The lone taxpayer win in the contingent liability son-of-boss partnership tax shelter cases fell on Friday, when the Tenth Circuit ruled that the taxpayer loss was a sham. See Sala. Vs US (10th Cir 2010).
This was one of the son-of-boss shelters, the kind that makes me wonder how a self-respecting tax attorney can provide an opinion in a case like this. The taxpayers had an unrelated 60 million dollar gain that they did not want to pay taxes on. So they entered into some long and some short option deals and contributed them to a partnership. They claimed to have magically created an artificially puffed up basis by ignoring the short options but not the long. The partnership is liquidated after just a few weeks, as intended, and they claim the puffed up basis of about $61 million goes to the partnership property received on liquidation. They sell the property. But they can only sell the property for its $1 million value, and therefore they claim a big loss, just the right amount to offset the $60 million gain. Instead of income of $60 million and change, Sala paid taxes ona reported adjusted gross income of about 26 thousand.
The court refers to the IRS Notice 2000-44, which discussed contingent liability partnership shelters as creating noneconomic losses that would not be taken into account as a loss deduction.
this court concludes Sala’s participation in Deerhurst GP lacked economic substance. Most compelling is that the claimed loss generated by the program was structured from the outset to be a complete fiction. It is clear the transaction was designed primarily to create a reportable tax loss that would almost entirely offset Sala’s 2000 income with little actual economic risk. By acquiring a series of long and short options that largely offset one another, contributing them to Deerhurst GP in exchange for a partnership interest, and then almost immediately liquidating the partnership, Krieger was able to ensure that a tax loss nearly equivalent to Sala’s income would be achieved in just a few weeks.
Why did tax attorneys participate in the planning, promotion or opinion writing for these kinds of deals? I suspect the reason is related to the reason that banks pushed sleazy loans off on people in order to have more "product" for the securitization profit machine during the subprime crisis--there has been an oft-repeated slogan that 'greed is good' because it is just business doing what business knows how to do best--making money. That kind of end result focus can make people forget the ethics of the enterprise, and fail to focus on whether their own actions uphold the integrity of the law.