Tax shelter scam repeat unlikely, but dangers remain. Prominent investors not charged; still owe taxes, penalties
New York — It is one of the largest tax shelter scams. Three men were indicted here Wednesday in a scheme that duped Hollywood stars, prominent business figures, and a high-ranking United States official, allege federal prosecuters. Could it happen again? ``No,'' say most tax experts.
``The high write-off shelter is basically dead - the benefits are disappearing,'' says Fuhrman Nettles, vice-president of the Stanger Register, a Shrewsbury, N.J., partnership research firm.
The Tax Reform Act of 1986 is phasing out most tax shelters by preventing investors from reducing their stated income by applying losses from partnerships. ``The tax bill killed tax shelters,'' says Christopher Davis, president of the Investment Partnership Association.
But loopholes remain. And con artists are using them.
``One of the myths of the land is that tax shelters are gone as of Jan. 1,'' says Bill McDonald, assistant commissioner of enforcement at the California Department of Corporations.
The Internal Revenue Service has 425,000 income tax returns under investigation now for abusive tax shelter deductions. Thirty percent are from California.
``We have 100 tax shelter fraud cases open in this department now. It's a constant priority,'' Mr. McDonald says.
McDonald is concerned that five tax shelters which are still allowed by the Tax Reform Act will be ``very active areas of abuse.''
Energy investment tax credits for solar, biomass, geothermal, wind, and ocean development projects. McDonald's office recently got an injunction against a California firm that had collected $90 million from 3,000 investors buying ``solar modules.''
The devices were supposed to generate electricity that was sold back to the electric utility companies. State officials charge that the modules did nothing at all.
Investment tax credits, which allowed companies deductions for major equipment or buildings purchases. But McDonald says the long transition period in the rules creates opportunities for abuse.
Oil and gas limited partnerships fall under the ``passive'' category in the new tax law, but ``working interest general partnerships'' do not.
Such partnerships are meant to give people who are actively involved in the operation, and exposed to all liabilities, a tax shelter. But McDonald contends this category is being used to sell ``purely fictitious'' general partnership shelters.
Accelerated depreciation is still granted on films, videotape, and record production, as well as race horses, aircraft, and semiconductors.
Up to $25,000 in tax credits is still given for rehabilitating historical buildings, low-income housing projects, and research and development. McDonald's department just brought a case against Marlin Industries, a Los Angeles firm that sold 18 limited partnerships for $45 million to reconstruct landmark buildings. ``Almost none of the money went into the buildings,'' claims McDonald.
``Tax shelter fraud is going to be with us as long as the tax code allows these write-offs. And as long as people perceive that they're paying too much while others have a special shelter,,'' argues McDonald. He adds, ``Both the IRS and the states will continue to have to devote substantial resources to the problem.'' McDonald is slated to testify in a Senate hearing on the IRS budget next month.
There are clues that individual investors can look for that may indicate a crooked deal, says Mr. Nettles at the Stanger Register.
For example, ask for a prospectus before buying anything. Then check the legal opinion section in the prospectus. ``After each subsection in this 60- or 70-page section, there should be a statement to the effect that more likely than not, the government will permit this write-off,'' says Nettles.
If the lawyers simply state that the figures provided have been reviewed, but no opinion given, then the investment may be suspect.
Also, any shelter offering more than a $2 loss for every $1 invested in any of the first five years must be registered with the US Treasury Department. ``If a partnership offers $2,000, $3,000 or more, ask for their registration number. And call the Treasury to check it,'' Nettles advises.
The IRS tax shelter rules and penalties have been stiffened since the three promoters indicted this week lured prominent personalities with returns of $4 for every $1, which was not uncommonly high at the time.
The three, including Charles A. Atkins, who once wowed Wall Street with his tax-shelter savvy, allegedly sold limited partnerships from 1978 through 1983. They ran a government securities trading operation that generated more than $1.3 billion in bogus losses by faking their trades.
As a result, Mr. Atkins's partnerships - more than 100 were sold - provided tax write-offs ranging from $300,000 to $4 million for such prominent people as Laurence A. Tisch, head of CBS Inc.; investment banker Michael-David Weill; actors Sidney Poitier, Lorne Greene, and Michael Landon; and William R. Salomon, former managing partner of the Salomon Brothers brokerage firm.
No criminal charges were lodged against the these investors, but they will have to refigure their tax bills without the deductions, plus pay interest and possibly penalties.