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<div class="timestamp">December 27, 2007</div>
<h1>
Judge Hands I.R.S. Victory in Tax Shelter
</h1>
<div class="byline">By <a href="http://query.nytimes.com/search/query?ppds=bylL&v1=LYNNLEY%20BROWNING&fdq=19960101&td=sysdate&sort=newest&ac=LYNNLEY%20BROWNING&inline=nyt-per" title="More Articles by Lynnley Browning">
LYNNLEY BROWNING</a></div>
<p> A civil court has ruled
that a popular tax-avoidance scheme known as Son of Boss was abusive
and any deductions claimed for it were invalid, an important victory
for the <a href="http://topics.nytimes.com/top/reference/timestopics/organizations/i/internal_revenue_service/index.html?inline=nyt-org" title="More articles about the Internal Revenue Service.">Internal Revenue Service</a>
in its battle against questionable tax shelters sold to wealthy individuals. </p>
<p>The decision, by the United States Court of Federal Claims, covers
one of the most widely used aggressive tax shelters of the late 1990s
through recent years. </p>
<p>The ruling, issued on Friday and discussed by an I.R.S. spokesman
for the first time Wednesday, also could have significance for <a href="http://topics.nytimes.com/top/news/business/companies/deutsche_bank_ag/index.html?inline=nyt-org" title="More information about Deutsche Bank A.G.">
Deutsche Bank</a>,
the German bank that is under criminal investigation by Manhattan
federal prosecutors over its work with questionable tax shelters that
the I.R.S. considers similar to Son of Boss. </p>
<p>Deutsche Bank officials could not be reached immediately last night for comment. </p>
<p>The ruling, in a case that was closely watched by tax specialists,
concerned an entity known as Jade Trading, which sued the I.R.S in the
Court of Federal Claims in 2003 for a refund after the agency ruled its
claims for tax deductions invalid.</p>
<p>Jade Trading was a partnership controlled by Robert W. Ervin of
Sturgis, Ky., and was used by him and his brothers in 1999 to help
offset income taxes due on $40 million in profit from the sale of their
cable television business. </p>
<p>The Ervin brothers paid fees to the <a href="http://topics.nytimes.com/top/news/business/companies/american_international_group/index.html?inline=nyt-org" title="More information about American International Group (A.I.G.)">
American International Group</a>
and to Sentinel Advisors, an investment firm, among others, for a Son
of Boss shelter that they then used to generate around $40 million in
artificial tax losses.</p>
<p>The 75-page ruling, by Judge Mary Ellen Coster Williams, also said
that a key part of the transaction "was devised and marketed by a tax
accounting group, BDO Seidman's 'Tax Sells' Division, as a tax product,
not by an investment adviser as a vehicle to earn profit."</p>
<p>Son of Boss, which the I.R.S. formally disallowed in 2000 and has
never considered valid for deductions, involves creating artificial
losses that are then used improperly to offset legitimate gains. The
scheme is based on an older shelter, bond and options sales strategy,
or Boss.</p>
<p>Mr. Ervin and his partners had tried to claim that they had made
$450,000 in investments that had generated $40 million in losses. </p>
<p>Judge Williams's ruling said that the losses claimed by Mr. Ervin and his partners were "purely fictional." </p>
<p>She further wrote that the transaction's "fictional loss, inability
to realize a profit, lack of investment character, meaningless
inclusion in a partnership and disproportionate tax advantage as
compared to the amount invested and potential return, compel a
conclusion that the spread transaction objectively lacked economic
substance."</p>
<p>One definition of an abusive tax shelter is a tax-motivated transaction that lacks economic substance.</p>
<p>By 2005, the I.R.S. had persuaded more than 1,200 people who bought
Son of Boss tax shelters to come forward and pay $3.7 billion in taxes
owed or risk being prosecuted by the government. The government can be
expected to use the ruling in this case to pressure additional
taxpayers to settle.</p>
<p>Tax shelters similar to Son of Boss are at the center of the
government's criminal case against former employees of the accounting
firm KPMG. That case, which federal prosecutors once billed as the
largest tax fraud case in history, has faltered since the judge
dismissed charges against 13 defendants.</p><br clear="all"><br>-- <br><br><br>Juanita Flores<br>Advocate for the Truth from Jesus