U.S. Court Rejects Two Prominent L.A. Real Estate Investors’ Attempt to Use Tax Avoidance Scheme

The U.S. Department of Justice reports in its press release (quotation, not an independent finding): “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 partnershi”