Participants in the Son-of-BOSS tax shelter have maintained their perfect losing record in the Tax Court. Therefore, another Son-of-BOSS deal has failed to produce its promised loss deductions.
Son-of-BOSS is a variation of a slightly older tax shelter known as the “bond and options sales strategy,” or BOSS. Son-of-BOSS transactions take many forms, but they all have one thing in common: Assets that are encumbered by significant liabilities must always be transferred to a partnership. The goal is to increase basis in that partnership or in the assets themselves. The liabilities are usually obligations to buy securities. However, they are typically not completely fixed when they are transferred to the partnership.
This contingency is supposed to let the partnership treat the liabilities as uncertain. This, in turn, is supposed to let the partnership ignore the liabilities in computing basis. The result is supposed to give the partners basis in the partnership or in the assets themselves. This increased basis is supposed to translate into large loss deductions for the partners, all with no actual economic losses. The Tax Court has yet to fall for the scheme.
The Court has used several theories to reject Son-of-BOSS losses. In this case, the Court once again relied on the fact that the two partnerships involved in the transactions did not actually exist. The partnerships were invalid because they were created only to carry out tax avoidance schemes. Thus, their members never intended to run any business through them.
The partnerships also failed the “prongified” test for determining whether the parties intended to and did, in fact, join together for the present conduct of an undertaking or enterprise. One managed to scrupulously adhere to the formal requirements for looking like a partnership. However, it did not display any objective indication of a mutual combination for the conduct of an ongoing enterprise. The second partnership barely even went through the motions. It filed partnership returns and issued K-1s to its purported partners. However:
- there was no evidence the purported partners made any contributions to the partnership;
- the partnership did not have a formal operating agreement;
- the partnership did not conduct any business in its own name;
- there was no real profit for the partners to control or withdraw; and
- the partnership did not keep any books or records.
Since the partnerships were invalid, they were simply disregarded. Thus, the purported partners were treated as directly engaging in the partnerships’ activities and directly owning the partnerships’ property.
This meant that the supposedly separate long and short options that were the heart of the transaction were actually a single-option spread. Thus the options were part of one contract, and they could not be separated to produce artificial losses.
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