Son of BOSS

Abstract

Derivatives typically lead to multiple ways to achieve the same payoff. They also allow considerable control over the timing of cash flows. In the past, this led clever taxable investors to adopt positions that were essentially riskless but would produce a loss in the current year for tax purposes with offsetting gains deferred until a subsequent tax year, or in some cases, (arguably) taxed at a lower rate or not at all. Over the years, the IRS has waged a continuing battle to uncover such schemes and to close the loopholes that seemed to permit them. A strong tool in this fight has been a legal ruling that allows the IRS to ignore the letter of the regulations if they can show that tax avoidance is the sole economic purpose for an investor's strategy. Naturally, this has given rise to increasingly elaborate derivatives-based tax avoidance schemes, for which demonstrating a lack of economic purpose is hard to do. In this article, Tucker walks us through one of the latest and greatest of such tax avoidance schemes, known as Son of Boss.