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Supreme Court Deals Blow to IRS In Tax Shelter Case

The U.S. Supreme Court ruled against the IRS in a decision that may prevent the collection of $1 billion from people who used a tax shelter that was popular in the late 1990s and early 2000s.  In United States v. Home Concrete & Supply, LLC, the Court found that Section 6501(e)(1)(A) of the Internal Revenue Code, which extends the limitations period for the government to assess a deficiency against a taxpayer, does not apply when a taxpayer overstates the basis in property that he has sold, thereby understating the gain received from the sale.

The general rule is that the IRS has 3 years from the date a return is filed to begin the audit or collection process.  This 3 year rule can be extended to 6 years if the taxpayer fails to report an item of gross income that is in excess of 25 percent of the amount of gross income actually shown on the return.  In this case, the IRS argued that the 6 year statute of limitations should apply, while the taxpayer asserted that the 6 year statute of limitations should not apply because the tax strategy utilized did not involve the omission of income.  In the 5-4 decision, the Supreme Court agreed, saying the IRS overstepped its bounds in seeking to apply the 6 year statute of limitations.

The tax shelter at issue was known as the Son of BOSS, short for “bond and option sales strategy,” 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 by artificially inflating the cost of the asset to make the profit from its sale appear smaller.  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.  This decision will no doubt throw a wrench in any plans the IRS may have to go after other offenders.

It is worth noting that this is not the first time the IRS has tried to go after taxpayers who used the Son of BOSS strategy.  The Court’s decision comes as other courts have rejected regulations that were designed to help the government pursue Son of BOSS cases.  This just goes to show that the IRS is nothing if not relentless, and they will aggressively pursue taxpayers who they feel have engaged in abusive behavior.  The next tax shelter participant may not be so lucky as to be able to hide behind the statute of limitations…