TAX/LEGAL UPDATE: IRS LOSES Tax-Shelter Case

The U.S. Supreme Court has ruled against the Internal Revenue Service in a tax-shelter case.

The case involved a 1999 sale of a Salisbury, N.C., heating oil and concrete business, Home Concrete & Supply LLC. The transaction totaled about $10.6 million, according to court records. But the tax shelter enabled the partnership holding the oil business to report a gain of just $69,000 from the sale.

The business was advised on the tax shelter by Jenkens & Gilchrist LP, a Texas law firm that eventually shut down after an IRS investigation into its tax-shelter practice.

The IRS waited too long— more than three years—to challenge taxpayers' filings that used a "Son of BOSS" tax shelter, the court ruled. The court's ruling didn't address the legality of the tax shelter.

The decision could benefit dozens of taxpayers who used the shelter and cost the government hundreds of millions of dollars in revenue, perhaps as much as $1 billion.

Son of BOSS was a term Treasury officials coined 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 cost of an asset to make the profit from its sale appear smaller.

All resembled an earlier shelter marketed as "BOSS," short for "bond and option sales strategy." The Son of BOSS transaction was marketed in various forms by advisers at some accounting and law firms beginning in the late 1990s. Several thousand taxpayers likely used the shelter before the Treasury and Congress took steps to block its tax benefits, beginning in 2000.

While the IRS and Treasury were moving against Son of BOSS shelters as early as 2000, individual deals could be difficult to detect, and the IRS obtained much of its information through lengthy investigations of promoters. By the time the IRS got around to auditing individual taxpayers, the three-year statute of limitations for assessing back taxes often was running out, lawyers said.

The IRS argued in a number of cases that a six-year statute of limitations should apply. The six-year statute typically applies in cases in which the taxpayer has omitted income.

Many taxpayers ultimately resolved the cases through settlements that allowed them to pay back taxes and some penalties. But other taxpayers fought back in court. They argued that the six-year statute of limitations shouldn't apply, because Son of BOSS didn't involve omission of income. In Wednesday's 5-4 decision, the Supreme Court agreed, saying the IRS overstepped in using the six-year statute of limitations.

[WSJ, Thurs., 4-26-2012, p. CB]