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Tax Shelters, Nonrecourse Debt, and the Crane Case
Bittker, Boris
Bittker, Boris
Abstract
Tax shelters have evoked an abundance of journalistic speculation, expert commentary and legislative action, but surprisingly few litigated cases. The paucity of litigation is especially odd, since shelters seem to generate business losses almost as rapidly as tax deductions, especially for surgeons, orthodontists, accountants, lawyers and other gullible folks. With so many tax shelters in ruins, why have we not had a flood of tax cases contesting deficiency notices based on the theory that the unpaid balance of an investor's nonrecourse debt is an "amount realized" on a foreclosure, abandonment or similar event? Knowledgeable practitioners to whom I have put this question in recent months have not been able to explain the dearth of deficiency notices and lawsuits, but some have suggested that taxpayers may "forget" when a venture collapses that the Internal Revenue Service is interested in the fact that their tax deductions in prior years exceeded their cash outlays. In fact, taxpayers who prepare their own returns may neglect to report gains when a tax shelter collapses even if they have excellent memories. After all, the notion that a business failure can produce taxable income is counter-intuitive, and so is the idea that investors benefit when they are "relieved" of nonrecourse debt. Tax experts can entertain both ideas with equanimity, to be sure, but we listen to a different drummer.