The federal government has lost a Son of Boss tax shelter case involving taxpayers who invested in foreign currency options.

The case concerned a claim by Carlos E. Sala and his wife Tina for a refund on Sala's 2000 federal taxes. Sala had income in 2000 of more than $60 million, but he claimed a tax loss that essentially nullified his tax burden through his involvement in a foreign currency options investment transaction known as Deerhurst.

Sala filed an amended return on Nov. 18, 2003, eliminating the loss claimed on his original
2000 return and paying over $26 million in taxes, plus penalties and interest. He later filed another amended return reclaiming the tax loss and seeking a refund of the taxes, interest and penalties. The government contended Sala was not entitled to claim the tax loss because Deerhurst was an improper tax shelter. Sala brought suit against the government to obtain a refund of the taxes, interest and penalties he paid.

Judge Lewis T. Babcock rejected the government's claim that the tax shelter was necessarily abusive. "The facts show Sala's participation in the Deerhurst Program was a genuine investment transaction that possessed economic substance and was entered into for the purposes of realizing profits above and beyond the tax losses," he wrote. "Because Sala's investment in the Deerhurst Program was not abusive, it is immaterial whether other transactions of the general type he entered into were abusive."

The judge found that Sala's participation in the Deerhurst Program "possessed a reasonable possibility of profits beyond the tax benefits, was entered into for a business purpose other than tax avoidance, and was motivated by a desire for profits above and beyond the tax benefits sought."

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