sort of like the late 1970's-early 1980's, but MUCH more complicated. I was a state income tax auditor (California Franchise Tax Board) from 1975 to 1982, and we were just starting to get a handle on some of the tax shelter arrangements that were rampant in the mid to late

1970s as we were auditing those returns. A lot of them took advantage of the fact that limited partners, in those pre-1986-Act days, were able to use nonrecourse debt as basis for deducting losses. So assets were purchased at inflated prices, financed by nonrecourse loans, and sometimes the taxpayer was able to get tax benefits in the first year way in excess of their actual cash investment in the limited partnership. After that nobody cared what happened to the asset itself (real estate, movies, etc.) and when it was sold the partners would claim a big loss. (Ironically enough, some of the real estate shelters turned out to be good deals in the end if the partnership hung on to the property long enough.) The "at risk" rules and passive loss and credit limitations of the 1986 Act put a stop to most of those structures. Modern tax shelter transactions are MUCH more complex. There are a bunch of IRS Notices and Revenue Rulings describing them. If you go into the IRS web site and search on "abusive tax avoidance transactions" you will get a lot of references. One you might look at is the one called "Son of Boss," which is described in Notice 2000-44 Butthat's just one example. Trying to read the descriptions ofthese transactions always makes my head ache. Katie in San Diego

But the cancellation of the non-recourse debt would cause taxable phantom income. I'm told that the usual method of handling that was for the tax(not-)payer to change accountants. Seth