WSJ: IRS Is Winning the Tax Shelter War

Interesting front-page article in today's Wall Street Journal:  U.S. Scores a Win Against Tax-Shelter Abuse, by David Wessel:

The [Castle Harbour] ruling is the latest in a series of appellate-court wins in corporate tax-shelter cases for the IRS and Justice Department as they continue to battle corporate excesses of the 1990s. The government recently has prevailed over Dow Chemical, Coltec Industries and Black & Decker in decisions that are, or should be, scrutinized by executives pondering the wisdom of overly creative tax shelters.

With the perspective that comes from moving between representing the IRS and representing companies over a 30-year career as a tax lawyer, IRS Chief Counsel Donald Korb says the wind is shifting in the government's direction now, as it often does after a period in which taxpayers go too far.... "The widespread use of computers and the exotica of modern corporate finance, coupled with the desire of the Big Six public accounting firms, investment bankers and some law firms to generate revenues not based on traditional billable hours, but instead based on...fees, led to a new phenomenon, commonly called corporate tax shelters," Mr. Korb observed in a recent lecture. Tax cops were outmanned and outmaneuvered. Congress was beating up on the IRS in the 1990s as too tough on taxpayers. And, as we know now, an anything-goes attitude prevailed in many corporate boardrooms with too many lawyers and accountants becoming accomplices instead of obstacles....

William Nelson of McKee & Nelson, ... who did a stint in the 1980s as chief IRS counsel, says "The tax law is undergoing a recalibration. The courts are all over the lot. There is a lot of confusion...and lack of consistency."

But when the courts, for whatever reasons, come down on the side of the IRS repeatedly, a lot of corporate executives, tax lawyers and accountants grow wary -- at least for a while -- about tax shelters that stretch the laws beyond recognition. Some stories have happy endings.