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US IRS recovers $3.7 bln from shelter settlement

July 11, 2005

By Mark Felsenthal

WASHINGTON (Reuters) – The U.S. Internal Revenue Service
has recovered more than $3.7 billion in unpaid taxes, interest
and penalties from users of the illegal “Son of Boss” tax
shelter, the agency said on Monday.

The IRS deemed Son of Boss abusive in 2000 and has said it
resulted in more than $6 billion in estimated understatements
of taxes due from some 1,800 taxpayers. These were mostly
wealthy individuals such as corporate executives seeking to
shelter huge gains from business or stock sales during the late
1990s market boom.

“We are still processing a number of the more complicated
elections and expect the final tally to be near $4 billion,”
said IRS Commissioner Mark Everson in a statement.

To date, more than 1,200 people have taken advantage of the
settlement offer. About 750 taxpayers passed on the settlement.

“The IRS will continue to pursue these cases through audits
and the normal litigation process,” the agency said. The first
cases are expected to go on trial this fall.

Son of Boss was a variant of another illegal tax shelter
called the Bond and Options Sales Strategy. It used financial
products, such as currency options and government securities,
to create what the IRS called artificial tax losses that were
used to offset big profits from asset sales.

Under the terms of the settlement, participants were
required to concede their entire claimed tax loss and pay a 10
to 20 percent penalty.

In exchange, they were allowed to deduct part of their
out-of-pocket transaction costs, which generally ran to 6 to 7
percent of the claimed tax loss.

The IRS also said it had received strong turnout for a
settlement offer to companies and executives who participated
in a tax avoidance scheme involving the transfer of stock
options or restricted stock to family controlled entities.

The IRS identified 114 executives and 42 companies who
participated in abusive transactions. Of these, 80 individuals
and 33 companies participated in the settlement.

The settlement required executives to include 100 percent
of their stock option compensation in income, pay interest,
income and employment taxes, and a 10 percent penalty.

Michigan Democratic Sen. Carl Levin, who investigated tax
shelters sold by accounting and law firms and banks, said this
shelter led to nearly $1 billion in unreported taxable income.




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