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In response to
"tell me what that is? (I should know, I'm sure. I'm dim.) -- nm"
by
Huan Van de Camp-Jiminez
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here is a quick summary based on something i have here
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Here is the basic pattern contained in the son of Boss type tax shelters. These transactions reduce or eliminate capital gains by creating artificial capital losses. Although the pattern is simple, it is obfuscated with mounds of paperwork, intricate financial instruments and virtually incomprehensible tax code provisions.
Tax shelter promoter sets up two companies, Company A and Company B and funds each company with $50. Company A buys a briefcase for the $50.
Client comes to promoter and says, "I have a $1.0 million capital gain." Promoter says, "No problem, I can eliminate that gain for you by generating a $1.0 million loss to offset your gain."
Promoter devises the following plan:
Client purchases the $50 briefcase from Company A by paying Company A $1,000,050!
Client pays $50 in cash. In addition (here's the tax shelter part), Client "pays" another $1.0 million by signing a promissory note (a promise to pay) payable to Company A for $1.0 million in 30 years . For tax purposes, Client purchased the briefcase for the cash payment and the promissory note, so the tax cost for Client's briefcase is $1,000,050.
Client then sells the briefcase to Company B for $50. Thus, economically, Client is made whole; Client paid $50 for the briefcase and sold the briefcase for $50. However, Client's tax basis in the briefcase was $1,000,050 and by selling the briefcase for $50, Client incurred a $1.0 million loss! That loss will then be used to offset Client's $1.0 million capital gain, effectively zeroing out his tax liability.
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Responses:
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