WSJ, June 3, 2004:  Deadline Looms For IRS Offer On Tax Shelter

THE IRS OFFER   The IRS is offering to settle with people who used the Son of BOSS tax shelter. The deadline is June 21.   • If you settle, you must pay all back taxes owed plus interest -- and may be stuck with penalties ranging as high as 20%.   • If you reject the offer, you may ultimately owe much more in penalties -- and be saddled with hefty legal bills.

The IRS's tough stance underscores the government's growing determination to take a tough line against shelters. "It's clearly a hardball offer," says Ronald Pearlman, a former Treasury Department official and now a law professor at Georgetown University Law Center.

The government's antishelter crusade is proceeding on several other fronts. Federal prosecutors in New York City have launched separate criminal investigations into promotions of potentially abusive shelters by two of the nation's biggest accounting firms -- KPMG LLP and Ernst & Young. The Treasury has issued more pronouncements specifying types of transactions that don't pass muster, such as one that people use to avoid limits on Roth IRA contributions. And courts are ordering major law and accounting firms to turn over names of clients who participated in shelters the IRS considers abusive.

The IRS is reacting to growing pressure from Congress to tackle bogus shelters, at a time of rapidly mounting concern about huge budget deficits. "The IRS has stepped up to the plate -- and I believe they have hit a home run -- with their pursuit of the Son of BOSS transaction," says Sen. Max Baucus, ranking Democrat on the Finance Committee. The Senate recently passed a bill giving the IRS more weapons to use against abusive shelters. But the bill's fate in the House remains uncertain.

How investors react to the IRS offer could help shape the government's strategy in attacking other types of shelters. If enough people wave the white flag, it may make more of these types of offers.

"The guy who's 65 years old and built up some sort of brick-and-mortar company, who really wants to travel around the world and spend time with the grandkids, is likely to say, 'I want to get this behind me,' " says Charles P. Rettig, a tax lawyer at Hochman, Salkin, Rettig, Toscher & Perez PC in Beverly Hills, Calif. "But the guy who is the start-up entrepreneur, who got there by putting everything on the line at the beginning, is much more likely to proceed to litigation because when he looks inside the IRS settlement initiative, his comment is going to be: 'Where's the beef?' "

Nobody is sure exactly how many people used the Son of BOSS shelter, but the IRS last month said it's "already aware of several thousand transactions." Some of them came from its investigation of promoters and from Justice Department enforcement actions.

"The message to taxpayers who invested in these schemes is clear: We are going to find you," IRS Commissioner Mark W. Everson said.

Here's what's at stake in the IRS offer -- and what lawyers see as the major pros and cons for clients to consider.

The Shelter

It's known as "Son of BOSS" because it's a spinoff of an earlier technique the government also went after. (BOSS stands for "bond option sales strategy.") In essence, the shelter involves the creation of what the government calls artificial losses used to offset taxable income, and thus reduce or even eliminate taxes.

A typical participant is someone who built or inherited a business and sold it, or a large interest in it, during the late 1990s or 2000. The stakes are enormous. The IRS estimate of more than $6 billion doesn't include interest and penalties. Many transactions generated tax losses of between $10 million and $50 million each, and others could be much higher.

IRS officials get angry when talking about Son of BOSS and its architects. One senior official refers to a particularly bad strain of this shelter as having come "right from the toilet."

The Offer

The IRS is asking participants to give up their claim to all tax losses in connection with the shelter. Participants will also have to pay interest and possibly a penalty.

You typically won't owe a penalty if you took advantage of an IRS offer in 2002 to disclose your participation in the shelter. If you didn't, and if this was your first and only abusive shelter, there's a mandatory 10% penalty.

For serial abusers, the penalty rises to 20%. However, the IRS will agree to let you deduct as a loss your out-of-pocket transaction costs, such as promoter and professional fees.

The Reaction

Lawyers say some clients will accept the offer because it's easier than facing years of costly litigation and negative publicity stemming from court fights. It would mean avoiding even higher penalties, as much as 40% in some cases. Also, you would be able to write off your out-of-pocket expenses.

But some lawyers say their clients are preparing to fight the government in court. These investors hope to bolster their case by pointing to written opinions received from tax lawyers and accountants they relied on before they participated.

What about criminal charges? Some lawyers say clients who accept the IRS offer would be demonstrating good faith and probably wouldn't face charges. But others fear that the IRS might view a surrender as an admission of guilt. "That is a real concern," Mr. Rettig says.

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Tax-exempt groups will face scrutiny by a Senate panel.

The Senate Finance Committee plans a hearing June 22 on charities and other tax-exempt groups. "Lately, more and more tax problems involving charitable giving have come out," says Sen. Chuck Grassley, the Iowa Republican who heads the panel.

Among the issues the panel will focus on are governance, charities that accommodate tax shelters and donor gifts of property.

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BRIEFS: Lower interest rates: The IRS said the underpayment rate for individual taxpayers will drop to 4% next quarter from 5% this quarter. ... A Senate-approved bill calls for creating a blue-ribbon commission on comprehensive tax reform.