The verdict is in for two Texas attorneys – Cary Patterson and Harold Nix – who the IRS says used a Son of Bass tax shelter to eliminate the federal tax on millions of dollars. Between 1998 and 2000, the two men earned fees of more than $30 million each by representing the State of Texas in litigation against tobacco companies. When the IRS took them to court, Hix and Patterson lost and filed an appeal. Now the Fifth Circuit Court of Appeals has ruled against them again, after finding that the investment partnerships they set up lacked economic substance. For tax purposes, the Court said, the losses generated by the partnership, totaling more than $50 million, should be disregarded.
Acting Attorney General John A. DiCicco applauded the court ruling, saying in a statement that the court had "recognized that determinations of this sort must be made on the objective evidence irrespective of the claimed motives of the individual investors." The court did stop short, however, of adding penalties to the defendants' tax bills, as requested by the IRS.
Boss and Son of Boss
As the name implies, Son of Boss is an offshoot of Boss, which stands for Bond Options Sales Strategy. Boss was struck down by the IRS, after which the promoters of this scheme simply changed the game slightly and created the next generation of this type of scheme.
Son of Boss is the term used to define a category of complex tax maneuvers which ultimately create an artificial loss for investors, eliminating large capital gains while exposing the investors to minimal risk. The scheme involves a simple pattern that is made complex by being buried in mounds of paperwork designed to obfuscate that pattern and, it is hoped, deflect the attention of the IRS.
At the core of Son of Boss is a transaction in which the basis of the assets sold is artificially stepped-up. The result is a purported tax loss where there was no corresponding economic loss.
Basically, Son of Boss works this way: an investor purchases an asset worth a small amount (such as $50) from a company that is part of the scam. He purchases the asset for $50 cash plus a promissory note for $1 million, payable at a date in the distant future. The basis of the asset for tax purposes becomes $1,000,050. The taxpayer then sells the asset to another company involved in the scam, for $50, and incurs a $1,000,000 loss. That sounds simple, but in order for promoters of the tax shelters to make money, the transactions are made so complex that it is virtually impossible for the taxpayer to sort out. The tax shelter transaction is structured so as to seem to fit neatly within the tax code, to make it harder to detect.
Back in May of 2004 the IRS, the IRS issued a global settlement offer for taxpayers involved in Son of Boss cases. Since then, hundreds of taxpayers have settled their cases.