High Court Limits IRS Time to Challenge Tax Shelters

The U.S. Supreme Court ruled against the Internal Revenue Service in a decision that may prevent the collection of $1 billion from people who used a tax shelter popular in the late 1990s and early 2000s.

The justices, voting 5-4, said the IRS has only three years to challenge so-called Son-of-BOSS tax shelters. Lower courts had disagreed on the question, with some saying the IRS had up to six years.

Justice Stephen Breyer wrote for the court that the case is governed by a 1958 high court decision that interpreted “identical” language in an earlier version of the law.

“It would be difficult, perhaps impossible, to give the same language here a different interpretation without effectively overruling” that decision, Breyer wrote.

The tax agency had said the extra three years are crucial because of the complex, hard-to-detect nature of the disputed shelters.

The son-of-BOSS 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. BOSS stands for “Bond and Option Sales Strategy.”

Gross Income

The question for the high court was whether basis inflation is covered under a provision that gives the IRS six years to act against taxpayers who omit “gross income” from a return. The taxpayers in the case argued the IRS is bound by the three-year period that applies in other contexts.

The ruling may affect Warburg Pincus LLC’s Bausch & Lomb unit, which is fighting a court case that concerns alleged basis overstatement in a different context. The IRS is seeking hundreds of millions of dollars in taxes, penalties and interest from the company, whose case doesn’t involve a son-of-BOSS shelter.

The IRS says more than 1,900 taxpayers used son-of-BOSS shelters, saving as much as $6 billion, according to agency estimates. More than 1,200 of those took part in a settlement program that the IRS said had recouped almost $4 billion in 2004 and 2005.

In a court filing last year, the government said the basis-overstatement issue was important to 30 pending cases, involving $1 billion in taxes, interest and penalties.

1954 Version of Law

Breyer’s opinion was joined in full by Chief Justice John Roberts and Justices Clarence Thomas and Samuel Alito, while Justice Antonin Scalia joined the main part of it. Dissenting were Justices Anthony Kennedy, Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan.

Writing for the four, Kennedy said the re-enacted version of the tax law at issue today contained additional language that left room for the government’s view that it had six years to file a challenge.

The case before the justices stemmed 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.

The case is United States v. Home Concrete & Supply, 11-139.

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