Raining on Tax Shelters

As treasury Secretary Lawrence Summers acknowledged, taxpayers are expected to pay the minimum they legally can. But they shouldn't be allowed to twist the tax code to avoid that minimum.

Mr. Summers is convinced that's what many corporate income-taxpayers are doing - using ever more elaborate "tax shelters" to avoid paying their fair share. He points to declining tax revenue from companies, even as profits climb. Last year corporate tax receipts were down 2 percent. Revenue from individuals, by contrast, was up 6.2 percent.

The secretary estimates that at least $10 billion a year is diverted from the federal Treasury by a bewildering array of dubious tax shelters. Some involve shifting profits to foreign partners that aren't subject to US taxes; others have involved manipulating loans or insurance policies.

Creating shelters is an industry in itself. Tax accountants compete to come up with new ones that can be profitably marketed to businesses. Is their use illegal, or just shrewd?

It all depends. When the Internal Revenue Service spots a questionable tax shelter, it takes the company using it to court. Recent rulings have gone against such prominent defendants as United Parcel Service, Compaq computers, and the Winn-Dixie grocery chain. The standard for finding a shelter illegitimate is whether its primary intent is to avoid taxes, without any other economic purpose or rationale.

Summers would like that standard written into federal law. Meanwhile, he's taking administrative steps, such as requiring firms that devise tax shelters to tell the IRS what they're doing. He's also forming a special IRS team to concentrate on shelters.

All this is in the name of protecting the integrity of the tax system - a legitimate concern, since the proliferation of corporate tax shelters can't help but offend the average taxpayer's sense of fairness.

Summers's antishelter move is needed as a check on tax avoidance. But his effort to crack down begs another question: What's one to make of a tax code that so readily spawns elaborate tax shelters?

While the code may never become simple, it should at least be made less complex and thus less exploitable.

(c) Copyright 2000. The Christian Science Publishing Society

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