Tax Shelter

A transaction by which a taxpayer reduces his or her tax liability by engaging in activities that provide deductions or tax credits to apply against his or her tax liability. In such cases, the activities engaged in are said to "shelter" the taxpayer's other income. Abuses in the use of these devices have led to amendments to the Internal Revenue Code, which have sharply curtailed the availability and usefulness of these devices, such as the "at-risk" rules and the penalties imposed on abusive tax shelters, I.R.C. §6700.

at-risk rules provisions of the Internal Revenue Code that limit the amount of loss from business and investment activities that a taxpayer may deduct to the total amount that he or she has "at risk" in the activity. A taxpayer is "at risk" in an activity only to the extent of the cash or other property he or she has invested in the activity and to the extent he or she is personally liable for the debts of the activity secured by his or her property. A taxpayer is not at risk for amounts of nonrecourse debt. The at-risk rules are generally applicable to most business activities except real estate investment. I.R.C. §465. Chirelstein, Federal Income Taxation §13.02 (8th ed. 1997).




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