Son of Boss Abusive Tax Shelter

This website is the creation and property of San Francisco tax attorney, Robert L. Sommers.

SON OF BOSS

Introduction

NEWS FLASH - February 23, 2012:

Presidential candidate Mitt Romney's involvement with the Son of Boss tax scam.

Introduction to Abusive Tax Schemes

This website uses the infamous son of Boss tax shelter as a tool to explain how our tax code has been manipulated by some of the sharpest and most devious minds in the country. At its core, the son of Boss tax shelter involves the same concept employed by other tax shelters to reduce or eliminate capital gains: the creation of an artificial tax loss to offset a taxable gain. What sets the son of Boss tax shelter apart is the magnitude of tax dollars lost to the U.S. Treasury, as well as the tortured logic of its creators. Understanding how the son of Boss transaction distorts economic reality offers an insight into how all tax shelters work, as well as how the dysfunctional nature of our current tax code provides the opportunity to attain such illogical results.

Tax Shelters in a Nutshell

Here is the basic pattern contained in the son of Boss type tax shelters. These transactions reduce or eliminate capital gains by creating artificial capital losses. Although the pattern is simple, it is obfuscated with mounds of paperwork, intricate financial instruments and virtually incomprehensible tax code provisions.

  1. Tax shelter promoter sets up two companies, Company A and Company B and funds each company with $50. Company A buys a briefcase for the $50.
  2. Client comes to promoter and says, "I have a $1.0 million capital gain." Promoter says, "No problem, I can eliminate that gain for you by generating a $1.0 million loss to offset your gain."
  3. Promoter devises the following plan:
  1. Client purchases the $50 briefcase from Company A by paying Company A $1,000,050!
  2. Client pays $50 in cash. In addition (here's the tax shelter part), Client "pays" another $1.0 million by signing a promissory note (a promise to pay) payable to Company A for $1.0 million in 30 years . For tax purposes, Client purchased the briefcase for the cash payment and the promissory note, so the tax cost for Client's briefcase is $1,000,050.
  3. Client then sells the briefcase to Company B for $50. Thus, economically, Client is made whole; Client paid $50 for the briefcase and sold the briefcase for $50. However, Client's tax basis in the briefcase was $1,000,050 and by selling the briefcase for $50, Client incurred a $1.0 million loss! That loss will then be used to offset Client's $1.0 million capital gain, effectively zeroing out his tax liability.
  4. Assume that Company B then sold the briefcase back to Company A for $50. Promoter is ready for his next client now that Company A has the briefcase and Company B has $50, and the pattern can be repeated.

The foregoing example illustrates the core principles of how tax shelters work. The transaction is legal and fits within the literal rules of the tax code. Millions of taxpayers offset capital gains with capital losses. But does the transaction work? Of course, the answer is clearly no; otherwise, no one would ever pay a dime in capital gains taxes. This is an example of an "artificial basis step-up transaction," the cornerstone of many tax shelter schemes. The promoter, through an sham transaction designed solely for the purpose of manipulating the tax code, creates a purported tax loss where there was no corresponding economic loss.