Tax Shelters and the Search for the Silver Bullet

This article describes the ongoing legislative and administrative efforts to curtail tax shelters. It concludes that these efforts, which rely largely on disclosure requirements and penalties, cannot succeed as long as taxpayers continue to win many of the litigated shelter cases. It also concludes that the recent proposal of the Joint Committee on Taxation, to codify the economic substance doctrine, is unlikely to solve the problem. Although the proposal would have the salutary effect of preventing courts from deciding that the economic substance doctrine does not exist, courts would remain free to conclude that the doctrine is not applicable in particular situations, or to find that the doctrine is satisfied in highly dubious circumstances. Narrowly tailored legislative responses to particular types of shelters are also not adequate as a solution to the overall shelter problem; since the legislative fixes are prospective only, taxpayers merely move on to new types of shelters not yet legislated against. Accordingly, the article suggests a new approach to the shelter problem, based on the general disallowance of noneconomic losses. This could be accomplished by either (1) the enactment of a Code provision flatly disallowing noneconomic losses, subject to an exception for noneconomic losses the deduction of which is clearly contemplated by Congress, or (2) a legislative grant of authority to the Treasury to promulgate regulations retroactively disallowing noneconomic losses, as necessary to prevent abuse