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SEVENTH CIRCUIT UPHOLDS RETROACTIVE 'SON OF BOSS' REGS

February 07, 2008

The Seventh Circuit Court of Appeals has upheld a ruling striking down a variant of the "Son of Boss" tax shelter. The TaxProf reports:

The opening of Judge Easterbrook's unanimous opinion foreshadowed the result:
Paul M. Daugerdas, a tax lawyer whose opinion letters while at Jenkins & Gilchrist led to the firm’s demise (it had to pay more than $75 million in penalties on account of his work), designed a tax shelter for himself, with one client owning a 37% share.

The Seventh Circuit described the tax shelter this way:

A transaction with an out-of-pocket cost of $6,000 and no risk beyond that expense, while generating a tax loss of $3.6 million, is the sort of thing that the IRS frowns on. The deal as a whole seems to lack economic substance; if it has any substance (a few thousand dollars paid to purchase a slight chance of a big payoff) then the $3.6 million “gain” on one premium should be paired with the $3.6 million “loss” on the other; and at all events the deal’s nature ($36,000 paid for a slim chance to receive $7.2 million) is not accurately reflected by treating Euro 56,000 as having a basis of $3.6 million.

We blogged the district court decision here.

Mr. Daugerdas hobnobs with Howie Mandel in happier times:

Daugerdas&Howie_web.jpg