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In
February, 2005, the
Treasury Department and the Internal Revenue
Service issued guidance that designated "sale-in/lease-out"
or "SILO" arrangements as abusive tax avoidance
transactions.
According
to the tax authorities, SILO arrangements are
designed to exploit the tax law by shifting
tax benefits from a tax-indifferent party that
cannot use them to a taxpayer that can.
Taxpayers
entering into SILO arrangements cannot claim
tax benefits as the purported owners of property
subject to a lease because they do not acquire
tax ownership of the property.
In
the American Jobs Creation Act of 2004, Congress
enacted limitations on the deductibility of
losses from future SILO transactions. The Notice
informs taxpayers that the IRS will challenge
the purported tax benefits claimed by taxpayers
entering into earlier SILO transactions on a
number of grounds. It further states that SILOs
are considered ‘listed transactions.’
Taxpayers
who enter into SILOs and who are required to
file tax returns must disclose their participation
to the IRS. In addition, promoters of listed
transactions must keep lists of investors and,
in certain cases, register those transactions
with the IRS.
In
March, the IRS announced that more than $3.2
billion had been collected from over 1,000 taxpayers
who participated in the Son of Boss tax shelter
settlement scheme, a total that is expected
to rise.
The figure included back taxes, fines and interest
paid by the 1,165 taxpayers who had participated
in the scheme thus far, and according to the
IRS, the typical taxpayer payment was almost
$1 million, with 18 taxpayers paying more than
$20 million each. One taxpayer alone was said
to have paid over $100 million.
Son of Boss evolved from an earlier scheme known
as ‘BOSS’ (bond and option sales strategy).
The scheme utilised a complex set of derivative
transactions to reduce tax liability and was
commonly used in the late 1990s to offset large
one-off gains such as the sale of a business.
Under the stringent terms of the settlement
initiative, taxpayers were required to concede
100% of the claimed tax losses and pay a penalty
of either 10% or 20% of the total, unless they
had previously disclosed the transactions to
the IRS.
“This
was a particularly bad shelter, and we’re glad
so many chose to get right with the government,”
commented IRS Commissioner Mark W. Everson.
“Despite
the tough terms we offered, two-thirds of Son
of Boss participants have come forward and paid
up,” he added.
Based on disclosures the IRS has received from
promoter investigations and from investor lists
from Justice Department litigation, the agency
believes that more than 1,800 people participated
in Son of Boss. It is predicted that the total
revenue yield from the settlement scheme will
exceed $3.5 billion.
The Son of Boss ‘amnesty’ has also benefited
the coffers of various state governments, with
Arizona, Illinois, Maine, Maryland, Michigan,
New York, Ohio, Utah and Virginia having collected
more than $23.5 million from voluntary state
tax return amendments.
Furthermore, under an information sharing initiative
between the IRS and state tax authorities, an
additional $161 million in disallowed losses,
and assessments of nearly $16 million in taxes,
interest and penalties, were uncovered by the
states of Colorado, Connecticut, Maine, Maryland,
Missouri, North Dakota, Pennsylvania, Utah and
Virginia.
Ever keen to emphasise the agency’s recent hard
line policy on tax shelters, Commissioner Everson
issued a stern warning to those yet to participate
in the Son of Boss settlement initiative.
“For
those who didn’t come forward, we know who they
are (and) we are going after them,” he stated.
In
January 2007, the Senate Finance Committee passed
a series of measures cracking down on tax shelter
abuses, which were subsequently removed from
the legislation to which they were attached
as it made its way through Congress..
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