ABUSE OF STRUCTURED FINANCIAL PRODUCTS- Misusing Basket Options to Avoid Taxes and Leverage Limits MAJORITY AND MINORITY STAFF REPORT

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as publicly traded partnerships, may have more than 100,000 partners at a time, some of whom
hold a partnership interest for only a few trading days in a given year, making identifying and
notifying all partners difficult, if not impossible. In addition, at the end of an audit, TEFRA
requires the IRS to notify each partner of any tax assessment for the deficiencies attributable to
the partnership, failure of which may cause the assessment to become invalid. 503 That
notification burden is equally difficult, time consuming, and expensive to implement. A possible
solution is amending TEFRA to allow the IRS, in the case of large partnerships, to notify the
partnership itself when initiating or concluding an audit, and to rely on that partnership to notify
the individual partners it deems appropriate.
Ending Bank Participation in Abusive Tax Structures. Finally, this investigation is
not the first by the Subcommittee to examine bank participation in transactions involving
substantial tax avoidance. 504 Past investigations have exposed highly suspect transactions
involving major financial institutions, major law firms, sophisticated counterparties, and
hundreds of millions or billions of dollars. Because banks employ personnel and systems
capable of designing, implementing, and administering complex transactions involving
structured financial products and other derivatives, too many have too often become facilitators
of financially engineered tax avoidance and even tax evasion schemes. In some cases, federal
prosecutors and regulators have imposed civil or criminal penalties against banks for aiding or
abetting tax misconduct. But more is needed. To end bank involvement with abusive tax
structures, federal financial regulators, as well as Treasury and the IRS, need to intensify their
warnings against, scrutiny of, and legal actions to penalize bank participation in tax-motivated
transactions.
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503 26 U.S.C. § 6225.
504 See, e.g., U.S. Senate Permanent Subcommittee on Investigations reports and hearings, “Fishtail, Bacchus,
Sundance, and Slapshot: Four Enron Transactions Funded and Facilitated by U.S. Financial Institutions,” S. Prt.
107-82 (1/2/2003); “U.S. Tax Shelter Industry: The Role of Accountants, Lawyers, and Financial Professionals,” S.
Hrg. 108-473 (11/18 and 20/2003); “Tax Haven Abuses: The Enablers, The Tools and Secrecy,” S. Hrg 109-797
(8/1/2006); “Tax Haven Banks and U.S. Tax Compliance,” S.Hrg. 110-614; “Dividend Tax Abuse: How Offshore
Entities Dodge Taxes on U.S. Stock Dividends,” S.Hrg. 110-778 (9/11/2008).