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Tax shelters have evoked an abundance of journalistic speculation, expert
commentary and legislative action, but surprisingly few litigated cases. The
paucity of litigation is especially odd, since shelters seem to generate business
losses almost as rapidly as tax deductions, especially for surgeons, orthodontists,
accountants, lawyers and other gullible folks. With so many tax shelters
in ruins, why have we not had a flood of tax cases contesting deficiency notices
based on the theory that the unpaid balance of an investor's nonrecourse
debt is an "amount realized" on a foreclosure, abandonment or similar event?
Knowledgeable practitioners to whom I have put this question in recent
months have not been able to explain the dearth of deficiency notices and
lawsuits, but some have suggested that taxpayers may "forget" when a venture
collapses that the Internal Revenue Service is interested in the fact that their
tax deductions in prior years exceeded their cash outlays. In fact, taxpayers
who prepare their own returns may neglect to report gains when a tax shelter
collapses even if they have excellent memories. After all, the notion that a
business failure can produce taxable income is counter-intuitive, and so is
the idea that investors benefit when they are "relieved" of nonrecourse debt.
Tax experts can entertain both ideas with equanimity, to be sure, but we
listen to a different drummer.
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