Pitfalls and Traps of Tax Reform

The Tax Reform Act of 1976 was the most significant amendment of the Internal Revenue Code since its major overhaul in 1954. The Act dealt with a wide variety of income, gift, and estate tax matters with particular emphasis on tax shelter arrangements. Most of the provisions of the Act require successive readings and reference to the legislative history to understand them. A greater difficulty arises in interpreting the Act from its incidental or secondary effects. The Act clearly has an effect on Code provisions and business transactions not anticipated by Congress. Thus, new and complex tax traps have been created that must be identified, analyzed and subjected to the scrutiny of tax planners. The purpose of this Commentary is to identify five major potential tax traps that stem from the Act, so practitioners may analyze and hopefully avoid these particular pitfalls. These potential traps are in the following areas: (1) corporate buy/sell agreements; (2) lump sum distributions from pension plans; (3) subchapter S elections; (4) minimum tax on tax preference items; and (5) preferred stock bailouts