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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 of that year, 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 by that point, 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 then 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 had received from
promoter investigations and from investor lists
from Justice Department litigation, the agency
believed that more than 1,800 people participated
in Son of Boss. It was predicted that the total
revenue yield from the settlement scheme will
exceed $3.5 billion.
The Son of Boss ‘amnesty’ 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 at that point.
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.
In
a further development in the Son of Boss saga,
ruling in December 2007, the United States Court
of Federal Claims found in favor of the Internal
Revenue Service, confirming that the shelter
was an abusive scheme, and that any deductions
claimed under it should therefore be disallowed.
The
closely-watched case involved Jade Trading,
which in 2003 took legal action against the
US tax authority after it ruled that millions
of dollars in artificial tax losses were not
valid.
Delivering
her verdict on the matter, Judge Mary Ellen
Coster Williams suggested, according to a New
York Times report, that the losses being claimed
by Jade Trading's principal, Robert Ervin and
his brothers, who were his business partners
at that time, were "purely fictional".
"In
sum, this transaction's fictional loss, inability
to realize a profit, lack of investment character,
meaningless inclusion in a partnership, and
disproportionate tax advantage as compared to
the amount invested and potential return, compel
a conclusion that the spread transaction objectively
lacked economic substance," the Judge was
further quoted by Reuters as observing.
The
decision was expected to have implications for
other, similar cases.
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