Paul L. Caron

Thursday, January 21, 2010

Lederman Presents Basketing and Corporate Tax Shelters Today at SMU

Lederman Leandra Lederman (Indiana-Bloomington) presents A Tisket, A Tasket: Basketing and Corporate Tax Shelters at SMU today as part of its Tax Policy Colloquium Series hosted by Christopher H. Hanna and Henry J. Lischer, Jr. Here is the abstract:

The U.S. federal income tax system requires individuals to basket a number of types of expenses and losses. Oddly, corporations taxed under Subchapter C of the Internal Revenue Code (Code) generally are not subject to many of the basketing restrictions that apply to individuals. Thus, corporations generally can deduct their passive investment expenses and losses from their active business income. That ability allowed infamous tax strategies such as the FLIP/OPIS basis shifting shelter and the CINS contingent installment sale shelter to be developed. The article proposes extending the passive/active distinction that already exists for individuals to the domestic corporate context. If corporations’ passive-source expenses and losses were required to be basketed with their passive income (such as income from interest; dividends; and rents and royalties, other than those produced by an active business), most abusive tax shelters involving financial products would not work. Thus, if adopted, the proposal would limit the prospects of future cloned tax shelters.

The paper also discusses possible objections to the proposal, including the possible complexity entailed in separating corporations’ active business income and losses from passive income and losses. Multi-national corporations are already required to do that sorting for several purposes. For example, the Passive Foreign Investment Company (PFIC) regime requires identification of a foreign corporation’s passive and active income (and assets) in order to determine whether the corporation is a PFIC, which subjects U.S. shareholders to anti-deferral tax rules. The distinction made by this and other regimes that draw on the same definitional Code section could readily be extended to the domestic context. The proposal thus would impose the minimum additional costs needed to eliminate the effectiveness of the most common and costly type of corporate tax shelter activity.

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