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Published: 3/25/2005

Tax shelter probe includes Toledo businessman

BY GARY T. PAKULSKI
BLADE BUSINESS WRITER

An IRS crackdown on tax shelters, which has a Toledo connection, has netted $3.2 billion in back taxes and penalties for the U.S. treasury, the agency said yesterday.

The money was collected from 1,165 wealthy Americans who used a shelter called the "Son of Boss" that was aggressively marketed in the late 1990s and 2000, according to the agency.

As part of the ongoing crackdown, the IRS is obtaining from accounting firms, lawyers, and other marketers, the names of those who used improper or potentially improper tax shelters.

Sources of information include the Chicago office of Jenkens & Gilchrist PC, which helped Toledo businessman David K. Welles Sr., former owner of Therma-Tru Corp., Maumee, set up a tax shelter similar to Son of Boss, according to IRS court filings.

Judge James Moran, of U.S. District Court in Chicago, this month rejected claims from Mr. Welles and family members that some of their records at the Chicago legal office were protected by attorney-client privilege and shouldn't be given to the IRS.

In 2000, the Welles family sought the tax shelter, which lawyers told them was proper, to reduce federal taxes owed on a partial sale of Therma-Tru.

Their tax savings are unclear, but IRS court filings say they were trying to reduce taxes on expected gains of at least $200 million. The family's remaining interest in Therma-Tru, along with shares held by the new owner, were sold three years later for $925 million to publicly-traded Fortune Brands Inc.

Julie Simpson, a family spokesman, said the Welles are working with the IRS, but haven't reached a settlement.

The IRS has asked the prominent Toledo law firm of Shumaker Loop and Kendrick, which referred the Welles to the Chicago legal office, about its relationship with Jenkens & Gilchrist, according to a lawyer at the Toledo firm. However, the lawyer said Shumaker Loop is not part of a criminal investigation of firms that promoted the tax shelters.

While the IRS is attempting to collect back taxes and penalties of 10 to 20 percent from taxpayers who used the shelters, they are not being investigated criminally, IRS officials have said.

In the settlement with people who used Son of Boss - which is short for Bond and Options Sales Strategy - the IRS obtained "typical" payments of $1 million, officials said. However, 18 taxpayers paid more than $20 million each, and one paid more than $100 million, the agency said in a statement.

The IRS is taking a hard line with 400 people who used the Son of Boss shelter but who haven't voluntarily stepped forward. Another 200 people were barred from the program because they had also been involved in marketing the shelter.

"It's our belief that taxpayers who did not participate in the settlement will rue the day they made that decision," IRS Commissioner Mark Everson said in a written statement. "We know who they are. We are going after them."

The IRS expects to have collected $3.5 billion by the time the Son of Boss settlement program is wrapped up in coming months, the agency said.

Many states will benefit from the settlement, because taxpayers settling with the IRS are also revising their state tax returns, the IRS said.

Last month, the IRS expanded the settlement program to another improper tax shelter involving executives who avoided taxes by transferring stock options to family-controlled entities.

The IRS, by law, won't release the names of individual taxpayers involved. Mr. Welles' involvement was revealed when he became the only client of Jenkens & Gilchrist to file a motion in federal court in Chicago seeking to prevent turnover of certain information to the IRS, Judge Moran said in a written ruling.

Contact Gary Pakulski at:

gpakulski@theblade.com

or 419-724-6082.



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