Tax Shelter Opinions Threatened the Tax System in the 1970s

By Dennis J. Ventry Jr. Dennis J. Ventry Jr. is a visiting scholar in taxation at the UCLA School of Law and an assistant professor of law at the American University Washington College of Law (beginning fall 2006). Copyright 2006 Dennis J. Ventry Jr. All rights reserved. In early 1980 the IRS reported that tax shelter activity was threatening the tax system. The tax shelter industry was bilking the government out of billions of dollars in revenue, overloading the court system, and undermining the voluntary nature of the U.S. federal income tax. IRS Commissioner Jerome Kurtz told the Institute on Federal Taxation at the University of Southern California in January 1980 that abusive tax shelters amounted to a tax administration problem ‘‘of major proportions.’’ 1 Nearly 200,000 individual returns representing 18,000 shelter schemes were clogging the examination and appeals process. Those returns, Kurtz said, involved almost $5 billion ‘‘in questionable deductions.’’ 2 IRS emissaries spread similar messages. Robert Mundheim, Treasury’s general counsel, told a group of securities lawyers in January 1980 of the growing administrative burden asso- ciated with abusive shelters, calling it ‘‘one of IRS’ most serious compliance problems.’’ 3 Turning to the backlog of court cases, tax shelters accounted for more of the in- creased caseload of the U.S. Tax Court than any other kind of controversy. From 1980 through 1982, tax shelter cases tripled in number from 5,000 to more than 15,000, representing approximately one-third of the entire Tax Jerome Kurtz, ‘‘Kurtz on ‘Abusive Tax Shelters,’’’ Tax Notes, Feb. 18, 1980, p. 213. Id. By September 1980 Treasury had identified another 7,000 shelter schemes, and the total lost revenue from abusive tax shelters had exceeded $5 billion. See Proposed Amendments, Tax Shelters; Practice Before the Internal Revenue Service, 45 Fed. Reg. 58,594 (Sept. 4, 1980) at supplementary information. Robert H. Mundheim, ‘‘Mundheim on ‘Abusive Tax Shel- ters,’’’ Tax Notes, Feb. 18, 1980, p. 213. TAX NOTES, May 22, 2006 Court docket. 4 ‘‘The great abuse we are finding in this area,’’ Kurtz warned, ‘‘could result in a serious decline in taxpayers’ perception of the fairness and evenhanded- ness of our administration of the tax system and conse- quently in the level of voluntary compliance.’’ 5 Mund- heim shared similar fears, saying that the ‘‘widespread nature’’ of tax shelters ‘‘undermines the public’s confi- dence in the fairness of the tax system’’ and ultimately ‘‘may affect the level of voluntary compliance.’’ 6 Tax lawyers were complicit in the proliferation of tax shelters. Their written tax opinions legitimized question- able schemes, protected investors from fraud penalties, and encouraged taxpayers to participate in transactions that were likely to be disallowed if challenged. ‘‘At a minimum,’’ Mundheim explained, ‘‘the tax opinion is viewed as fraud insurance’’ whereby ‘‘the investor is protected against loss’’ with respect to statutory fraud penalties. 7 Kurtz believed that the penalties themselves needed to be strengthened and that that was a job for In September 1982, 15,105 tax shelter cases were included on a docket of 50,968 cases. New York State Bar Association (NYSBA) Tax Section, ‘‘Managing the Tax Court Docket,’’ 85 TNT 146-93 (July 24, 1985). Kurtz, supra note 1, at 213. That was not the first time Kurtz connected tax shelter activity to tax equity and voluntary compliance. See, e.g., Kurtz, ‘‘Remarks to the American Institute of Certified Public Accountants,’’ 103 Daily Tax Report J-3 (May 26, 1977); ‘‘Kurtz Outlines Service Attack on Tax Shelters,’’ Tax Notes, Nov. 7, 1977, p. 24. Mundheim, supra note 3, at 213. Commentators saw a similar relationship between tax shelter activity and reductions in voluntary compliance writ large. See James B. Lewis, ‘‘The Treasury’s Latest Attack on Tax Shelters,’’ Tax Notes, Oct. 13, 1980, p. 723 (tax shelters produce ‘‘impairment to the fairness of the income tax, the perception of unfairness by the rest of the taxpaying public, and the feared adverse impact on the level and temper of voluntary compliance’’). But see John Andre LeDuc, ‘‘The Legislative Response of the 97th Congress to Tax Shelters, the Audit Lottery, and Other Forms of Intentional or Reckless Noncompliance,’’ Tax Notes, Jan. 31, 1983, p. 363 at 366 (questioning the theory that the perceived inequity of tax shelters leads to an across-the-board decline in voluntary com- pliance rates). Some commentators challenged the very notion of the U.S. federal income tax as a voluntary tax. ‘‘There is a myth,’’ Henry Sellin wrote, ‘‘nurtured by a long series of Commissioners of Internal Revenue, that ours is a self-assessing system.’’ Sellin, ‘‘Professional Responsibility of the Tax Practi- tioner,’’ 52 Taxes 584 (October 1974). Judge Learned Hand called taxes ‘‘enforced exactions, not voluntary contributions. To de- mand more in the name of morals is mere cant.’’ Commissioner v. Newman, 159 F.2d 848, 851 (2d Cir. 1947). Mundheim, quoted in Laurence Goldfein and Stanley Weiss, ‘‘An Analysis of the Proposed Changes Under Circular 230 Affecting Tax Shelter Opinions,’’ 53 Journal of Taxation 340, 345 (December 1980). (C) Tax Analysts 2006. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. Tax Shelter Opinions Threatened The Tax System in the 1970s