US Supreme Court rules Texas billionaire owes tax shelter penalty

WASHINGTON Tue Dec 3, 2013 1:53pm EST

WASHINGTON Dec 3 (Reuters) - The U.S. Supreme Court on Tuesday unanimously ruled that Texas billionaire Billy Joe "Red" McCombs must pay steep penalties to the Internal Revenue Service related to more than $45 million he tried to shield from taxes.

The decision could lead to the payment of hundreds of millions of dollars in penalties and interest that the government has alleged other taxpayers owe in disputes similar to the McCombs case.

McCombs, former owner of the Minnesota Vikings football team, and his business partner Gary Woods in 1999 set up a partnership to run a tax shelter known as a "current options bring reward alternatives," or COBRA. It was designed to create financial losses to offset windfall gains McCombs was expecting.

The tax shelter itself had already been ruled a sham by lower courts. But McCombs and Woods argued that a 40 percent IRS penalty should not apply.

In an opinion written by Justice Antonin Scalia, the high court said the Texans' arguments were "unpersuasive."

"At the end of the day, Woods' and McCombs' $3.2 million investment generated tax losses that, if treated as valid, could have shielded more than $45 million of income from taxation," Scalia wrote.

"The penalty is applicable to tax underpayments resulting from the partners' participation in the COBRA tax shelter," Scalia wrote.

Woods and McCombs did not immediately respond to requests for comment on Tuesday.

Greg Garre, the lawyer who represented the Texans before the high court in October, declined to comment on the decision. An IRS spokesman also declined to comment.

It was unclear exactly how much money McCombs and Woods owed the IRS because interest has accrued on the penalties, tax lawyers said on Tuesday.

The ruling dealt a blow to other taxpayers fighting the IRS in court or in audits over 40 percent penalties, said Nathan Clukey, a former Justice Department attorney.

"It's game over," said Clukey, now with the law firm King & Spalding LLP. "It's not like the court minced words here. They were fairly explicit. It's an impressive win for the government."