Section of Taxation Publications
  VOL. 57
NO. 2
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 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
 That Newtime Religion: Breaking Another False Idol—The COSS
Alvin D. Lurie*

*President, Alvin D. Lurie, P.C., New Rochelle, New York; Cornell University, B.A. 1943, LL.B. 1944. First appointed Assistant Commissioner of Internal Revenue (Employee Plans and Exempt Organizations), 1974-78.

And there is nothing new under the sun. Is there a thing whereof it is said: "See, this is new?—it hath been already, In the ages which were before us."
Ecclesiastes 1:9-10

So it says in the Bible, but it ain't necessarily so. It is doubtful that the abusive tax shelters designed in recent years "hath been already," and no doubt never before have so many been gobbled up by so many taxpayers to avoid so many billions of tax dollars. For a time the Internal Revenue Service seemed overwhelmed by a steady stream of abusive shelters like nothing it had ever seen before, and it was slow to react. But all of a sudden the mills of the gods are not grinding so slowly, and with no sacrifice in the exceeding small grist of their grinders.

Take the case of Ernst & Young. That icon of the business world has been forced to pay the Service $15 million (nondeductible) for alleged violations of the shelter registration and list maintenance requirements, according to a Service press release last July 2nd. One has to believe that the much-publicized compensatory option sale shelter ("COSS" to the initiate) devised by Ernst & Young for the two top executives of Sprint, for estimated tax savings exceeding $100 million, played a big part in this outcome.

It was early last year that the story broke of the startling boardroom doings at Sprint that led to the sudden resignation of its then two top guns, Esrey and LeMay, for having taken advantage of a tax shelter designed by Sprint's outside auditors, the very same Ernst & Young, presumably with full knowledge and encouragement of the Sprint directors. So one might be forgiven for head-scratching at this sudden outbreak of morality in high places. It sort of reminds one of the retort of Claude Raines, "I'm shocked, shocked," on being told, as the police inspector in "Casablanca" (the movie), of corruption in his very domain.

One could hardly blame the company executives for yielding to the temptation placed before them by their own company's accountants to avoid-or at least long defer-the enormous, mega-million dollar tax bill that would otherwise come with the even more enormous paper profits they had potentially enjoyed on the run-up in value of their stock options. While they could not be completely unaware of the potential exposure associated with any tax shelter that promises such wondrous results, presumably they were assured there was nothing illegal about the attempt to reduce tax liability by lawful means (and possibly even reassured by recital of Learned Hand's famous line, "Any one may so arrange his affairs that his taxes shall be as low as possible"). This option sale device, after all, had been constructed by their own company accountants, one of the nation's most respected tax powerhouses, and copper-riveted by the tax opinion of an equally prestigious, Dallas-based law firm.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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