Advertisement
YOU ARE HERE: LAT HomeCollections

Judge Rules Against IRS in `Son of Boss' Tax Case

A federal jurist finds that the agency went too far in retroactively banning a shelter that cost the government billions of dollars.

July 21, 2006|From Bloomberg News

A federal judge ruled that the Internal Revenue Service overstepped its authority by retroactively banning a tax shelter known as "Son of Boss" that cost the government at least $6 billion in lost revenue in the late 1990s.

Judge T. John Ward of the U.S. District Court for the Eastern District of Texas said the regulations, issued by the IRS in August 2000, didn't apply to taxpayers who used the tax shelters before the rules were issued.

Retroactive application of the rules was an "abuse of discretion," Ward wrote in a 28-page judgment released Thursday.

It's the first significant legal defeat for the IRS in its six-year campaign against the tax shelters, a version of which prompted a federal probe of KPMG. The No. 4 U.S. accounting firm agreed in August 2005 to pay $456 million to avoid criminal prosecution relating to the sale of such tax products.

The ruling may hurt the government's case against 16 former KPMG executives, including former Deputy Chairman Jeffrey Stein, who are charged with knowingly selling illegal tax shelters including one similar to the shelter ruled on by Ward on Thursday.

"Tax-evasion charges cannot stand in the Stein case if the underlying shelter survives on its merits," said Lee Sheppard, a contributing editor at Tax Notes, an industry magazine.

"A conspiracy-to-obstruct-justice case and false-tax-returns case could survive the shelter being sustained on its merits," Sheppard said.

"Son of Boss" refers to tax shelters similar in design to those known as Boss, or Bond and Option Sales Strategy, which the IRS banned in December 1999. According to the IRS, such strategies generated artificial tax losses designed to offset income from other transactions.

The judge's ruling may also help firms such as Ernst & Young that are being sued by former customers who bought the shelter and were subsequently audited by the IRS.

The IRS is studying the ruling, "which affects one part of the government's case," IRS Chief Counsel Don Korb said.

He said the government would pursue a second legal principle in the fall challenging the tax shelter on the grounds that it violated a so-called economic substance test, which demanded that tax shelters have an economic purpose other than just reducing tax liability.

Advertisement
Los Angeles Times Articles
|
|
|