Finding Shelter from the Storm

The loud proud cry: "We've never paid a dime in taxes"

Ronald Reagan saved roughly $4,500 in federal income taxes last year by declaring losses on his tax-sheltered ranch near Santa Barbara, Calif. While still a peanut farmer in 1976, Jimmy Carter so skillfully used Internal Revenue Service rules that he owed virtually no taxes on an income of $54,934.79. The President later voluntarily donated $6,000 to the IRS. And Ted Kennedy, who was railing against the abuses of tax shelters at last month's Democratic Convention, has much of his fortune tied up in real estate, which is considered the sugar daddy of shelters by many tax experts.

By fair means or foul, avoiding taxes has become a popular U.S. sport. Nicholas Murray of the investment firm of Shearson Loeb Rhoades estimates that queries about tax shelters have doubled in the past year. Says William G. Brennan, publisher of a tax shelter newsletter in Valley Forge, Pa.: "Because of inflation, more and more people keep landing in the 50% bracket, and that's what makes sheltering profitable." An estimated 2 million individual tax returns now fall into the 50% bracket with taxable incomes of $41,500 or above for single people and $60,000 or above for couples.

Tax havens are investments that enable people to generate paper losses to write off against their regular income, thus shielding the investor's cash from the full bite of the IRS. A person making $100,000 a year, for example, might sink $30,000 in a tax shelter that would lower his taxable income in the first year to perhaps $85,000. Since at least half of the $30,000 would have gone to the IRS had it not been sheltered, the investor really gets his investment at half price. And it usually continues to generate write-offs for several years. At the same time he enjoys the possibility that the shelter investment will later pay off.

The range of tax shelters is limited only by the ingenuity of the lawyers who often launch them. Donald Flynn, 44, who made a small fortune recently by selling his interest in a North Woodstock, N.H. data processing firm, now keeps the IRS at bay with his 42-ft.-sloop tax shelter He paid $40,000 down on the $150,000 vessel last November and then put it out for charter. The sloop must show a profit two years out of five, but in the years when it loses money, the losses, including interest payments, insurance and upkeep, are deductible from Flynn's regular income. The IRS still permits him to use the sloop 10% of the time, and Flynn took an inexpensive eight-day cruise in the U.S. and British Virgin Islands last May.

Experts estimate that 1,200 charter yachts that involve some tax dodges are cruising the waters off Florida, the Bahamas and the Caribbean islands.

Walter G. Hibbs, 42, whose oilfield tool companies in Houston earn him more han $100,000 a year, protects part of his ncome through a second business venture that leases air compressors to oil-well operators. The oilfield equipment benefits from complex tax credit carry-forwards and depreciation, thus accumulating losses that are used to offset his leasing-company profits. Says Hibbs proudly: 'We've never paid a dime in taxes on those profits."

Congress originally permitted such tax shelters as natural resource exploration and development, public housing construction and equipment leasing in order to encourage investments considered socially desirable but financially questionable. Without the extra tax incentives, those ventures might seem so risky that few people would undertake them. But besides the legitimate shelters that Congress encouraged, hundreds of others have grown up that do little for the economy.

One currently favored gimmick involves buying, at wholesale prices, box-loads of Bibles for $5 each. After holding them for one year, the investor donates the books Jo charity and takes a tax deduction of $20 for each Bible, the value set by the original owner. Another shelter under attack involves buying lithograph plates of an obscure artist, which gives the owner the right to produce 300 or so limited-edition prints. The investor might pay for this with $30,000 in cash, plus $120,000 in a so-called nonrecourse note, which does not have to be paid unless the plates bring that much in sales. The investor claims depreciation deductions as though the plates were worth the full $150,000, even if no prints are ever sold.

Robin Moore, author of The French Connection, has agents peddling a tax shelter that involves buying an interest in five future novels by Moore and others. An investor puts up $20,000 cash and a $100,000 note due in ten years and gets to depreciate $115,000 on his taxes in the first three years. If the novels and anticipated movies are bookstore and box-office smashes, the investor will hit the jackpot. If they flop, though, the investor will still have to pay off the $100,000 note after ten years.

The favorite tax shelters, however, remain traditional real estate ventures and oil and gas exploration. Says Stuart E. Seigel, formerly chief counsel for the IRS and now a Washington tax lawyer: "Real estate investments tend to be more economically sound and assure tax benefits with no questions asked." Someone with $200,000 to invest might use the money for a down payment on a $1 million apartment complex. He would receive the rental income from the property, plus a tax credit because of depreciation on the $1 million building. The credit could then be used to lower his regular taxable income.

Energy exploration investments have become hot tax shelters recently because the decontrol of oil and gas prices has unproved the potential payoff. In 1978 public investors put $670 million into oil and gas ventures. Last year that shot up to almost $1.1 billion. If the energy search is successful, the reward is a pot of gold. If the drilling turns up a dry hole, there is a generous tax write-off.

Whether the tax shelter is risky or conservative, the one almost certain payoff is an IRS audit of the investor's tax return. The Treasury Department has programmed its computers to watch carefully for people who report large tax shelter write-offs. Warns IRS Commissioner Jerome Kurtz: "Those people investing heavily in abusive tax shelters are looking for trouble with us." -

This file is automatically generated by a robot program, so viewer discretion is required.