Industry News - Regulatory Updates
April 25, 2012
IRS loses tax shelter case before Supreme Court
The U.S. Supreme Court recently ruled that the Internal Revenue Service could not continue to pursue the collection of back taxes from a business which the agency considered a tax shelter, on the grounds that the extended six-year statute of limitations did not apply.
This may impact a number of other cases being brought against similar tax shelters, obliging the IRS to recognize the three-year statute of limitations as applicable. The amount of tax revenue which may be affected by the ruling is around $1 billion, according to Reuters. Multiple cases at the appeals court level have given rise to contradictory rulings prior to this decision.
The IRS argued that the extra time is necessary, because these particular tax shelters can be difficult to detect. The ruling may also impact other types of tax shelters, Bloomberg notes. These particular financial strategies involve artificially inflating the cost-basis of assets so that the capital gains claimed upon sale can be minimized or eliminated, effectively hiding profits.
Although the court ruled against the IRS, the decision was split five to four. With the decision made, however, the IRS may find its ability to pursue users of certain tax shelters limited. Given the ties to capital gains, this could have an impact on action taken against day traders and other investors in the future.