The Problem of Corporate Tax Shelters: Uncertain Dimensions, Unwise Approaches

Abstract

This paper analyzes the apparent book-tax consequences of the transactions involved in Compaq Computer Corp. v. Comm'r., IES Indus. v. U.S., and United Parcel Service of America, Inc. v. Comm'r. My review suggests that existing measures of a book-tax disparity are too crude to capture the book-tax effects of these and other corporate tax shelters. Thus, even if shelters are proliferating and causing ever greater discrepancies between financial and tax reporting, existing methods of analysis may not permit us to perceive the existence of such trends. This examination illustrates the extraordinary difficulty of understanding the true dimensions of a corporate tax shelter problem.

The paper also briefly considers some of the doctrinal implications of the three cases. In general, the government's aggressive litigation strategy in those cases has left its "economic substance" and "business purpose" doctrines in shambles. We now have less understanding of when those doctrines should apply and what they mean when they do. I argue that tools such as economic substance and business purpose should be reserved to combat transactions that are more unambiguously objectionable than the ones involved in those cases.