The Internal Revenue Service won its first court case against the questionable tax shelters known as "Son of Boss" on a procedural point.

The boss in Son of Boss is short for a bond and options sales strategy, which the IRS formally disallowed in 2000, saying that the tax treatment created artificial losses to offset legitimate gains. Last week's decision from a U.S. Tax Court judge is the first time a court has ruled on the shelter.

The actual case was brought against the founder and former chief executive of a brokerage firm in Omaha, Neb., R. J. Thompson Holdings. Randall J. Thompson sold the firm to TD Waterhouse of Canada in June 2001 and sued the IRS himself last summer, when the agency disallowed more than $20 million in tax losses. That case was set to begin in Los Angeles yesterday.

And while the IRS viewed the ruling as a victory -- in a statement, IRS Commissioner Mark Everson said that the case was "the first concrete manifestation of the fruits" of a commitment to end the use of such shelters -- technically, the tax court judge didn't rule on the merits of Son of Boss. Thompson defended the need for a hearing based on a jurisdictional issue, which the judge rejected.

In 2004, the IRS offered to reduce penalties owed if investors who used Son of Boss came forward and paid the taxes owed. About 1,200 investors took advantage of the offer, paying $3.8 billion. At the time, the IRS warned the 600 other taxpayers who had used the shelters that if they didn't come forward and settle, the agency would disallow all the tax benefits and assess the full 40 percent penalty that the law allows.

Similar shelters are at the center of the government's case against KPMG. In October a federal grand jury charged 19 defendants (including 16 former employees of the accounting firm), with at least 39 counts of tax evasion and a single count of conspiracy to defraud the IRS. Lawyers for the defendants have argued that their clients did nothing illegal, noting that no court had yet ruled that the shelters are improper.

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