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Supreme Court to hear Texas tax shelter case

The IRS is notoriously aggressive in seeking to impose tax penalties against what it perceives to be unjustified tax shelters. But the U.S. Supreme Court has agreed to hear a Texas case challenging those penalties.

The case involves a business transaction by Red McCombs, a Texas billionaire who is well known around the country for his ownership of professional sports teams. At various time, he has owned the San Antonio Spurs, the Minnesota Vikings and other franchises.

In United States v. Woods, the tax case the Supreme Court has agreed to hear, Mr. McCombs and a business partner undertook a transaction involving the purchase and sale of options on foreign currency. The federal government contends that the purpose of the transaction was solely to incur paper losses that could offset gains elsewhere - particularly from McCombs's pro sports teams.

The transaction in question was known by the acronym COBRA. The letters stood for "current options bring reward alternatives." This tax shelter strategy has been used by other as well, and the IRS has been previously cracked down on it.

The government took the position that a penalty of 40 percent should apply on taxes that the IRS said were owned on the COBRA deal. But the Fifth U.S. Circuit Court of Appeals held that the 40-percent penalty was not applicable.

There is also now a federal law that applies a tax penalty of 40 percent in certain cases. Congress passed the law in 2010 to apply to cases where taxpayers are found to have made "gross valuation misstatements' in IRS filings.

The Congressional action clarified the law for cases that arose after 2010. But the governments is still pursuing the McCombs case, seeking to solidify its ability to seek the 40-percent penalty for pre-2010 cases.

Source: "Supreme Court To Weigh IRS Penalties On Alleged Tax Dodges," Huffington Post / Reuters, Patrick Temple-West, 3-26-13

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