Corporate tax shelters.

Most previous legislative attacks on corporate tax shelters have targeted specific transactions and have taken place on an ad-hoc basis. In recent years, proposed legislation has become more comprehensive, the important elements of which include increases in penalty rates, stronger registration requirements, and improved rules of conduct. An economic cost-benefit analysis is an efficient tool for analyzing the behavior of offenders and, more importantly, for analyzing the best ways to deter such behavior. This type of analysis has been partially applied by tax shelter legislation recently proposed. A taxpayer's decision whether to comply with tax laws is a rational choice to maximize its expected utility. The taxpayer chooses a level of compliance by weighing the costs and benefits of compliance with those of noncompliance and then selecting that level of compliance that will lead to the highest expected benefit. This cost-benefit equation is the foundation of our analysis and resulting recommendations, and we conclude that by changing the balance so that tax shelters become either less beneficial or more expensive for the taxpayer to engage in, the government can reduce commerce in tax shelters. The problem needs to be tackled not only from the narrow domain of tax law but also from the broader perspective of corporate law and rules of conduct. Such rules should include potential personal liability for shareholders when the shareholders hold additional positions. We must also enhance the clarity and strictness of the duty of care rules, including directors' duties, officers' duties, and in-house advisors' responsibilities. Tax lawyers should be subject to more restrictive rules with respect to their tax shelters opinions and should be forced to fulfill to duties to their clients and the Government. This is not to say that these proposals should be implemented without a comprehensive solution in the tax laws. As long as the tax laws are full of loopholes and inconsistencies, tax shelter producers will confront even greater temptations to take risky positions and play the audit lottery. Only a comprehensive solution in the tax laws may provide a step towards a reduction in the problem of tax shelters.S.J.D.LawSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studies, Law Schoolhttp://deepblue.lib.umich.edu/bitstream/2027.42/131044/2/3045872.pd