“Son of Boss” Tax Shelter

Transactions Involving Exotic Options

The “Son of Boss” tax shelter was one of the most widely used tax shelters of the late 1990s. Cambridge Finance Partners was retained by the Department of Justice to provide consulting support, and to support the expert testimony of Stanford finance professor Steven Grenadier, in a “Son of Boss” case involving two prominent Los Angeles real estate investors. At issue in the case was a package of exotic “Asian-style” options written against a basket of REIT stocks. The taxpayers claimed that the options were intended to shield them against losses from a second terrorist attack in the wake of the 9/11 attacks. Following a four-day trial, U.S. District Judge John F. Walter ruled that the option transactions had no real economic substance and were simply designed to fabricate tax basis in certain partnerships. Among the factors he cited was Professor Grenadier’s “persuasive” testimony that the option package offered virtually no likelihood of a payoff to investors and that investors dramatically overpaid for the transactions.

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