Merrill Lynch Settles With IRS Over Tax Shelters

by Mike Godfrey, Tax-News.com, New York

29 August 2001

The Internal Revenue Service announced yesterday that Merrill Lynch had settled a longstanding dispute over tax shelters, making what they described as a 'substantial payment' as part of the agreement.

Merrill Lynch, the US brokerage, agreed it had paid a fine to the IRS to end an investigation into its development of questionable tax shelters a decade ago. Merrill spokesman Bill Halldin said the payment was not material and would not affect earnings. "We decided it was in the best interest of all parties to resolve this matter," he said.

The dispute involved instalment sales transactions during 1989 and 1990 in which Merrill Lynch participated. The transactions were the subject of federal court cases involving companies including Allied Signal, Brunswick Corp. and Colgate-Palmolive Co.

The key issue was whether the transaction should have been registered as a tax shelter with the IRS. Without admitting or denying that it did, Merrill Lynch agreed to make the unspecified payment for registration and to begin a review of all its investment vehicles to ensure they comply with federal law, said the IRS.

The IRS is beefing up its effort to curb abusive tax shelters, including a program requiring shelter promoters to register them. Over 3,000 registrations have already been filed and the IRS has begun investigating five shelter promoters for alleged failure to register.

The administration would like to do more to curb the use of 'abusive' tax shelters (of course, in the eyes of the IRS, all tax shelters are 'abusive'). Congress rejected an administration-inspired bill last year that would have considerably toughened up the laws on tax shelters, although the IRS, like the encroaching sea, is doing what it can to prevent abuse within existing legislation.

The key points of last year's bill, which may resurface, were:

• The 'substantial understatement' penalty imposed on abusive corporate tax shelter items (as redefined) generally would be increased to 40% (from 20%), with no reasonable cause exception;
• The Treasury Department would be able to disallow deductions, credits, exclusions, or other allowances obtained in an abusive corporate tax shelter;
• Deductions for fees and tax advice expenses related to abusive corporate tax shelters would be denied, and a 25% excise tax would be imposed on fees received in connection with promoting or rendering tax advice related to abusive shelters;
• The corporate purchaser of an abusive corporate tax shelter would pay an excise tax of 25% of the maximum payment to be made under a tax benefit "protection arrangement."

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