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Department of Justice
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FOR IMMEDIATE RELEASE
Thursday, February 5, 2009
U.S. Court Rejects Two Prominent L.A. Real Estate Investors’ Attempt to Use Tax Avoidance Scheme

WASHINGTON - A federal court in Los Angeles invalidated an abusive tax shelter scheme engaged in by prominent real estate investors James Thomas and Edward Fox, the Justice Department announced today. U.S. District Judge John F. Walter also imposed the maximum penalty - forty percent - allowed by the tax code against them.

Thomas, a former Internal Revenue Service (IRS) attorney, and Fox owned real estate, including interests in the Library Tower, the Gas Company Tower and the Wells Fargo Center, all located in Los Angeles. In 2001 they sought out an abusive tax shelter that has become known as "Son of BOSS." In the Son of BOSS scheme used by Thomas and Fox, they purchased an exotic form of a financial option that they claim would have protected them against a catastrophic decline in real estate values, which they feared in the immediate aftermath of the terrorist attacks of September 11.

Thomas and Fox paid the accounting firm of Arthur Andersen and insurance giant AIG more than $2 million in fees to obtain financial options, but Judge Walter agreed with the government that the true value of the options was less than $1,000. Notwithstanding the low value of the options, Thomas and Fox claimed that the scheme created more than $145 million of tax "basis." That tax basis, if valid, could have been used to shield from the income tax more than $145 million of future profits had Thomas and Fox sold their real estate at a gain.

Judge Walter determined that the tax avoidance scheme had no real economic substance and was simply designed to fabricate tax basis in certain partnerships. The court rejected Thomas’s attempt to claim an increase in tax basis of $100 million despite paying only $1.5 million for the transaction at issue. Similarly, the court rejected Fox’s attempt to claim a $45 million increase in tax basis despite paying only $675,000. According to the court, Thomas and Fox, and their tax advisor, Martin Griffiths, "obviously recognized" the tax benefits to this fabricated basis. The court also rejected Thomas and Fox’s contention that the abusive tax shelter accomplished a reasonable business purpose.

Most of the more than 2000 taxpayers who used the "Son of BOSS" scheme settled their cases with the IRS, paying the full tax and part of the penalties owed, and the IRS announced in 2005 that it had collected nearly $4 billion as a result of those settlements. The government warned taxpayers who did not settle that it would pursue those cases in court and seek the maximum penalty allowed.

"The court’s decision today is yet another victory for the American taxpayer," said John A. DiCicco, Acting Assistant Attorney General of the Justice Department’s Tax Division. "Too many individuals in the last decade have turned to abusive tax shelters to keep from paying their fair share of taxes. This decision serves as yet another reminder that these abusive schemes are not valid."

Acting Assistant Attorney General DiCicco and Thomas P. O’Brien, U.S. Attorney for the Central District of California, thanked Assistant U.S. Attorney Andrew Pribe, Tax Division trial attorney Rick Watson and IRS Chief Counsel attorney Jonathan Sloat who represented the government.

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