Justice Strikes Down Tax Shelter

A Los Angeles court invalidated abusive “Son of Boss” tax shelter scheme and imposed the maximum penalty of 40% on real estate investors James Thomas and Edward Fox last week. Thomas (who was once an IRS attorney) and Fox devised a scheme wherein they purchased an exotic form of a financial option that was supposed to protect them against the decline in real estate values, which they feared in the immediate aftermath of the terrorist attacks of September 11.

These options, which had a real value of only $1,000, were obtained through fallen accounting firm Arthur Andersen and bailout baby AIG for over $2 million in fees. The benefit of the option was that they supposedly created more than $145 million of tax basis. This would have offset income on over $145 million of future profits. That means the partners wouldn’t have owed income tax on the same amount.

Judge Walter determined that the tax avoidance scheme had no real economic substance and was simply designed to fabricate tax basis in certain partnerships.

In other words there was no economic or business purpose for the transactions. Most of the nearly 2000 taxpayers involved in the “Son of BOSS” scheme hav settled their cases with the IRS, remitting some $4 billion in aggregate to the IRS.

“The court’s decision today is yet another victory for the American taxpayer,” said John A. DiCicco, Acting Assistant Attorney General of the Justice Department’s Tax Division. “Too many individuals in the last decade have turned to abusive tax shelters to keep from paying their fair share of taxes. This decision serves as yet another reminder that these abusive schemes are not valid.”

It’s so nice to see some justice meted out to the cheaters.

Image Credit: Sudhamshu, Flickr