One of America's most influential industries ended its busiest period of the year yesterday, but it wasn't the retail industry.
This industry helped produce everything from the movie "Ghostbusters" to wind energy. It reported assets as varied as luxury cars, oil and gas wells, sailboats, thoroughbred horses, dairy cows, historic buildings and jojoba beans.
This is the tax-shelter industry, in which Americans, most of them wealthy, plow income that would go to the Internal Revenue Service into ventures that tax collectors can't reach. Built around myriad "incentives" in the U.S. tax code for certain kinds of investment, shelters lured more than $10 billion from individual taxpayers last year, according to federal and private authorities.
This was an increase of more than $4 billion since 1981, these authorities said. And because much of the money otherwise would have gone to the government as income taxes, the U.S. Treasury was a partner in every venture that this industry spawned.
The Treasury Department and several congressional tax authorities have proposed doing away with most legal underpinnings of the shelter industry. According to the Treasury, most shelters favor the rich and distort the economy so that in some cases "taxpayer energy and resources are consumed in pursuing tax advantage rather than economic advantage."
Shelters are also a basic feature of American life. They have proliferated so much in the last 15 years that officials of many industries -- including home building, entertainment, energy, scientific research and much more -- contend that their businesses would be "crippled" without the investment dollars that shelters lure.
Shelters are ventures that, in part, cut investors' taxes. That is because federal law, in the name of encouraging certain industries -- most notably real estate and oil and gas -- allows taxpayers to deduct large amounts of their investment from their gross income. The law allows for special deductions and credits that can exceed the amount invested in a single year.
So while the shelter records "losses" on paper, the investor has in fact reaped more than a dollar of deductions for each dollar invested, often moving himself to a lower tax bracket. Later, when the venture turns a profit, the money often is taxed as a capital gain rather than as ordinary income, meaning that 60 percent is tax-exempt.
As a result, shelter promoters market tax benefits along with the venture itself. And the action is heaviest at the end of the year because Dec. 31 is the deadline for shifting would-be tax dollars into these investments.
"Is Your Tax Year Ending?" asked a December advertisement by Cannon Capital Group in the Los Angeles Times. The ad promised "$64,000 in tax credits" for a 10 percent down payment on a windmill venture designed to produce wind energy for California utilities.
"Taxes into Assets," promised a similar ad by Cathay Wind Inc., which described itself as "a full-service wind-energy company" that could provide $84,750 in tax credits.
The promises are backed up by a 15 percent federal investment tax credit -- a sum subtracted directly from taxes, not from gross income -- for investments in renewable energy, and also by a similar state energy-credit program.
Like most shelters, they also rely on a law allowing accelerated depreciation of capital goods, a provision intended to encourage capital investment by allowing people to "write off" the cost of these goods in less time than they would wear out.
And they rely on the special tax treatment of large, limited partnerships -- the format of most shelters -- which allows partners to subtract losses due to the partnership from their overall gross income. This "shelters" that income, rather than taxing the partnership as a separate entity.
"Our investment activity picks up easily by 50 percent in October and November," said a Cannon broker. "The deal has to make economic sense for people to invest in it, but it's undeniable that people are buying windmills because of the tax credits."
More than three-fourths of the money invested in independent oil and gas company ventures comes through shelters, according to industry spokesmen. Although the slide in oil prices last year led to a 45 percent drop in such investment, $1.48 billion had been invested by Dec. 1, according to the Robert A. Stanger Co., a research firm that monitors the shelter industry.
"My company wouldn't have existed without the tax laws," said Donald Finn, a consultant to Callon Petroleum, an independent oil company in Natchez, Miss., whose assets have grown in five years from $15 million to $150 million.
"In the last five years, 18,000 people have put up $250 million," Finn said.
Similarly, industries as varied as horse breeding, movie making, real estate and cattle feeding will be "crippled" if the tax underpinnings of shelters are abolished, said Fuhrman Nettles, a spokesman for the Stanger Co.
By Dec. 1, Nettles said, individuals had invested almost $5 billion in real estate shelters registered with the Securities and Exchange Commission. This figure, which excludes smaller ventures, such as much rental housing, accounted for a 24 percent increase over the previous year.
Such ventures are built around an asset that gets favored tax treatment -- a building that can be depreciated and whose mortgage interest can be deducted from gross income; a cow whose feed can be deducted before the cow eats it; a horse that qualifies as an investment tax credit; a movie whose costs can be written off in advance as business expenses or equipment depreciation.
The movies "Tootsie" and "Ghostbusters" were among many financed through limited partnerships, according to a spokesman for Merrill Lynch.
The Treasury's wide-ranging and controversial "tax-simplification" proposal would do away with many of these advantages. It would abolish the investment tax credit and sharply limit deductions for depreciation of capital goods. It also would change the tax laws so that losses from large, limited partnerships could not be used to "shelter" unrelated income from taxes.
"The tax code effectively guides the allocation of capital, overriding private market factors" and consumer choice, the Treasury wrote in its proposal. "This undeclared government industrial policy has grown dramatically in scale and yet it largely escapes public scrutiny or systematic review."
Shelters proliferated in the late 1970s when inflation began pushing middle-income people into higher income brackets, prompting them to seek ways to avoid paying higher taxes. The government has cracked down significantly since then, requiring that shelters produce serious economic activity in addition to generating losses.
The IRS brought cases in 1984 against 114,000 taxpayers for claiming losses from "abusive tax shelters" -- those deemed to lack economic value, to rely on overvalued assets or to strain legal interpretations -- and claimed an extra $2.2 billion in taxes, a spokesman said.
"If the only reason is that they want to reduce their taxes, they'd better get themselves some good help because they're going to need it," said Bill Roth, director of the IRS' Office of District Examination Programs.
Many tax experts argue that something more profound than greed is at stake in legal as well as illegal shelters.
"The American taxpayer has lost faith in the fairness of the tax system and in the ability of the government to reform it," said Stanford Ross, a Washington tax attorney and former Treasury Department official. "The government has for longer and longer times tolerated shelters and, in the name of reform, passed acts that scarcely touched them . . . .
"The response is predictable," Ross said. "You can't fault people for finding legal ways to reduce their taxes."
Despite its large investment totals, the shelter industry did not enjoy a jolly 1984 holiday season. The Stanger Co. reported a 3 percent decline in the amount invested in shelters, compared with increases of 30 percent a year in the early 1980s.
Several accountants attributed the decline to uncertainty caused by the IRS crackdown, recent changes in tax laws and the threat of major changes.
Many major industries are lobbying heavily to save the shelter provisions in the name of prosperity for all. Promoters of shelters now refer to them as "tax-advantaged investments," citing a negative connotation for the more familiar term.
"There's nobody speaking for the public good," said accountant Andrew Lang of Bethesda, who describes himself as a skeptic toward shelters. "All the lobbies are looking out for themselves. It's a mad scramble for tax benefits."
Even the staunchest defenders of shelters indicate that they are losing patience with the legal and economic acrobatics required to take advantage of them.
"We have more accountants working for us than geologists," said Finn of Callon Petroleum. "It's a crying shame. In America!"