Treasury, IRS Whack “Son of Boss:” The Treasury Department and the Internal Revenue Service have issued regulations designed to take out a tax shelter commonly known as “Son of Boss.”

The regulations address the tax treatment of the assumption of certain obligations by a partnership from a partner. The new regs ensure that temporary or permanent non-economic tax losses cannot be created by transferring these obligations to partnerships.

In one variation of a “Son of Boss” transaction, a taxpayer purchases and writes economically offsetting options and then purports to create substantial positive basis by transferring those option positions to a partnership. On the disposition of the partnership interest, the liquidation of the partnership, or the taxpayer’s sale or depreciation of distributed partnership assets, the taxpayer claims a tax loss, even though the taxpayer has incurred no corresponding economic loss.

“These regulations are part of our increased efforts to shut down abusive tax shelter transactions,” said the Treasury Department’s assistant secretary for tax policy, Pam Olson. “The regulations will remove any question that the transactions do not produce the results claimed by the promoters of the transactions.”

IRS Summons Law Firm to ID Taxpayers: For the first time, a law firm is being summoned to discover taxpayers who are involved in potentially abusive tax avoidance transactions.

The Internal Revenue Service has received approval from the U.S. District Court, Northern District of Illinois, to serve a John Doe summons on the law firm of Jenkens & Gilchrist. The summons asks the firm to identify those taxpayers who may have invested in listed transactions or other potentially abusive transactions organized or sold by the law firm’s Chicago office.

“Our efforts to curb potentially abusive tax avoidance transactions depends on our ability to obtain and use a web of information about these transactions and those who invest in and promote them,” said IRS chief counsel B. John Williams. “As part of our efforts, we have and will issue summonses to law firms, accounting firms, investment banks and others who may have been involved in the promotion of questionable transactions.”

The key features of a John Doe summons are that the IRS must seek court approval to serve them and, if there are objections to the summons, the statute of limitations for assessing tax deficiencies for the unknown parties - the “John Does,” in this case, the investors - is automatically suspended beginning six months after the service of the summons, while objections to the summons are resolved.

House Approves IRS Efficiency Bill: The House has approved a bill to improve efficiency at the Internal Revenue Service, paving the way for legislation that would ease the burden for many taxpayers.

The Taxpayer Protection and IRS Accountability Bill of 2003 would reform penalty and interest provisions, giving a first-time penalty waiver to individual taxpayers in certain cases, according to CCH Tax News. It would also allow taxpayers to pay installments on their tax liabilities for less than the full amount that they owe, and allow e-filers until April 30 to file their returns.

“It goes without saying that our tax code is far too complicated for anyone to understand - and often turns honest, hard-working taxpayers into ‘violators’ of unforgiving IRS rules and regulations,” said Rep. Rob Portman, R-Ohio, the bill’s sponsor: “This bill strengthens and protects the rights of taxpayers by bringing common sense and accountability to the IRS.”

Among other provisions are reforms to more closely guard taxpayer confidentiality and an increase in funding for low-income taxpayer clinics.

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