Share this story
Close X
Switch to Desktop Site

Shelters - good way to put off Uncle Sam - should begin soon

Whether your income is $20,000 or $200,000, you can counteract the heavy impact of taxes and at the same time reap substantial profits through ''sheltering'' it.

As the new year gets under way, now may well be the best time to invest in one of the wide variety of tax-shelter programs available on the market so you can get the advantages for a full year.

About these ads

Many tax shelters are perfectly legitimate and provide a method to accumulate a personal estate. Real estate ventures and energy-related exploration are viewed not only as popular shelters but also as a way to contribute to the expansion of the economy. It's the abusive shelters that sometimes empty investors' pockets and bring on investigations from the Internal Revenue Service.

Tax shelters have been called loopholes by those who disagree with them and tax incentives by those who favor their retention in the law.

But basically, a tax shelter ordinarily provides only a deferral of taxes - not an escape from taxation. It's an investment that generates virtually immediate tax deductions that, for a time at least, can reduce the investor's taxable income from other sources.

Someone with an income of $100,000 a year, for example, might decide to sink to perhaps $85,000. Since at least half of the $30,000 would have gone to the IRS had it not been sheltered, the investment really comes at half price.

Beware the pitfalls, however. Tax shelters are often both risky as investments and may be as likely to bring an IRS investigation as they are to lower taxes. For a person whose tax bracket is less than 50 percent, the tax savings generated by the deductions may not be great enough to justify the risk. A person's tax bracket is the percentage of each extra dollar of income that he or she would have to pay to the government in taxes.

Tax shelters have been around for a long time. Congress originally permitted them in such fields as natural resource exploration and development, housing construction, and equipment leasing, to encourage investments considered socially desirable but financially questionable. The rationale was that without the extra tax incentives, these ventures might seem so risky that few people would undertake them.

In the early 1960s, it became evident that a substantial market existed for tax shelters for people who had no way to avoid paying the full tax on their incomes.

About these ads

Reputable broker-dealers started to maintain tax shelter departments to sell limited partnerships in such ventures as real estate, oil and gas, and other investments. Accounting and legal firms began to advise clients on shelters.

Soon, not only the rich were investing in them. As inflation pushed people into higher tax brackets, shelters began to attract people of more moderate means, and now they are available to a broad range of wage earners who want to hold on to as much of their earnings as possible.

Today, tax shelters run the gamut from oil and gas wells to Bibles. The four main categories of tax shelters are oil and gas, real estate, agribusiness, and equipment leasing. Other common shelters - the so-called ''exotics'' - include cattle feeding and horse breeding operations, recordings, video games, artwork, gems, research and development, motion pictures, sports teams, railroad cars, and securities transactions. Each has its individual characteristics.

There are also quasi-tax shelters such as Keogh and individual retirement account (IRA) plans, salary reduction plans - plans that are not shelters as such but deferred annuities. They really come under the category of retirement planning and profit-sharing programs.

There had been some thought that the Reagan tax cuts would diminish the popularity of tax shelters, the thinking being that lower rates would make such investments less attractive. But despite the reduction of the top individual tax rate to 50 percent from 70 percent, and other cuts, the Economic Recovery Tax Act of 1981 actually spurred the real estate tax shelter boom by more than doubling the permitted rate of depreciation of real estate.

''In my experience people in the 50 percent tax bracket today are every bit as interested in saving taxes as were people who were in the 70 percent bracket in 1980,'' says Peter L. Faber, a tax lawyer in the Wall Street law firm Winthrop, Stimson, Putnam & Roberts.

And although certain kinds of shelters, such as those dealing with oil and gas, appear to have lost their allure during the recent recession, others - notably real estate - seem to hold as much attraction as before.

Measuring tax shelter activity is difficult. In fact, there is no formal definition of just which of a vast array of tax shelter activities should be regarded as shelters. At least one measure, however - the sale of registered limited partnerships - shows enormous growth.

Sales of limited partnership units grew at a record $14 billion in 1983 from

''What we refer to as 'tax shelters' aren't just tax shelters anymore,'' says tax shelter expert Robert A. Stanger, who publishes two monthly newsletters, The Stanger Report and The Stanger Register. But whatever they are called, he adds, they are continuing to sell well.

For every tax shelter there has to be a syndicator or promoter of some kind and an investor or group of investors. The approach to the investors, with some variations, usually works like this: The promoter issues a prospectus describing a particular investment. Typically, the prospectus emphasizes both the positive and negative aspects of investing in the venture. That accomplishes two objectives:

First, it protects the promoter from lawsuits if the venture turns out to be unsuccessful. Second, there is what Mr. Faber terms the ''forbidden fruit'' aspect. In deliberately playing down an investment the promoter actually attracts some people and gives the impression that facing high risk could bring high reward, Faber said.

The investor thinks, ''If I win, I win big.'' But, in fact, Faber notes, there often is high risk with little chance of any reward.

To his way of thinking there is no such thing as a tax shelter. There are only good and bad investments. A good investment can be enhanced if it results in tax reductions. A bad investment is just that.

Often, he says, it is hard for the investor to tell from the prospectus whether there is economic justification for the venture. Almost all prospectuses contain a lawyer's opinion, but the opinion addresses legal issues and not the underlying economics.

Caution is the watchword in dealing with shelters, tax experts warn. You should examine prospect-uses carefully. Individuals have jumped into shelters without researching them and have been fleeced by unscrupulous operators.

''Before investing, it's important to realize it is just that - an investment - and to analyze the pretax economics with a business adviser,'' cautions Edward B. Kostin, a tax partner in the Boston office of Coopers & Lybrand, the accounting firm. ''Then, you should carefully evaluate the quality of the business and the management, the risk-reward relationship, the tax costs and benefits, the cash return, and other financial and tax planning alternatives with an attorney and business adviser.''

Meanwhile, the IRS is becoming more aggressive in clamping down on ''abusive'' shelters. Under the recent tax law, the IRS can seek court injunctions to halt promotions claiming fraudulent tax savings.

Generally, the Internal Revenue Service puts priority on stopping deals that overstate the fair market value of assets by 300 percent or more, offer write-offs of more than $4 for each $1 of investment, or require a cash investment of less than 20 percent of the property's purported value.

Several newsletters evaluate tax shelters, as well as report on individual offerings. Among the top-rated letters in the shelter field are The Stanger Report and The Stanger Register, PO Box 8, Fair Haven, N.J. 07701, monthlies priced respectively at $325 and $200 a year; The Brennan Reports, PO Box 882, Valley Forge, Pa. 19482, a monthly newsletter available for $145 yearly; and The Investor's Tax Shelter Report, Investment Search Inc., 223 Duke of Gloucester, Annapolis, Md. 21401, priced at $95 annually.

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.