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RELATED ARTICLE: Abusive Tax Shelter Disclosure and Control
The basic concept is presented in the example below, which illustrates the potential results of tax shelters that were available to investors before the enactment of legislation designed to curb the use of these shelters.
In a decision released shortly after the Tax Court's decision in the Countryside case, the Seventh Circuit in Valero upheld the district court's order, rejecting Valero's claim that the tax shelter exception to the tax practitioner/client privilege did not apply to the documents in question.
Any person who organizes and sells potentially abusive tax shelters is required to maintain a list identifying each person who purchases an interest in any such tax shelter, along with any additional information required by the IRS.
Schallheim and Wells (2006) measure nondebt tax shields based on the difference between taxes paid and financial statement tax expense in an attempt to capture the effect of "off financial statement" deductions such as accelerated depreciation, stock option deductions, tax shelters, and the like.
At the time, the IRS was investigating more than 100 tax shelter promoters, including accounting firms, law firms, and financial institutions.
Although perhaps not usually thought of as a tax shelter, contributing to an RRSP is, in fact, the best known and most popular tax shelter.
The new regulations also apply to providers of tax shelter plans.
The Canadian financial community became aware of the industry and sensitive to the possibilities of tax shelter as an attractive vehicle for wealthy individuals and corporations.
* Legislation in 2004 created significant new penalties for the failure to disclose a reportable tax shelter transaction and for an understatement of tax related to a tax shelter transaction.
The Franchise Tax Board will follow the IRS tax shelter settlement initiative as outlined in IRS Announcement 2005-80, effectively creating the California Tax Shelter Resolution Initiative to run alongside the federal initiative.