Son of Boss Settlement Initiative FAQs
Section 2(a) — Terms of Initiative: Tax Adjustments
Q-2a.1. What is included in the phrase “all claimed tax benefits and attributes”?
A-2a.1. Taxpayers will be entitled to no ordinary or capital losses from the transactions. This includes, but is not limited to: inflated basis loss, inflated basis in retained assets, loss carryforwards or carrybacks, fee deductions, losses passed through from partnerships or other flow-through entities, and net interest expense on loans from third parties.
Q-2a.2. Which items are included in computing the net out-of-pocket costs and fees?
A-2a.2. “Net out-of-pocket costs and fees” include the net cost of property contributed to the partnership (including cash) and fees paid to third parties to facilitate the taxpayer's investment in the Son of Boss transaction, reduced by the cash and the fair market value of assets distributed from the partnership to the taxpayer, amounts received by the taxpayer on the sale of the partnership interest, and amounts received by the taxpayer in connection with the transaction from any other source, or any combination of such. For example, in the loan premium transaction, the “net” cost of property contributed to the partnership does not include any cash received from the premium borrowing. Similarly, in a transaction involving offsetting options, the “net” cost of the property contributed is the amount of premium paid for the purchased option reduced by the amount of premium received for the written option.
Q-2a.3. How should the taxpayer treat a refund or reimbursement of the fees paid to the accounting firm or other party (or reduction of previously accrued but unpaid fees) relating to the tax shelter investment?
A-2a.3. If the refund (which, for purposes of these FAQ, includes any reimbursement or reduction) was received before the taxpayer and the Service execute the settlement agreement, the refund is included in the net out-of-pocket computation by reducing the fees paid or accrued. The closing agreement will provide that, if the refund is received after the taxpayer and Service execute the settlement agreement, the taxpayer must recognize income from the refund in the tax year the amount was received.
Q-2a.4. Please explain the character of the out-of-pocket costs. Can I choose the character? Can I use some of the fees as long-term loss and some as ordinary loss? When must I make that choice?
A-2a.4. Taxpayers have a choice of treating the net out-of-pocket costs as either a long-term capital loss or as an ordinary loss equal to one-half the net out-of-pocket costs, but neither both nor any combination of each. For example, the net out-of-pocket costs are $2 million. The taxpayer may elect to treat the $2 million as if it were a long-term capital loss on Schedule D or the taxpayer may elect to treat $1 million (one-half of $2 million) as if it were an ordinary loss on Line 14 of the 1040 (Form 4797) in the year the fees were paid or accrued. The taxpayer may not elect to treat, for example, $1 million as a long-term capital loss and $500,000 (one-half of the remaining $1 million) as an ordinary loss. Taxpayers elect long-term capital or ordinary treatment during the 60-day period for providing additional information and documentation on the form that will be provided.
Q-2a.5. If a taxpayer claimed an inflated-basis loss from one of these transactions in a year barred by the statute of limitations, is the taxpayer eligible to claim the net out-of-pocket costs?
A-2a.5. Yes, but only to the extent that those costs and fees exceed any tax benefits (including tax benefits with respect to costs and fees) claimed in the barred years.
Q-2a.6. If the taxpayer paid or accrued costs and fees from one of these transactions in a year barred by the statute of limitations, is the taxpayer eligible to claim the net out-of-pocket expenses?
A-2a.6. Yes, but subject to the limitation that, if the tax benefits were claimed in a year barred by the statute of limitations, the costs and fees will be allowed only to the extent that they exceed the tax benefits claimed in the barred years. The costs and fees will be permitted in the first open year.
Q-2a.7. How are “net out-of-pocket costs” treated when the taxpayer's loss from the Son of Boss transaction was claimed in a year other than the year in which the expenses were paid or accrued?
A-2a.7. Under Section 2(a)(2), the taxpayer may treat the net out-of-pocket costs as a loss in the year those costs were paid or accrued. The taxpayer may account for the net out-of-pocket costs in the year the taxpayer claimed the loss for the Son of Boss transaction only if that was the year in which those costs were paid or accrued.
Q-2a.8. If the taxpayer realized “actual” losses and elects to participate in the settlement, can the taxpayer deduct 100 percent of the “actual” losses?
A-2a.8. Actual losses incurred in the Son of Boss transaction (for example, a taxpayer realized a small loss on the offsetting options) are included in the “net out-of-pocket” costs determination and thus are not separately deductible under the terms of the settlement.
Q-2a.9. In computing their net out-of-pocket costs, how should taxpayers determine the appropriate valuation of the property (if any) distributed from the partnership?
A-2a.9. Taxpayers should use fair market value in computing their net out-of-pocket costs. Taxpayers will have the burden of proving the fair market value as of the date of distribution from the partnership. If taxpayers cannot reasonably determine fair market value, the Service, in its discretion, may agree to treat the cost of the asset to the partnership as a proxy for fair market value. In all events, in the closing agreement, the parties will adjust the basis of the distributed property as appropriate, including by the valuation (either cost or fair market value) used in calculating the taxpayer’s net out-of-pocket cost.