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April 22, 2006

Defenders of the tax-shelter practices of the 1990s like to say that "the courts haven't found them illegal." That's a bit less true now, according to the weekened Wall Street Journal today ($ link). The paper reports that the tax court this week ruled a Son of Boss partnership out of Omaha didn't work:

Tax Court Judge David Laro, in Washington, D.C., in an opinion not yet released, granted the IRS summary judgment earlier this week in its case against now-defunct RJT Investments X LLC, which was based in Omaha, Neb. The IRS argued that RJT used scam accounting to create large losses in order to slash its federal taxes.

In 2004, the IRS settled out of court with about 1,200 businesses and collected $3.8 billion in taxes due, interest and penalties that were less than the maximum allowed by the law. At the time, the IRS warned 600 other taxpayers that had taken advantage of the shelter that if they didn't come forward and settle, the IRS would disallow all the tax benefits and assess the full 40% penalty that the law allows.

"The RJT Investments case is the first concrete manifestation of the fruits of that commitment," said IRS Commissioner Mark Everson in a statement. ""We will continue to fight these cases as long as we have to."

The "not ruled illegal" argument has always been disingenous, given that it takes years for tax shelter cases to come to trial.

As the decision hasn't yet been released, it's hard to tell how much impact the RJT case will have. According to the journal, "In the RJT case, RJT didn't challenge the IRS on the merits of the case. Instead RJT defended the case on a jurisdictional issue, which the judge rejected."

The Omaha locatiion of this shelter may mean that our Eighth Circuit will be a key player in the tax shelter wars on appeal. The WSJ cites an RJT attorney as saying an appeal is in the works.

Tax Analysts has more on its free site here.

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