IRS Triumphs In 'Son Of Boss' Case

by Glen Shapiro, LawAndTax-News.com, New York

21 May 2009

A US federal appeals court has upheld a decision denying over USD50m in claimed tax losses arising from two taxpayers’ investment in a ‘Son of Boss (BLIPS)’ tax shelter.

In the case Klamath Strategic Investment Fund v United States, the Fifth Circuit Court of Appeals held that "a lack of economic substance is sufficient to invalidate the transaction regardless of whether the taxpayer has motives other than tax avoidance." The court concluded that "no reasonable possibility of profit existed" for the transaction in question.

Son of Boss tax shelter schemes evolved from an earlier incarnation known as ‘Boss’ (bond and option sales strategy). The scheme utilises a complex set of derivative transactions to reduce tax liability and was commonly used in the late 1990s to offset large one-off gains such as the sale of a business.

In March 2005, the Internal Revenue Service announced that more than USD3.2bn was collected from over 1,000 taxpayers who had participated in a Son of Boss tax shelter settlement scheme launched almost one year earlier. This amnesty scheme also benefited the coffers of various state governments, with Arizona, Illinois, Maine, Maryland, Michigan, New York, Ohio, Utah and Virginia collecting more than USD23.5m from voluntary state tax return amendments.

The appeals court ruling affirmed an earlier decision by a district court and joins the majority of circuits which have ruled on the question.

"We are pleased that the Fifth Circuit has joined all the other appellate courts in ruling that ‘Son of Boss’ tax deductions are not permissible,” said John A. DiCicco, Acting Assistant Attorney General at the Justice Department’s Tax Division.

“We are also pleased that the court has recognized that determinations of this sort must be made on the objective evidence irrespective of the claimed motives of the individual investors," he added.

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