The U.S. Court of Federal Claims has issued a ruling in a tax shelter case that could have far-reaching implications in similar cases.
The case involved Jade Trading, a limited liability corporation allegedly used by Robert Ervin and two of his brothers in 1999 to offset the income taxes due on a $40 million profit from the sale of their cable business. They each purchased a $15 million option and sold it to American International Group. They contributed the option spread to Jade Trading, claiming a tax loss of $15 million each, even though they each had only paid $150,000 for the options.
The tax shelter, known as a Son of BOSS transaction, generated artificial losses, according to the court. Son of BOSS is the successor to an earlier tax shelter known as a bond and options sales strategy.
Judge Mary Ellen Coster Williams noted that the transaction was devised and marketed by BDO Seidman's "Tax $ells" Division as a tax product, not by an investment advisor as a vehicle to earn profit. She ruled that the transaction failed the economic substance test and said the "claimed losses were purely fictional."
