US Government Exceeded Powers In Tax Shelter Case

Ian Allison

28 July 2006

A judge in Texas has ruled that regulations issued by the US tax authority, the IRS in 2000 did not apply to taxpayers who used the a tax shelter known as "Son of Boss" (a bond and option sales strategy), prior to that date. The US government exceeded its power by outlawing a tax shelter and through its retroactive application of the rules, according to the judge who deemed the retroactive rules to be "an abuse of discretion." The ruling is expected to be only a minor setback for the US government in its prosecution of tax shelter cases, as it does not come from a precedent-setting court. It is possible though that the case will have a bearing on the case against 16 former KPMG executives who are alleged to have defrauded the US Treasury to the tune of billions of dollars by selling a variety of tax shelters, including Son of Boss, to wealthy clients in the 1990s, which is due to go to trial next January. Last year, the IRS released the results of its Son of Boss settlement offer, a 2004 initiative which offered users of the shelter improved settlement terms in a limited amnesty. More than 1,200 taxpayers qualified to participate in this offer, and the IRS collected some $3.8 billion in taxes and penalties. However, about 600 investors did not come forward, with some instead electing to challenge the IRS in court.