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Article

Tax Shelters and Statutory Interpretation: A Much Needed Purposive Approach

Few are unaware that the federal Tax Code and the accompanying Treasury Regulations provide a detailed, complex (and lengthy) set of rules. It is hardly surprising (or new) that taxpayers attempt to avoid these rules to lower their taxes. Courts and lawmakers have long grap-pled to identify abusive transactions and strip taxpayers of the associated tax savings. The transactions have, however, changed dramatically over the last decade, making the task much more challenging. The rapid pro-liferation of aggressive and diverse tax shelters has created what many refer to as a “tax shelter war.” In general, tax shelters refer to transac-tions carefully designed to fit within the letter of the law to derive benefits unintended by those sections. Courts, however, do not inquire directly into purpose when analyzing tax shelters. They instead rely on traditional anti-abuse tests. These tests are outdated and insufficient to curb current tax shelters. Even those that defend these tests admit that they supply neither a necessary nor sufficient basis for denying tax benefits. Scholars defend the usage of these tests believing a viable alternative to be lacking. This Article attempts to fill this gap and develops an alternative test, which inquires directly into the purposes of the tax laws to address abuse directly. After developing this test along with an extensive set of guidelines for analyzing tax provisions, the test is applied to three recent tax shelters to illustrate its advantages. Such a test is an essential weapon to compete in current and future tax shelter wars.

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