Son-of-BOSS Casts Long Shadow Over Tax Law

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By Erin McManus

The Son-of-BOSS tax shelter’s litigation afterlife has outlasted the actual transactions by more than a decade, and prompted changes to the tax code during a period in which very little significant tax legislation ever became law.

A search of written federal court decisions on the Son-of-BOSS (bond option sales strategy) tax shelter revealed 107 decisions beginning in 2004, with the latest released Dec. 14. There were at least seven cases still underway as 2016 drew to a close for a transaction that first appeared around 1998 and largely ended in 2000 when the Internal Revenue Service issued Notice 2000-44, saying it wouldn’t allow the claimed tax benefits and warning of possible penalties.

Andy S. Grewal, a tax law professor at the University of Iowa College of Law, told Bloomberg BNA in a Dec. 16 e-mail that the “audit difficulties in Son-of-Boss cases likely contributed to the push to scrap TEFRA in favor of what we have today.” Grewal was referring to the Tax Equity and Fiscal Responsibility Act (Pub. L. No. 97–248), which was replaced by a new partnership audit regime under the Bipartisan Budget Act of 2015.

Grewal said that he doubts the economic substance doctrine would have been codified under tax code Section 7701(o) “but for the proliferation of Son-of-BOSS cases.”

The transaction and similar tax shelters were designed to create large paper losses for wealthy taxpayers by inflating their bases in sham partnerships. The losses were then used to offset gains and thus minimize taxes, frequently on a significant windfall, such as gain from the sale of a business.

The U.S. Tax Court’s Dec. 14 decision AD Inv. 2000 Fund LLC v. Commissioner, T.C. Memo. 2016-226, was, perhaps ironically, another attempt by James Haber, the creator of Son-of-BOSS, to defend his creation and its claimed tax attributes by arguing that newly discovered evidence demonstrated that an IRS expert witness had lied in his report and during trial testimony as to his expert qualifications. The Tax Court remained unpersuaded, finding that the entities involved couldn’t be recognized for tax purposes.

Penalty Box

The IRS warned in Notice 2000-44 that “[a]ppropriate penalties may be imposed on participants in these transactions or, as applicable, on persons who participate in the promotion or reporting of these transactions.”

The agency carried through on that warning. Its most aggressive stance is to go for the 40 percent penalty for a gross valuation misstatement under Section 6662(h). Of the 29 Son-of-BOSS decisions in which the penalty was stated, 18 were subject to the penalty equal to 40 percent of the understated tax liability resulting from the transaction.

A few tax shelter participants who were able to appeal Tax Court and federal district court decisions to the U.S. Court of Appeals for the Fifth Circuit got away with 20 percent penalties under that circuit’s precedent from Heasley v. Commissioner, 902 F.2d 380 (5th Cir. 1990), and Todd v. Commissioner, 862 F.2d 540 (5th Cir. 1988). The U.S. Supreme Court put an end to the Todd/Heasley rule when it held in United States v. Woods, 134 S. Ct. 557 (2013), that the 40 percent penalty applied if the entire transaction was found to lack economic substance.

The tax code allows taxpayers an exception to penalties if they can show they had good cause and reasonably relied on professional advice in taking the positions they did on their returns. Many Son-of-BOSS participants made the argument. Few succeeded.

“Son-of-BOSS (and other shelters that followed it) had an unfortunate effect on penalty protection,” Bob Probasco, former tax controversy practitioner and current director of the Low Income Tax Clinic at Texas A&M University School of Law, told Bloomberg BNA in a Dec. 16 e-mail. “Tax opinions, often by very reputable accounting and law firms, stretched too far to justify results that were too good to be true.

“Unfortunately, when tax advisors over-reached, so did the IRS and the courts. That resulted in overly broad statements of when taxpayers could not rely on advice from tax professionals. Some taxpayers who really did deserve penalty protection lost it. Son-of-BOSS also contributed to the complex, onerous, and widely-criticized ‘covered opinion’ standards in Circular 230. Those Circular 230 standards were subsequently relaxed but not before creating many problems,” he added.

To contact the reporter on this story: Erin McManus in Washington at

To contact the editor responsible for this story: Meg Shreve at

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