Son of Boss

Son of BOSS is a type of tax shelter used in the United States, one that was designed and promoted by tax advisors in the 1990s to reduce federal income tax obligations on capital gains from the sale of a business or other appreciated asset. Its informal name comes from the name of an earlier tax shelter, BOSS ("Bond and Option Sales Strategy"), which it somewhat resembles.

Details

The term was coined by U.S. Treasury officials to describe a variety of tax shelters that sought to wipe out taxes on capital gains from the sale of a business or other appreciated asset; for example, by artificially inflating the basis of a partnership by contributing an asset paired with a contingent liability. The partnership contribution rules at the time ignored the contingent liability that effectively offset the asset. The result was an inflated basis that allowed the taxpayer to claim a loss from the partnership's subsequent unwinding. The shelters involved creating paper losses to offset real gains. All resembled an earlier shelter marketed as "BOSS," short for "Bond and Option Sales Strategy." Beginning in the late 1990s, advisers at some accounting and law firms marketed the Son of BOSS transaction in various forms. It is likely several thousand taxpayers used the shelter before 2000 when the Treasury and the Congress began taking steps to block its tax benefits.^[1]

The Son of BOSS schemes involved 1,800 people and cost the government $6 billion in lost revenue, according to Internal Revenue Service (IRS) estimates. Of the $6 billion, the government has recovered more than half. The IRS started cracking down in 2000. By 2005, 1,165 people had settled Son of BOSS cases with the IRS. The complex structures used in the schemes were difficult, however, for the IRS to unravel. Reuters News Service reported that the IRS was losing some court challenges to its crackdown.^[2]

Significant rulings

In 2000, the Internal Revenue Service issued IRS Notice 2000-44,^[3] asserting that Son-of-BOSS transactions were invalid.

The Son of BOSS scheme has been ruled to be invalid for Federal tax purposes. For background, see generally ^[4] American Boat Company LLC v. United States;^[5] and Klamath Strategic Investment Fund v. United States.^[6]

In IR-2005-83, Aug. 29, 2005, the IRS reported that in the largest criminal tax case ever filed, KPMG admitted that it engaged in a fraud that generated at least $11 billion in phony tax losses which, according to court papers, cost the United States at least $2.5 billion in evaded taxes. In addition to KPMG’s former deputy chairman, the individuals indicted include two former heads of KPMG’s tax practice and a former tax partner in the New York, New York office of a prominent national law firm.^[7]

The only Son of BOSS case which has been decided by the U.S. Supreme Court is United States v. Home Concrete & Supply, LLC, which was decided in 2012. This case concerned primarily whether the statute of limitations was properly applied, and not the validity of scheme itself.

Home Concrete & Supply was a limited liability company formed in 1999 to facilitate a Son of BOSS scheme for two North Carolina businessmen, Robert Pierce and Stephen Chandler, who owned a small oil-and-coal company. The two filed their 1999 tax returns in 2000. They were audited by the Internal Revenue Service in 2006, and were billed that year for unpaid taxes totaling $6 million. The Home Concrete partners sued, arguing the IRS violated a three-year statute of limitations on its power to claim unpaid taxes. The IRS replied it was within its power to bill taxpayers up to six years back when more than 25 percent of a taxpayer's gross income was involved.^[2] The Home Concrete partners lost in District Court but won in February 2011 on appeal. The IRS appealed and the Supreme Court in November decided to take up the case. On April 25, 2012, the Supreme Court ruled in favor of Home Concrete & Supply, stating that the six-year statute of limitations did not apply when a taxpayer understated his income by overstating his basis, only the three-year statute applied.^[8]

In the interim, the law firm that helped the Home Concrete partners set up their Son of BOSS transactions, Jenkens & Gilchrist, closed. Two of its partners were found guilty of tax evasion.^[2]

IRS collections

According to the IRS, the IRS collected more than $3.7 billion from taxpayers in 2005 who voluntarily participated in a parallel civil global settlement initiative related to Son of BOSS.^[9] The BLIPS and SOS shelters are part of the Son of BOSS family of tax shelters.

2012 Presidential campaign

In a campaign advertisement released on August 9, 2012, incumbent President Barack Obama made specific reference to his GOP opponent Mitt Romney and Romney's presumed involvement in a Son of BOSS tax avoidance as a Marriott International board member.^[10][11]

References

1. McKinnon, John D. (2012-04-25). "IRS Loses Tax-Shelter Case". WSJ.com. Retrieved 2012-08-08.
2. Temple, Patrick. "Son of Boss crackdown lands in Supreme Court". Reuters. Retrieved 2012-08-08.
3. 2002 C.B. 255, Internal Revenue Service, U.S. Dep't of the Treasury.
4. 527 F.3d 443 (5th Cir. 2008).
5. 583 F.3d 471 (7th Cir. 2009).
6. 568 F.3d 537 (5th Cir. 2009).
7. "KPMG to Pay $456 Million for Criminal Violations". IRS website. Internal Revenue Service. August 29, 2005. Retrieved August 10, 2012.
8. "Statute Of Limitations". Tax Trials. Retrieved 2012-08-08.
9. "IRS Collects $3.2 Billion from Son of Boss; Final Figure Should Top $3.5 Billion". IRS. Retrieved November 11, 2013.
10. Tau, Byron (August 9, 2012). "New Obama ad suggests Romney paid no taxes". Politico.com. Politico. Retrieved August 10, 2012.
11. Borchers, Callum (August 9, 2012). "President Obama's campaign repeats call for more Mitt Romney tax returns, citing tax shelter used by Marriott when Romney was on board". The Boston Globe. Retrieved August 10, 2012.