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The BOSS's son is a ne'er do well

May 19, 2009

The "Son of Boss" tax shelter has had a rough time of it in court in the last few days.

On Friday the Fifth Circuit Court of Appeals joined other appeals courts in ruling that the widely-marketed tax shelter lacks economic substance. The shelter used offsetting option positions and a partnership to create artificial losses. The Treasury describes the shelter:

In one variant of this transaction, a taxpayer purchases a call option and simultaneously writes a similar offsetting call option. The offsetting option positions are then transferred to a partnership. Under the position advanced by the promoters of this arrangement, the taxpayer purports to have a positive basis in the partnership interest equal to the cost of the purchased call options, even though the taxpayer's net economic outlay to acquire the partnership interest and the value of the partnership interest are nominal or zero. This is because they claim that the taxpayer's basis in the partnership interest is not reduced for the partnership's assumption of the taxpayer's obligation with respect to the written call options. This artificially high tax basis in the partnership is then used to claim deductible losses (that can be used to shelter other income) by immediately selling the taxpayer's partnership interest, even though the taxpayer has incurred no corresponding economic loss.

It has fared poorly in the courts, including yesterday in the Tax Court. There a gentleman who used a Son-of-BOSS transaction to try to wipe out a $60 million capital gain came to grief. When the IRS disallowed the losses, he tried to get off on a technicality: that the Final Partnership Administrative Adjustment disallowing the loss wasn't adequate notice from the IRS. The Tax Court wasn't buying:

Petitioner waited until the partner-level proceeding, instead, to argue that the FPAA did not provide him adequate notice. He makes this argument despite the multiple determinations in the FPAA that disallow all tax benefits of the tax shelter. Petitioner's participation in a complicated basis-inflating tax shelter belies his naivete. Petitioner purchased a packaged tax shelter involving several sophisticated transactions to avoid paying taxes on a $60 million gain. He received the advice of multiple professionals, including counsel, regarding this purchase.

Bottom line: $12 million in additional taxes.

Cites:

Klamath Strategic Investment Fund, CA-5, No. 07-40861
Napoliello, T.C. Memo 2009-104

Tags: son-of-boss.tax court.tax shelters.