Taxpayer Wins Tax Shelter Penalty Issue

March 23, 2009

In a ruling that should give taxpayers hope, the United States Tax Court in Swanson v. Commissioner, T.C. Memo 2009-31 confirmed that the usual rules of penalty abatement law apply equally to coordinated tax shelter cases. The ruling is significant because in the past taxpayers have seldom won penalty abatement issues in coordinated tax shelter cases. Tax shelters are financial products that are generally marketed to high income individuals to generate losses to shelter income for that individual. A tax shelter becomes the target of a coordinated IRS audit effort when the IRS learns that the transaction is being marketed and the IRS determines that a significant purpose for the transaction is the avoidance or evasion of federal income tax. A common sense test for whether a transaction is a sham is whether the taxpayer would have made the business decision to engage in the transaction absent the tax benefits. If the IRS believes the answer to that question is “no” then, on audit, the IRS will disallow the tax benefits of the transaction as a sham and impose penalties to deter the taxpayer from future similar investments. View full story as a PDF below.

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