Requests for Tax Shelter Opinion Letters Denied

The Tax Court denied a partnership’s motions to compel the IRS to provide tax opinion letters related to all known “Son of BOSS” transactions, along with a list of law or accounting firms that have issued them. The court determined that the information requested by 3K Investments LLC (tax matters partner for plaintiff 3K Investment Partners) was confidential and was irrelevant to the partnership’s case.

Son of BOSS, a listed transaction, is a variation of the bond and option sale strategy (BOSS) in which tax losses are generated by artificially inflating the basis of partnership interests.

James Menighan purchased a prepackaged tax shelter from a law firm and contributed offsetting options on foreign currency through 3K Investments to the 3K partnership in an attempt to inflate his basis in the partnership. For the tax year ended Dec. 13, 2000, the IRS in a notice of final administrative adjustment adjusted the items reported on the partnership’s return and determined that accuracy-related penalties under section 6662 would apply to the resulting underpayments.

In an attempt to establish a good-faith and reasonable-cause defense to the penalties, the partnership petitioned the Tax Court and requested that the IRS produce the letters and list of their authors. The IRS had previously provided copies of the opinion letters issued to Menighan by the law firm, Jenkins & Gilchrist, but refused to provide additional information. The partnership maintained that the requested information was relevant and would be used to establish a good-faith and reasonable cause defense by showing that a large number of national law firms and accounting firms had taken the same position with respect to Son of BOSS transactions as the partnership. The Tax Court likened that line of reasoning to teenagers’ common argument that “everyone’s doing it.” The facts and merits of the specific case determine the reasonableness of the position taken on the partnership return rather than the advice given to other taxpayers, the court said. It agreed with the IRS that the requested information was not relevant; it would not lead to discovery of admissible evidence; and it represented confidential return information under section 6103.

The partnership argued the letters were not “return information” under the statute because they were not a return or attachment. However, the court noted, section 6103(b)(2) defines “return information” broadly to include data “with respect to a return” or action or consideration by the IRS regarding a taxpayer’s “tax, penalty … or other imposition, or offense.” Alternately, the partnership suggested that the letters could be provided with taxpayer-specific information redacted. However, the court cited the Supreme Court holding in Church of Scientology v. IRS (484 U.S. 9 (1987)) that “Congress did not intend the statute to allow the disclosure of otherwise confidential return information merely by the redaction of identifying details.”

By Karyn Bybee Friske, CPA, Ph.D., Pickens Professor of Business, and Darlene Pulliam, CPA, Ph.D., McCray Professor of Accounting, both of the College of Business, West Texas A&M University, Canyon, Texas.