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and a joint return for 2000 on April 29, 2001. Any distributed
cash was reported as a nontaxable return of capital rather than a
capital gain because the amount of cash distributed never
exceeded the adjusted basis.
Meanwhile, the IRS began to notice that very large amounts
of capital gains seemed to be disappearing from the nation’s tax
base via strategies like that of the Kligfelds. In 2000, the IRS
released Notice 2000-44, 2000-2 C.B. 255, which gave notice that
Son-of-BOSS transactions were officially “listed,” meaning the
IRS would aggressively pursue all taxpayers who had engaged in
them. The IRS reasoned that the transactions didn’t reflect
economic reality, and the disregarded liabilities must be taken
into account when computing basis. Without an inflated basis to
shade them, the losses flowing from the partnership would wither
away, and taxpayers using the Son-of-BOSS strategy would be left
with a large tax bill for their now-unsheltered gains. In June
2003, the government issued a summons to the law firm of Jenkens
& Gilchrist, which had been promoting the arrangement. The
summons sought the name and address of every U.S. taxpayer who
had pursued the strategy.
Kligfeld was among those caught in this summons net. The
Commissioner began examining the entities involved, and in
September 2004, he sent Holdings 2 an FPAA for its 1999 taxable
year. On the same day, he also issued a notice of deficiency to
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Last modified: November 10, 2007