U.S. Supreme Court to weigh penalty on sham tax shelter
WASHINGTON Oct 8 (Reuters) - The U.S. Supreme Court on Wednesday will hear arguments about whether the Internal Revenue Service can slap a 40 percent penalty on certain financial transactions in a case involving a tax shelter used by a Texas billionaire.
The shelter itself - known as a "current options bring reward alternatives," or COBRA - is not in dispute, only the IRS's attempt to collect the penalty. Lower courts have ruled COBRA shelters are a sham meant solely to avoid taxes.
At the center of the case are Texas business partners Billy Joe "Red" McCombs and Gary Woods. McCombs is a billionaire former owner of professional sports teams and co-founder of Clear Channel Communications Inc, a radio broadcaster.
Woods was the lead partner in the duo's tax shelter, established almost 14 years ago. He is the president of San Antonio-based McCombs Partners, an investment management business founded by McCombs.
COBRA TAX SHELTER
In 1999, McCombs was the owner of the Minnesota Vikings football team and expected a financial windfall from changes in the National Football League, the government said in court filings.
To offset his gains, he and Woods used a COBRA shelter to buy and sell options on foreign currencies to generate more than $45 million in 1999 paper losses from transactions that cost them only $1.37 million, the government said.
After an audit, the IRS in 2004 billed Woods and McCombs for unpaid taxes plus a 40 percent penalty. The taxpayers took the agency to court in 2005.
A Texas district court ruled the financial transactions were a sham, but disallowed the IRS's 40 percent penalty. The IRS appealed the penalty ruling, but lost again in a June 2012 ruling by the 5th U.S. Circuit Court of Appeals.
The government said in court filings that the IRS has prevailed in eight similar cases at other appeals courts. To settle the diverging appeals court views, the Supreme Court in March agreed to hear the case.
The government is arguing that Congress gave the IRS authority to apply the drastic penalty to transactions used to generate fake investment losses to offset taxable income.
McCombs and Woods are arguing that the IRS is overreaching its authority with the 40 percent penalty.
McCombs and Woods could not be reached for comment. Greg Garre, a lawyer with Latham & Watkins LLP who is representing the two Texans, declined to comment.
The IRS could not be reached for comment.
DECISION EXPECTED NEXT YEAR
The Supreme Court's decision is expected by June 2014. The government says "hundreds of millions of dollars" in tax penalties hang in the balance, according to court filings.
Nathan Clukey, a former Justice Department attorney who has argued tax shelter cases, said this one "is pretty significant for the government as far as the number of potential cases."
The case is the second tax shelter dispute to come before the Supreme Court in two years. In April 2012, the high court ruled in favor of two North Carolina businessmen who had a tax shelter similar to the COBRA scheme.
That 5-4 decision in United States v. Home Concrete & Supply LLC halted the IRS's ability to collect back taxes on tax shelters for an extended statute-of-limitations period.
Garre, who successfully argued the Home Concrete case, will face off in the Woods-McCombs case against deputy Solicitor General Malcolm Stewart, who argued the Home Concrete case for the government.
The case is United States v Woods No. 12-562.
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