US Tax Court Sides With IRS In Key Tax Shelter Case

by Leroy Baker, Tax-News.com, New York

25 April 2006

The Internal Revenue Service has won a significant legal victory in its campaign to deter the use of so-called 'abusive' tax shelter schemes, after the US Tax Court ruled that the 'Son of Boss' scheme is illegitimate.

Last Tuesday's ruling by Judge David Laro related to the sale of R. J. Thompson Holdings, a day-trading firm in Omaha, Nebraska, by its founder and former chief executive Randall J. Thompson, for $13 million in cash to TD Waterhouse of Canada in June 2001.

The IRS believes that Thompson used a Son of Boss scheme to create an artificial loss in order to slash the amount of federal taxes he owed on the sale, and disallowed more than $20 million in tax losses. Thompson, through a partnership, decided to challenge the IRS.

Son of Boss evolved from an earlier scheme 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.

The ruling is significant as it marks the first time that a court has ruled on the Son of Boss scheme, and Judge Laro's decision could have an important bearing on the outcome of the trial of 18 individuals facing criminal charges related to sale of tax shelters by the accounting firm KPMG.

Lawyers for the defendants, 16 of whom are former KPMG executives, have argued that their clients did nothing illegal because the tax courts had not hitherto established whether the tax shelters were improper.

The defendants in the KPMG trial are facing conspiracy and fraud charges for their role in creating and selling tax shelters viewed by the IRS as close relations to Son of Boss.

Last year, the IRS released the results of its Son of Boss settlement offer, a 2004 initiative which offered users of the shelter improved settlement terms in a limited amnesty. More than 1,200 taxpayers qualified to participate in this offer, and the IRS collected some $3.8 billion in taxes and penalties. However, about 600 investors did not come forward, with some instead electing to challenge the IRS in court.

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