Paul L. Caron
Dean




Friday, October 2, 2009

7th Circuit Affirms Denial of Accuracy-Related Penalties in Son-of-BOSS Tax Shelter

The Seventh Circuit yesterday affirmed the doistrict court's decision ruling that a taxpayer was not liable for accuracy-related penalties for engaging in a Son-of-BOSS tax shelter because he reasonably relied on the tax opinion of the Altheimer & Gray law firm. American Boat Co. v. United States, No. 09-1109 (th Cir. Oct. 1, 2009):

This case arose from a series of transactions constituting an example of what is now known as a "Son of BOSS" tax shelter. The shelter, which was aggressively marketed by law and accounting firms in the late 1990s and early 2000s, is a younger version of its parent -- the equally illegal BOSS (bond and options sales strategy) shelter. See Kligfeld Holdings v. Comm'r, 128 T.C. 192, 194 (2007) (providing a description of the Son of BOSS tax shelter). A Son of BOSS shelter may take many forms, but common to them all is the transfer to a partnership of assets laden with significant liabilities. The liabilities are typically obligations to purchase securities, meaning they are not fixed at the time of the transaction. The transfer therefore permits a partner to inflate his basis in the partnership by the value of the contributed asset, while ignoring the corresponding liability. The goal of the shelter is to eventually create a large, but not out-of-pocket, loss on a partner's individual tax return. This may occur when the partnership dissolves or sells an over-inflated asset. In turn, this artificial loss may offset actual -- and otherwise taxable -- gains, thereby sheltering them from Uncle Sam.

In this case, American Boat does not challenge the district court's determination that the particular transactions and tax structure violated tax law. Fortunately for those of us less mathematically inclined, we need not dwell on the finer details of American Boat's transactions. The IRS will receive its delinquent taxes. The real question in this case is whether American Boat, managed by David Jump, had reasonable cause for its underpayment. If it did, then no accuracy-related penalty applies; if it did not, American Boat's owners will be liable for 40% of the underpayment of $1,260,544.

This is a close case. In the end, we are searching for clear error in the district court's factual determinations, and we are unable to find it. Whether any judge on this panel might have reached a different conclusion after hearing the evidence first-hand is not the appropriate concern. Contrary to the government's assertion, we are not insulating from penalties every taxpayer who obtains an opinion letter from the same adviser who structures the transaction. And perhaps in today's day and age, after a decade of publicized corporate controversy and scandal, such reliance would not be reasonable. But whether one has reasonable cause for a tax underpayment is a fact-specific inquiry, and we must consider what Jump knew or should have known in 1998. The district court provided detailed reasons for reaching its conclusion, all of which were supported by the evidence before it. We find no clear error in the district court's factual findings, and no error of law in its legal determinations.

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Comments

American Boat is of course a violation of 1234(b) and also 500 years of double entry book keeping. You have to close a deferred expense. Period. Closing Deferred Revenue, 121 TAX NOTES 965 (2008)
http://www.utexas.edu/law/faculty/calvinjohnson/closing-deferred-revenue.pdf ]
But it is IRS Counsel's job to explain the depths of hte violation of the nrom to the court, and they didnt get through.

Posted by: calvin Johnosn | Oct 2, 2009 12:53:01 PM