Gimme (tax) Shelter

Gimme Shelter is, of course, one of the classic songs by The Rolling Stones, and it first appeared as the opening track on the band’s 1969 album Let It Bleed.

The song was written in the context of the cultural turmoil of the 1960s, e.g., the Vietnam War, and the lyrics speak of seeking shelter from a coming storm.

Oh, a storm is threat’ning,
My very life today;
If I don’t get some shelter,
Oh yeah, I’m gonna fade away

Gimme Shelter was needed all too soon on December 6, 1969 documented in the 1970 film of the same name directed by Albert and David Maysles and Charlotte Zwerin. The documentary chronicled The Rolling Stones’ 1969 US tour, which culminated in the disastrous Altamont Free Concert at which the above picture of Mick Jagger was taken.

The song and the film were also indicative of the long and sometimes inglorious history of tax shelters. During this time, the top tax brackets in the U.S. was extremely high, 70%; and there was a growing trend towards marketing and packaging tax shelters for the middle class. In Rolling Stones terms, Gimme Tax Shelter.

There is nothing inherently wrong with tax shelters which are methods to reduce taxable income, e.g. qualified retirement plans. But human nature being human nature, “abusive tax shelters” (defined by the IRS as transactions promoted for the promise of tax benefits with no meaningful change in a taxpayer’s income or assets) appeared in every increasing numbers.

Generally, the IRS has found several forms of abusive tax shelters such as the use of multiple layers of domestic and foreign pass-through entities such as Trusts, Partnerships, S-Corporations, and Limited Liability Companies. The cost of adverse tax consequences resulting from an abusive tax transaction can be significant.

And, oh yes, certain forms of qualified retirement plans have been classified as such by the IRS. In the late 1990s, for example, some fully insured defined benefit pension plans permitted by Section 412(i) of the Internal Revenue Code were funded by life insurance policies with “springing cash values”.

These policies had no cash value for the first 5-7 years, after which they had significant cash value. Just before the cash value sprung, the participant would purchase the policy from the plan for the policy’s surrender value, zero. The objective was create a tax free transaction. The fallout – both financial and legal – from these types of retirement plans continues.

I wrote about the newest form of supercharged retirement plan in one of my weekly columns for my other blog home, Slate’s BizBox blog, How To Buy A Business…Maybe, Maybe Not. It’s supposed to work something like this. A new business owner rolls his account from his former employer’s plan into his new retirement plan, and then uses the funds to buy stock in his new company.

Thus, the new business is capitalized with tax-deferred money. If it sounds too good to be true, it may very well be. It’s one of the transactions right on the IRS’s radar screen for abusive tax schemes. The IRS calls these transactions ROBS, rollover for business start-ups, so you kind of get the drift of their view.

For the technical details, here are two links.

  • The October 1, 2008 memorandum that Michael D. Julianelle, IRS Director of Employee Plans, penned. The memo alerts IRS agents performing audit reviews and determination letter approvals to study each of these transactions on a case-by-case basis.
  • McKay Hochman provides an excellent discussion of the retirement plan issues in their recent Email Alert, Rollovers for Business Start-ups (ROBS).

So what to do before committing money to any tax shelter? Attorney Susan Berson writes that some of the questions the IRS will ask about the tax shelter are the same ones you should ask before investing. Susan is a Partner in the boutique law firm, The Banking and Law Group, LLC, specializing in banking law, tax litigation, business law and mediation services.

Not much I can add to what Susan, formerly a senior trial attorney with the United States Department of Justice Tax Division in Washington, D.C., can say except this:

It’s worth the time and money to seek an opinion with a tax advisor not associated with the transaction. The cost of adverse tax consequences resulting from an abusive tax transaction can be significant.

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