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Tax Court finds Thighmaster's tax shelter flabby

December 16, 2009

Suzanne Somers parleyed a long sitcom run into an infomercial empire with the Thighmaster. But firm thighs only get you so far in Tax Court.

Ms. Somers and her husband got involved in a Son-of-Boss basis-shifting tax shelter to reduce taxes on their Thighmaster earnings. The shelter involved offsetting currency positions and a partnership, generating a tax loss of over $5 million (see the "read more" part of this entry for an IRS description of the mechanics of these shelters). The Tax Court said that the shelter didn't work:

Petitioner has not introduced credible evidence to establish that Palm Canyon had a legitimate nontax business purpose for entering into the MLD transaction, and the transaction did not have a reasonable prospect of achieving a pretax profit. A review of the MLD transaction reveals a prearranged set of transactions that were not imbued with any meaningful economic substance independent of tax benefits.

Not only did Ms. Somers lose the case, she and her husband also were hit with 40-percent valuation misstatement and 20-percent negligence penalties.

The Moral: don't trust shortcuts to either fitness or tax savings.

Cite: Palm Canyon X Investments LLC, T.C. Memo. 2009-288

Description of Son-of-boss basis shifting, IRS Notice 2000-44:

In another variation, a taxpayer purchases and writes options and purports to create substantial positive basis in a partnership interest by transferring those option positions to a partnership. For example, a taxpayer might purchase call options for a cost of $1,000X and simultaneously write offsetting call options, with a slightly higher strike price but the same expiration date, for a premium of slightly less than $1,000X. Those option positions are then transferred to a partnership which, using additional amounts contributed to the partnership, may engage in investment activities.
Under the position advanced by the promoters of this arrangement, the taxpayer claims that the basis in the taxpayer's partnership interest is increased by the cost of the purchased call options but is not reduced under §752 as a result of the partnership's assumption of the taxpayer's obligation with respect to the written call options. Therefore, disregarding additional amounts contributed to the partnership, transaction costs, and any income realized and expenses incurred at the partnership level, the taxpayer purports to have a basis in the partnership interest equal to the cost of the purchased call options ($1,000X in this example), even though the taxpayer's net economic outlay to acquire the partnership interest and the value of the partnership interest are nominal or zero. On the disposition of the partnership interest, the taxpayer claims a tax loss ($1,000X in this example), even though the taxpayer has incurred no corresponding economic loss.

Tags: son-of-boss.Suzanne Somers.tax shelters.