The United States Treasury Department and the Internal Revenue Service have issued regulations dealing with a tax shelter commonly known as "Son of Boss." The regulations address the tax treatment of the assumption of certain obligations by a partnership from a partner. The regulations ensure that temporary or permanent non-economic tax losses cannot be created by transferring these obligations to partnerships.
"These regulations are part of our increased efforts to shut down abusive tax shelter transactions," stated Treasury Assistant Secretary for Tax Policy Pam Olson. "In Notice 2000-44, we warned that these Son of Boss transactions didn't work. Nevertheless, we understand that some promoters have continued to pitch them. The regulations will remove any question that the transactions do not produce the results claimed by the promoters of the transactions."
In one variation of a 'Son of Boss' transaction, a taxpayer purchases and writes economically offsetting options and then purports to create substantial positive basis by transferring those option positions to a partnership. On the disposition of the partnership interest, the liquidation of the partnership, or the taxpayer's sale or depreciation of distributed partnership assets, the taxpayer claims a tax loss, even though the taxpayer has incurred no corresponding economic loss.
For example, assume that taxpayer A issues and purchases options to acquire stock in Corporation X. A pays $100 for the option to acquire X stock and receives $100 on the issuance of the option to acquire X stock. A then contributes to a partnership the $100 A received on the sale of the option, and the partnership assumes A's obligation to satisfy the option that A has issued. The value of A's interest in the partnership is $0. However, some taxpayers have argued that A's basis in the partnership is $100, because A's basis in the partnership interest is not reduced by the amount of the option obligation assumed by the partnership. A then sells his partnership interest for $0 and claims a $100 loss.
The regulations address this transaction by requiring A to reduce his basis in the partnership by the amount of the assumed option obligation. In accordance with legislation granting Treasury authority to issue these regulations, the regulations apply to assumptions by partnerships occurring on or after October 19, 1999.