I previously blogged the district court’s decision in Klamath Strategic Investment Fund LLC v. United States, 440 F. Supp. 2d 605 (E.D. Tex. 2006), which held that the anti-"Son of Boss" Reg. § 1.752-6 could not be applied retroactively by the IRS to tax shelters entered into prior to June 24, 2003 (when § 1.752-6 was issued as a temporary regulation) . The Seventh Circuit today upheld the application of Reg. § 1.752-6 retroactively to October 18, 1999. Cemco Investsors, LLC v. Forest Chartered Holdings, Ltd, No. 07-2220 (7th Cir. 2/7/08). The opening of Judge Easterbrook’s unanimous opinion foreshadowed the result:
Paul M. Daugerdas, a tax lawyer whose opinion letters while at Jenkins & Gilchrist led to the firm’s demise (it had to pay more than $75 million in penalties on account of his work), designed a tax shelter for himself, with one client owning a 37% share.
The Seventh Circuit described the tax shelter this way:
A transaction with an out-of-pocket cost of $6,000 and no risk beyond that expense, while generating a tax loss of $3.6 million, is the sort of thing that the IRS frowns on. The deal as a whole seems to lack economic substance; if it has any substance (a few thousand dollars paid to purchase a slight chance of a big payoff) then the $3.6 million “gain” on one premium should be paired with the $3.6 million “loss” on the other; and at all events the deal’s nature ($36,000 paid for a slim chance to receive $7.2 million) is not accurately reflected by treating Euro 56,000 as having a basis of $3.6 million.
Update: Joe Kristan has more here.
5 responses to “7th Circuit Upholds Retroactive Application of “Son-of-Boss” Regs, Contrary to Klamath”
good opinion, but one part leaves me confused:
“The Commissioner has a statutory power to disregard transactions that lack economic substance.
Compare Gregory v. Helvering, 293 U.S. 465 (1935), with Frank Lyon Co. v. United States, 435 U.S. 561 (1978).”
it’s a bit strange to establish the commissioner’s supposed “statutory power” by referring to cases. usually when you say that a statute supports something, you follow it up by a citation to a statute.
the people drafting economic substance codification proposals might be surprised to know that the statute is already there (See 26 U.S.C.A. Gregory and 26 U.S.C.A. Frank Lyon).
SEVENTH CIRCUIT UPHOLDS RETROACTIVE ‘SON OF BOSS’ REGS
The Seventh Circuit Court of Appeals has upheld a ruling striking down a variant of the “Son of Boss” tax…
SEVENTH CIRCUIT UPHOLDS RETROACTIVE ‘SON OF BOSS’ REGS
The Seventh Circuit Court of Appeals has upheld a ruling striking down a variant of the “Son of Boss” tax…
SEVENTH CIRCUIT UPHOLDS RETROACTIVE ‘SON OF BOSS’ REGS
The Seventh Circuit Court of Appeals has upheld a ruling striking down a variant of the “Son of Boss” tax…
SEVENTH CIRCUIT UPHOLDS RETROACTIVE ‘SON OF BOSS’ REGS
The Seventh Circuit Court of Appeals has upheld a ruling striking down a variant of the “Son of Boss” tax…
SEVENTH CIRCUIT UPHOLDS RETROACTIVE ‘SON OF BOSS’ REGS
The Seventh Circuit Court of Appeals has upheld a ruling striking down a variant of the “Son of Boss” tax…
SEVENTH CIRCUIT UPHOLDS RETROACTIVE ‘SON OF BOSS’ REGS
The Seventh Circuit Court of Appeals has upheld a ruling striking down a variant of the “Son of Boss” tax…
SEVENTH CIRCUIT UPHOLDS RETROACTIVE ‘SON OF BOSS’ REGS
The Seventh Circuit Court of Appeals has upheld a ruling striking down a variant of the “Son of Boss” tax…
It is possible to read section 7805(a) as a broad anti-abuse measure, which would encompass the common-law doctrines. Of course, this type of reading is foreclosed by what happened historically.