Tax Shelter – Statute of Limitations

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7^th Circuit Court of Appeals

Case Name: John Mchanan, et al. v. Deutsche Bank AG, et al.

Case No.: 17-2988

Officials: RIPPLE, MANION, and KANNE, Circuit Judges

Focus: Tax Shelter – Statute of Limitations

In 2001, John McMahan and his wholly owned corporation, Northwestern Nasal and Sinus Associates, S.C., participated in a tax shelter known as “Son of BOSS.” The shelter “is a variation of a slightly older alleged tax shelter known as BOSS, an acronym for ‘bond and options sales strategy.’” Kligfeld Holdings v. Comm’r, 128 T.C. 192, 194 (2007). It “was aggressively marketed by law and accounting firms in the late 1990s and early 2000s” and involves engaging in a series of transactions to create an “artificial loss [that] may offset actual—and otherwise taxable— gains, thereby sheltering them from Uncle Sam.” Am. Boat Co., LLC v. United States, 583 F.3d 471, 474 (7th Cir. 2009). Unfortunately for McMahan, the Internal Revenue Service (IRS) considers the use of this shelter abusive. See I.R.S. Ann. 2004‐ 21 I.R.B. 964 (“The Service has determined that Son of Boss transactions are abusive and were designed, marketed, and undertaken solely to create tax benefits unintended by any reasonable interpretation of the tax laws.”). The IRS initiated an audit of McMahan’s 2001 tax return in 2005. In 2010, the IRS notified McMahan it was increasing his taxable income for 2001 by approximately $2 million.

In 2012, McMahan filed this lawsuit in Illinois state court against Robert Goldstein (his accountant), American Express Tax and Business Services (Amex) (the firm that prepared his tax return), and Deutsche Bank AG and Deutsche Bank Securities Inc. (collectively, Deutsche Bank) (the entities that facilitated the transactions necessary to perpetrate the shelter). McMahan claims these defendants harmed him by convincing him to participate in the shelter. Deutsche Bank removed the case to the district court, citing the diversity jurisdiction statute, 28 U.S.C. § 1332. After a series of procedural steps described below, the district court dismissed McMahan’s claims against Goldstein and Amex for lack of prosecution and granted summary judgment to Deutsche Bank on statute of limitations grounds. McMahan appeals. We affirm.

Affirmed

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Attorney Derek A. Hawkins is the managing partner at Hawkins Law Offices LLC, where he heads up the firm’s startup law practice. He specializes in business formation, corporate governance, intellectual property protection, private equity and venture capital funding and mergers & acquisitions. Check out the website at www.hawkins-lawoffices.com or contact them at 262-737-8825.