District court allows $60 million of income to be offset by Son-of-Boss shelter
Sala v. U.S. (DC Co 4/22/08) 101 AFTR 2d ¶ 2008720
Mike Habib, EA
myIRSTaxRelief.com A district court has allowed an individual to offset $60 million of compensation income with losses from a Son-of-Boss transaction.
Facts. Carlos E. Sala had income in 2000 of more than $60 million. However, he claimed a tax loss that essentially nullified his tax burden. Sala achieved the loss through his involvement in a foreign currency options investment transaction known as Deerhurst. He claimed that the $60 million loss resulted from a series of steps that made use of an S corporation (Solid Currencies, Inc.) and an investment in a partnership (Deerhurst Investors, GP). These steps were orchestrated under a then-existing tax rule that disregarded short options as liabilities for purposes of establishing partnership basis. Under this rule, liabilities created by short options were considered too contingent to affect a partner’s basis in the partnership.
IRS challenged this transaction, which is commonly known as a Son-of-Boss shelter, on various grounds. The district court faced these key issues:
(1) whether the transactions creating Sala’s 2000 tax loss were sham transactions;
(2) whether Sala had a profit motive for entering into the transactions creating his 2000 tax loss;
(3) whether the transactions creating Sala’s 2000 tax loss, as executed, allowed the tax loss; and
(4) whether any allowable tax loss was rendered retroactively disallowed by Reg. § 1.752-6.