There are so few taxpayer victories in litigated tax shelter cases that when they do come along, they are worthy of reporting. In Sala v. United States (April 22, 2008), the United States District Court for the District of Colorado held in favor of the taxpayer, who was suing to obtain a refund of the taxes he paid after the IRS disallowed losses he had deducted resulting from what was clearly a tax shelter transaction.

The losses resulted from trading sophisticated foreign currency options and certain anomalies of the partnership tax rules. These transactions were widely marketed by accounting and law firms and came to be called “Son of Boss” transactions (“Boss” standing for Bond and Option Sales Strategy). Anytime a transaction becomes known by an acronym, it is best avoided, as you can be sure that the IRS has become aware of it.

In order to find in favor of the taxpayer, the court had to reject the following arguments made by the government: i) the transactions were “sham transactions”; ii) the taxpayer did not enter into the transactions for the purpose of making a profit; iii) the transactions had no economic substance; iv) the loss should be disallowed under the “step transaction” doctrine; v) there was no business purpose for the transactions; and vi) a regulation the government issued in a year after these years should be applied retroactively to deny the taxpayer the loss deduction. On each of these issues, the court found in favor of the taxpayer.

The court has already rejected the government’s motion for a new trial. An appeal by the government to the United States Court of Appeals is almost a certainty. In a case involving the same kind of transactions, on July 31, 2008, the United States Court of Federal Claims held in favor of the government in Stobie Creek Investments, LLC v. United States. The court found that there was no economic substance behind the transactions and denied the claimed tax benefits to the taxpayer. There is little question that the government will win far more of these cases than it loses.