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(Adds argument from taxpayers in 11th paragraph.)
Sept. 27 (Bloomberg) -- The U.S. Supreme Court agreed to hear an appeal in a federal tax-shelter case that may reshape the regulatory powers of the Internal Revenue Service.
The case will let the justices clear up lower court disagreement over the amount of time the IRS has to challenge a shelter that was popular in the late 1990s and early 2000s. The technique, known as “Son-of-BOSS,” was used to cut as much as $6 billion from tax bills, according to IRS estimates.
The IRS says it should have six years to act against Son- of-BOSS shelters, rather than the three-year period that applies in other contexts. The tax agency says the extra three years are crucial because of the complex, hard-to-detect nature of the shelters.
“The IRS’s ability to assess additional income tax often depends on the availability of the six-year assessment period,” the Obama administration argued in court papers.
The high court’s ruling may have broader implications as well, determining how much flexibility the IRS has to adapt to new tax-avoidance strategies. One issue in the case is the effect of an IRS regulation that retroactively declared the six- year period to be the applicable rule for Son-of-BOSS cases.
The disputed shelters were designed to artificially inflate the cost basis of an asset so that taxpayers claimed little or no capital gains when they sold it. Taxpayers often used partnerships and short sales, trades that typically are bets that the price of an asset will fall.
The question for the high court is whether basis inflation is covered under a statutory provision that gives the IRS six years to act against taxpayers who omit “gross income” from a return.
The case before the justices stems from the sale of a North Carolina company, Home Oil and Coal Co., by its two shareholders, Robert Pierce and Steven Chandler. The IRS concluded the men had improperly used a pass-through company to increase their cost basis, leaving them with a $69,000 gain on a sale of more than $10 million.
After the IRS acted, the taxpayers paid an additional $1.4 million and sued for a refund. A federal appeals court said the three-year period applied, meaning the IRS waited too long to press its case.
‘Guarantee a Win’
Pierce, Chandler and the pass-through company, Home Concrete & Supply LLC, said in court papers that the regulation was an improper attempt by the IRS to change the law retroactively.
“The regulation was issued in an attempt to guarantee a win for the IRS in this case, in which it is a party, and to revive and overturn various losses suffered in similarly situated cases in other jurisdictions,” they argued.
The IRS says more than 1,900 taxpayers used son-of-BOSS shelters. More than 1,200 of those took part in a settlement program that the IRS said recouped almost $4 billion in 2004 and 2005. BOSS stands for “Bond and Option Sales Strategy.”
The case, which the justices will hear in the nine-month term that formally starts next week, is United States v. Home Concrete & Supply, 11-139.
--With assistance from Richard Rubin in Washington. Editors: Justin Blum, Laurie Asseo
To contact the reporter on this story: Greg Stohr in Washington at firstname.lastname@example.org.
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