A federal judge ruled that the Internal Revenue Service overstepped its authority by retroactively banning a tax shelter known as “Son of Boss” that cost the government at least $6 billion in lost revenue in the late 1990s.
Judge T. John Ward of the U.S. District Court for the Eastern District of Texas said the regulations, issued by the IRS in August 2000, didn’t apply to taxpayers who used the tax shelters before the rules were issued.
t’s the first significant legal defeat for the IRS in its six-year campaign against the tax shelters, a version of which prompted a federal probe of KPMG. The No. 4 U.S. accounting firm agreed in August 2005 to pay $456 million to avoid criminal prosecution relating to the sale of such tax products.
The ruling may hurt the government’s case against 16 former KPMG executives, including former Deputy Chairman Jeffrey Stein, who are charged with knowingly selling illegal tax shelters including one similar to the shelter ruled on by Ward on Thursday.
“Tax-evasion charges cannot stand in the Stein case if the underlying shelter survives on its merits,” said Lee Sheppard, a contributing editor at Tax Notes, an industry magazine.
“Son of Boss” refers to tax shelters similar in design to those known as Boss, or Bond and Option Sales Strategy, which the IRS banned in December 1999. According to the IRS, such strategies generated artificial tax losses designed to offset income from other transactions.