IRS Declares No Statute of Limitations on Tax Shelters

By Jeff Winland, tax partner

The Chief Counsel of the IRS in a very recent Advice, (CCA) #201531019, has concluded that there is no tolling of the statute of limitations period in the case of a tax shelter which fails to register for a Tax Shelter Registration Number. According to the Chief Counsel, the IRS is unable to investigate tax shelter schemes in a timely manner to determine whether proper tax is being paid to the IRS if promoters do not timely inform the IRS of the shelters being promoted. Again, according to the IRS, they would have to obtain this information through “burdensome administrative and judicial proceedings.”

This determination is important for real estate partnerships because they may trigger the definition of a tax shelter and will have to register accordingly. A tax shelter is any investment that meets the following two requirements:

1. “The investment must be one with respect to which the person could reasonably infer, from the representations made or to be made in connection with any offer for sale of any interest in the investment, that the tax shelter ratio for any investor may be greater than 2 to 1 as of the close of any of the first 5 years ending after the date on which the investment is offered for sale.” [1]
   • The tax shelter ratio is defined as: “…with respect to any year, the ratio that the aggregate amount of deductions and 200 percent of the credits that are or will be represented as potentially allowable to an investor under subtitle A of the Internal Revenue Code for all periods up to (and including) the close of such year, bears to the investment base for such investor as of the close of such year.”
2. “The investment must be (i) required to be registered under a federal or state law regulating securities, (ii) sold pursuant to an exemption from registration requiring the filing of a notice with a federal or state agency regulating the offering or sale of securities, or (iii) a substantial investment.”
   • A substantial investment is defined as where: “…the aggregate amount that may be offered for sale to all investors exceeds $250,000 and 5 or more investors are expected.”

For real estate partnerships that are within the first five years of their existence that meet the substantial investment test, a tax shelter ratio calculation will have to be performed annually to see if they may be required to register as a tax shelter. Based on CCA #201531019, the consequences of a failure to do so could be devastating. The IRS would have an unlimited time period to commence an examination. [2]

For questions or more information, contact Jeff Winland at jeff.winland@aprio.com or 770-353-3108.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

[1] All quotations are from the IRS.

[2] An additional source for this article can be found here.