July 23,2004

Grassley, Baucus Release Details of Plans to Ensure Continued ''Son of Boss'' Enforcement

WASHINGTON – Sen. Chuck Grassley, chairman of the Committee on Finance, and Sen. Max Baucus, ranking member, today released details of their plans to revise their anti-tax shelterlegislation to make sure several hundred taxpayers who used the “Son of Boss” tax shelter don’tescape the taxes they rightfully owe. The senators announced their plans at a Wednesday hearing.

“The IRS gave Son of Boss participants a chance to come forward voluntarily,” Grassleysaid. “A large of number of them didn’t come forward. They’re apparently hoping that the clock willrun out on the statute of limitations, and they’ll get off scot-free. That would be unfair, both to theSon of Boss users who came forward and honest taxpayers who don’t buy into these schemes.”Baucus said, “Taxpayers who defiantly engage in abusive transactions and then attempt tohide in the weeds should not be rewarded. We intend to give the IRS adequate time to pursue thosewho rejected the terms of the voluntary settlement program.”

Grassley and Baucus plan to revise provisions in the Senate-passed Jumpstart Our BusinessStrength (JOBS) Act to extend the August 15 statute of limitations for Son of Boss investors who didnot participate in the IRS’s voluntary settlement program. Also, they plan to revise the interestsuspension rules for Son of Boss investors and other tax shelter investors.

A detailed history of the IRS and Treasury’s Son of Boss enforcement efforts and a description of the senators’ plans follow.

In Notice 99-59, 1999-52 I.R.B. 761, the Internal Revenue Service and the Treasury Department described a transaction that was being marketed to taxpayers for the purpose of generating artificialtax losses. This transaction was known as the “bond option sales strategy” or the “BOSS” transaction. Notice 99-59 described several variations on the basic BOSS structure. The Notice advised taxpayers that the BOSS structure, the described variations, and substantially similar transactions would be considered as abusive tax shelters that would be challenged by the IRS in court. Despite these efforts, tax shelter promoters quickly modified the BOSS structure to fall outside the variations described in Notice 99-59. The promoters persisted in marketing the revised scheme, known as Son of Boss, which generated artificial tax losses designed to offset income from other transactions through a series of contrived steps involving interests in a partnership.

In response, Treasury issued Notice 2000-44, 2000-2 C.B. 255, that would deny taxpayers thepurported losses resulting from the Son of Boss transaction. The notice also warned taxpayers andpromoters who participate in these transactions that they may be subject to criminal penalties if theywillfully conceal their participation on tax returns. The IRS was aware that thousands of Son of Bosstransactions had resulted in understatements of tax in excess of $6 billion, not including interest andpenalties.

On May 5, 2004, the Internal Revenue Service announced that taxpayers who invested in "Son ofBoss" transactions would have until June 21, 2004, to accept an IRS settlement offer to resolve theirtax issues. Under the terms of the agreement offer, eligible taxpayers would concede 100 percent ofthe claimed tax losses, must pay all applicable interest, and must accept the imposition of a penaltyunless they had previously disclosed their participation in the transaction. Taxpayers not participatingin the settlement would receive a statutory notice of deficiency (90 day letter) disallowing all lossesand out of pocket costs and would be assessed maximum applicable penalties. According to IRSCommissioner Mark Everson the IRS was “taking this unusual step because of the severity of theabuse."

To date, over 1,500 Son of Boss investors have elected to participate in the settlement program.However, in conducting IRS promoter investigations and summons enforcement actions by theDepartment of Justice, the IRS recently discovered hundreds of Son of Boss investors who haverefused to participate in the settlement program. The IRS has learned of at least 500 previouslyundisclosed transactions in the last few months and suspects hundreds more may be hiding theirparticipation. These investors are hoping the statute of limitations will lapse before the IRS canassess tax against them.

Son of Boss transactions were aggressively marketed in the late 1990s and 2000 to companies andhigh net-worth individuals. Many of these transactions generated tax losses of between $ 10 millionand $ 50 million. On August 15th, 2004, the statute of limitations for extended calendar year 2000income tax returns will close for a significant number of non-disclosing Son of Boss investors.These investors will escape their rightful tax liability after that date.

It is the view of the Chairman and Ranking Member of the Senate Finance Committee that nondisclosingSon of Boss investors should not be allowed to “run out the clock” on the statute oflimitations before the IRS finds them. The IRS and Department of Treasury have been on record inopposing these transactions since 1999. The purchase of these tax shelters in the year 2000 was anact of sheer defiance and disregard for the tax laws of the United States. The Senate and Houseversions of the bill to repeal the ETI regime contain a measure that would hold open the statute oflimitations on a transaction listed by the Treasury Department as a tax shelter, such as the Son ofBoss transaction, but this measure only applies to taxable years that are open to audit after the ETIrepeal bill is enacted. This would allow the non-disclosing Son of Boss investors to escape tax ontheir fraudulent scheme.

Accordingly, the Chairman and Ranking Member of the Senate Finance Committee announce theirintent to extend the August 15th statute of limitations for Son of Boss investors that did notparticipate in the IRS’s voluntary settlement program.

The Chairman and Ranking Member also are aware of another problem with these Son of Boss casesconcerning the suspension of interest while the case is pending. Because of a provision enacted aspart of the IRS Restructuring and Reform Act of 1998, the accrual of interest on most Son of Bosscases was suspended. This means that taxpayers who participated in these transactions and have nowbeen caught will not have to pay the interest on their tax deficiencies, despite understatementstotaling over $6 billion. The Senate version of the ETI repeal bill contains a provision that wouldturn off the interest suspension in the case of listed tax shelter transactions, but this change wouldbe effective after May 5, 2004. This would allow most Son of Boss deals to escape the interest owedon back taxes. The Chairman and Ranking Member intend to modify this effective date to repealthe interest suspension rule for transactions that are listed as of the date of enactment of thelegislation, but will continue to allow suspension for taxpayers that turn themselves in under thesevoluntary disclosure programs.