Tax Avoidance Flashcards
How may taxpayers structure their affairs?
Taxpayers may arrange their affairs in a way to result in the least amount of tax possible, there is no duty to do otherwise.
What is tax avoidance?
structuring your affairs to pay least amount of tax, generally by falling in line with the intent of the tax law. This is legally allowed.
What is tax evasion?
Intentionally structuring affairs in ways that is either explicitly not allowed or has no basis in the Code, generally less than a “reasonable basis” for the position.
○ Is illegal (criminal) and can land you in jail.
○ If there is dishonesty involved, it is likely evasion. Flat out lie about the circumstances.
What is a tax shelter?
an investment that is unrelated to a taxpayer’s normal trade or business and is certain to produce a tax loss but is not expected to produce a commensurate (or perhaps any) economic loss.
What are the 5 categories of avoidance and what do they mean?
- Deferral - pushing income into the future by incurring costs that are currently deductible and receiving the corresponding return from the investment in some future year.
- Conversion - converting ordinary income into tax-favored income, such as capital gain.
- Arbitrage - incurring expenses that are deductible in order to generate income that is tax favored, thus creating a tax loss in excess of any economic loss.
- Shift -
- Loopholes - application of the Code that Congress did not contemplate or intend to incentivize.
What is a “passive activity loss” and how is it deducted?
Loss on an investment that constitutes a trade or business and in which the taxpayer does not “materially participate.”
§ 469 - limits deductions on passive activity loss. Passive investment losses are restricted to offset other passive investment income. Cannot be used to offset ordinary income.
What is the limitation on interest deductions for investments?
Interest deductions for investments are limited to the amount invested during that tax year.
What is the general rule for sale and leaseback transactions?
The parties must be able to establish good business reasons for a transaction other than the tax savings.
